Regeneus — Positive STEP data and Japan patent grant

The Phase I STEP (Safety, Tolerability and Efficacy of Progenza) placebo-controlled trial randomised 20 patients to receive either 3.9m or 6.7m Progenza cells or placebo via a single injection into the knee. Eight patients were treated with each dose of Progenza and four received placebo injections. Twelve months of follow-up showed that Progenza was both safe and well tolerated. There were no serious adverse events and the incidence and nature of adverse events were similar in the Progenza and placebo groups.

While safety and tolerability was the primary outcome of the trial, patients were also monitored to assess the effect of Progenza on knee pain and function, quality of life, knee structures as assessed by MRI, and osteoarthritis biomarkers.

The Principal Investigator on the STEP study, Dr Donald Kuah, commented that the majority of Progenza-treated patients experienced clinically meaningful reductions in pain, whereas the same pain reduction was not seen in the placebo group. The 16 Progenza-treated patients showed a statistically significant reduction in pain from baseline (measured on the WOMAC pain subscale, p<0.001), whereas for the smaller group of four patients treated with placebo there was no statistically significant reduction in pain (Exhibit 1). Regeneus commented that pain measured on the widely used visual analogue scale (VAS) revealed very similar findings, but no details were disclosed.

MRI examination showed that there was a significant improvement in lateral tibial knee cartilage volume in patients treated with the 3.9m cell dose of Progenza, compared with a worsening in the placebo group (p=0.028), as shown in Exhibit 2.

We understand that detailed analysis of exploratory efficacy endpoints will be presented in a future scientific publication. The publication of these data in a peer-reviewed scientific publication will aid the assessment of the implications of the study for the probability of success in future clinical trials.

Regeneus highlighted that the reduction in cartilage degeneration seen in the STEP trial following Progenza treatment was consistent with results seen in a rabbit osteoarthritis model. In the rabbit model osteoarthritis was induced by partial meniscectomy (removal of knee cartilage), and the knees were injected with Progenza cells 21 days after the surgery. At day 49, four weeks after Progenza treatment, there was a significant reduction in cartilage degeneration scores in the middle load-bearing zone of the femur (zone 2) compared to the control group, as shown in Exhibit 3.

In December 2016 Regeneus entered a strategic collaboration and licensing agreement with AGC of Japan, granting AGC exclusive rights to manufacture Progenza in Japan and a 50% interest in Regeneus Japan, which holds the rights to develop and commercialise Progenza for OA and all other indications in Japan. Regeneus received US$5.5m upfront and is eligible for up to US$11m of development and approval milestone payments.

The Regeneus Japan JV is seeking clinical development partners to progress the development of Progenza for OA and other indications in Japan. Japan is a most attractive market for regenerative medicines because of laws that took effect in November 2014, which allow for expedited conditional approval of regenerative medicine products on the basis of safety and early evidence that is predictive of efficacy.

The positive safety data, early indications of efficacy and recently granted patent should all aid the Regeneus Japan JV as it negotiates with potential partners to progress the clinical development of Progenza for OA and other indications in Japan.

The successful completion of the STEP trial on schedule means that our forecast development timelines for Progenza are intact.

The next step in the clinical development of Progenza is likely to be a Phase II efficacy trial in Japan in patients with knee osteoarthritis; Regeneus’ preference is for this trial to be conducted by a clinical development partner. Before this trial can commence the Progenza technology will need to be transferred to AGC, which will undertake GMP manufacture of Progenza for the trial. We assume that the technology transfer and validation of Progenza manufacture by AGC would be completed in H1 CY19, enabling a Phase II trial in Japan to commence in Q3 CY19 and report results in Q1 CY21, allowing a potential market launch in early 2022.

We assume that a separate Phase IIb trial will be conducted outside Japan to support Phase III efficacy studies in the US and Europe, with the Phase IIb study commencing in 2020 leading to a potential market launch in 2026, as shown in Exhibit 4.

The ongoing discussions with potential clinical development partners for Progenza in Japan represent the most important potential catalysts in 2017. Securing a clinical partner for one or more indications would provide further validation of the commercial potential of Progenza, as well as providing additional non-dilutive funding.

Other anticipated milestones in 2017 include:

Our valuation of Regeneus has increased to A$145m (vs A$120m), or A$0.70/share (vs A$0.57/share). Following the successful completion of the Phase I STEP trial we have increased the likelihood of success for Progenza from 30% to 35% in Japan and from 15 to 20% in other markets. With the grant of patent in Japan we have extended market exclusivity for Progenza in Japan by one year to 2032.

With the end of FY17 approaching we have rolled forward the DCF model and are now using the end FY17e cash balance vs end FY16 cash balance previously. Our sum-of-the-parts DCF valuation model is summarised in Exhibit 5, with key assumptions shown in Exhibit 6.

Our valuation model applies a standard 12.5% discount rate and includes estimated net cash of A$4.3m at end June 2017. We assume that product sales reach peak market share six years after launch, grow in line with the market for the next four years (five years for Progenza in Japan) and then decline at 10% per year. For simplicity, we do not include upfront and milestone payments from any potential future licensing deals that have not yet been signed and instead assume that the full value of the product will be paid as a royalty. We note that there is a risk adjustment applied to each programme, appropriate to the status of development. Risk adjustments would unwind as programmes advance through clinical studies, gain regulatory approvals and secure commercial partners, etc.

With regard to Progenza, CryoShot, Kvax and the human cancer vaccine – the key long-term valuation drivers – we have assumed timely clinical and commercial progress in multiple regions, which should be achievable, but any delays/setbacks would have a negative impact on our valuation. Signing up AGC as a manufacturing partner for Progenza in Japan has provided significant validation of the commercial value of the company’s technology; this should make it easier to sign clinical development partners, which represents near-term potential upside.

Progenza could potentially be developed for a range of disease indications. At present we include only the single osteoarthritis indication in our valuation model, so progress in developing additional indications or licensing deals that include additional indications for Progenza represent potential sources of upside to our valuation.

We have made modest revisions to our financial forecasts, including pushing back receipt of US$1m of AGC milestone payments from FY17 to FY18. We now assume that US$1m of AGC milestone payments will be received in FY17 and US$5m in FY18.

The latest quarterly cash flow statement for the three months ending 31 March 2017 showed that operating cash payments in Q3 FY17 totalled A$2.1m (adjusted for AGC transaction costs and exchange rate impact), an increase over the A$1.8m average over the preceding two quarters due to planned acceleration in R&D activities. The cash balance at 31 March 2017 was A$4.9m, which, combined with A$1.2m of loans to shareholders that mature in July 2017 (provided at time of IPO in 2013 to fund exercise of employee options), and an estimated ~A$2.5 R&D tax incentive payment that will be receivable in H1 FY18, would fund operations to end Q3 FY18 at the current burn rate. The company expects additional licencing and milestone payments to extend the funding runway beyond the end of FY18 (we estimate an additional ~A$1-2m would be required from these sources). Up to US$11m in milestone payments could be received under the agreement with AGC on the achievement of specific development and approval milestones – we model US$6m (A$7.9m) milestones being received by end FY18, which would extend the funding runway into H2 FY19 (if received). We forecast Regeneus to have A$5.9m of net cash at the end of FY18.