Cereno Scientific — Pressing clinical assets forward to key inflection

The Q224 recap highlighted clinical progress for all candidates as previously guided (Exhibit 1).

CS1 is a delayed immediate release formulation of valproic acid with disease-modifying potential for PAH, underpinned by its epigenetic mechanism as a HDAC inhibitor. The Phase II trial for CS1 is a randomised, open-label, blinded endpoint, safety and tolerability study with exploratory parameters to help inform the next study design. The study is leveraging Abbott’s CardioMEMS Heart Failure System for continuous insights into pulmonary pressure and hemodynamics. Primary endpoint measures include safety, tolerability, pharmacokinetics and exploratory efficacy.

In June 2024, management announced that it was closing recruitment for the trial (effective 1 July), with the intention to proceed with data analysis. This was based on a recommendation from the Study Clinical Steering Committee, which noted that sufficient data was available to evaluate next steps. This should support a Q324 readout, which could represent a major inflection point for Cereno. We note that interim updates for the trial have been positive, including an interim patient case study, data quality control review, as well as the FDA approved Expanded Access Programme (first patient dosed as of 30 August 2024), allowing patients in the Phase II trial to continue taking CS1 after completing the study based on the perceived benefit. A strengthened IP position in Q224 (new patents in New Zealand (second family), the US (third family) and Brazil (third family)) should also support market protection, which underlines the commercial scope for the drug.

While we are optimistic about the outcome of the Phase II trial, we acknowledge that detailed conclusions should not be drawn until the final analysis is published. We note that CS1 holds FDA orphan drug designation and is now pursuing a similar label (orphan medicinal product designation) in the EU, with a decision expected in the next few months. The company recently dosed the first patient under the Expanded Access Programme, which should provide real-world data on longer-term benefits from continued CS1 treatment.

CS014 transitioned into the clinic in June 2024, marking a key milestone for Cereno. As a HDAC inhibitor with epigenetic properties, the drug is being developed as a potential treatment for thrombosis prevention. Thrombosis (including both antiplatelet and anticoagulant drugs) comprises over 50% of the global cardiovascular disease drugs market, and offers a significant commercial opportunity for Cereno, provided the encouraging preclinical data translate to human studies. The safety benefit of a reduced risk of bleed provides differentiation from currently available antithrombotic medications. The ongoing Phase I trial is a one-week, open-label, two-stage study (single- and multiple-ascending dose groups), assessing the safety, tolerability, pharmacokinetics and pharmacodynamics of the candidate in healthy volunteers. The trial aims to recruit 48 participants and results are expected in mid-2025.

CS585 is a selective, potent and oral prostacyclin receptor (IP) agonist, and is in the earlier stages of development as a potential treatment for cardiovascular disease. While a precise indication for the candidate is yet to be determined, we continue to expect an announcement regarding this selection by end-2024 and highlight that its promising preclinical research has received early validation with a publication in Blood, an established peer-reviewed journal.

In April 2024, Cereno announced its first patent family for CS585 in Europe, a sizeable market for cardiovascular disease. Preclinical data was presented at the European Haematology Association 2024 Hybrid Congress in June, showcasing CS585’s high selectivity for the IP receptor and the most recent update was presented at the European Society of Cardiology Congress on 31 August 2024 (abstract name: CS585, a novel prostacyclin receptor agonist, demonstrates sustained efficacy in vivo in the prevention of thrombosis).

In Q224, Cereno reported total operating expenses of SEK43.5m, materially higher than previous quarters (SEK35.5m in Q124 and SEK21.3m in Q223), which we attribute to the Phase II clinical trial for CS1, ongoing preclinical work on CS585 and the preparatory activities and subsequent clinical launch of the CS014 study. The company capitalises part of its R&D (reflected as income from capitalised work; SEK23.9m in Q224), cushioning the full impact of the higher costs on operating profitability (loss), which was reported at a loss of SEK19.6m (versus operating losses of SEK10.7m in Q223 and SEK13.8m in Q124). Personnel costs mirrored the previous quarter’s trend (SEK6.6m vs SEK6.3m in Q124), although we note that the run-rate was significantly higher than the SEK3.9m recorded in Q223. We attribute this to the recent senior hires by the company to lead the next stage of its development.

Net loss for the period was SEK21.2m, versus SEK10.7m in Q223, driven by the higher opex, as well as increased interest expenses (SEK1.6m vs SEK0.09m in Q223) following the drawdown of the SEK90m bridge loan (SEK45m had been drawn down as of June 2024) raised from Fenja Capital in November 2023. With the decision made in July 2024 to exercise the remaining SEK45m, the interest expenses are likely to rise in H224. Free cash outflow for the quarter was SEK37.2m, an improvement over the Q124 figure of SEK38.0m, with the impact of higher operating losses and capitalised R&D offset by a favourable working capital position. Capitalised R&D, reflected in the cash flow statement as purchase of intangible assets, was SEK23.9m in Q224 (vs SEK21.6m in Q124) and was majorly attributed to the Phase II PAH trial for CS1, as well as the launch of clinical studies for CS014.

Reflecting the H124 performance and near-term visibility, we have raised our opex expectations for FY24 and FY25 (both external and personnel costs), resulting in our operating loss estimates for FY24 and FY25 revising upwards to SEK52.1m and SEK53.5m, respectively, versus SEK42.7m and SEK44.8m previously. Accordingly, our cash burn estimates for FY24 and FY25 shift to SEK136.8m and SEK142.3m, versus SEK127.1m and SEK133.3m previously.

Cereno closed Q224 with a net cash balance of SEK40.2m (comprising SEK85.6m in gross cash and SEK45.4m in debt). The cash balance was supported by SEK73.6m in net cash inflow following the conversion of the TO3 warrants in April 2024. In July 2024, the company renegotiated the terms of its SEK90m loan facility (announced in November 2023) with Fenja Capital (formerly Formue Nord), extending the deal maturity by nearly one year to 31 March 2026 (previously 14 May 2025). Other loan terms (a 5% set-up fee and an interest rate of 3M STIBOR+10% due quarterly) remain unchanged. While the first SEK45m tranche was utilised in November, as stated earlier, the decision to draw down the remaining SEK45m was announced in July 2024. We view the renegotiated terms with Fenja Capital as positive for Cereno, providing the company with greater flexibility to deploy capital across its ongoing development programmes. Based on our cash burn projections, we estimate the adjusted repayment timelines to support a cash runway through Q125 (we otherwise anticipate the need for another fund raise in Q125 to service the debt), past key upcoming inflection points such as the Phase II top-line results for lead asset CS1 (in Q324), and potentially close to the initial data readouts from the Phase I CS014 trial (anticipated from mid-2025). We note that the runway is slightly shorter than we previously anticipated (Q225) due to the higher-than-expected opex run-rate. We estimate Cereno will need to raise a total of c SEK100m in 2025, before signing a licensing deal for CS1 in 2026, with its associated cash inflows.

Our valuation for Cereno uses a risk-adjusted net present value (rNPV) approach (using appropriate probabilities of success for the respective phases of development, and a flat discount rate of 12.5%). The calculated enterprise value reflects contributions from the company’s clinical candidates, CS1 (Phase II) and CS014 (Phase I). Our underlying assumptions for the two assets are detailed in our initiation note (CS1 and CS014) and we updated our CS014 assumptions in our prior update note (to reflect its entry into the clinic). We note that the data readouts from the Phase II trial for CS1 are expected within Q324, and, if supportive, may lead to an upward revision in our valuation. The clinical entry of the third pipeline asset, CS585, may also provide further upside.

We adjust our near-term forecasts to reflect the H124 run-rate and incorporate the latest net debt position. Our valuation benefits from rolling forward our model, with the upgrade slightly tempered by FX adjustments (strengthening Swedish krona against the US dollar) and a lower comparable net cash position (SEK40.2m vs SEK77.4m in our last update). Our revised valuation for Cereno stands at SEK2.6bn or SEK9.1/share (vs SEK2.5bn or SEK9.0/share previously). A breakdown of our rNPV valuation is presented in Exhibit 2.

In line with our standard approach, we also present a diluted valuation of the company. Our model assumes licensing deals in 2026 for CS1 and 2027 for CS014, with the partner taking over development activity. However, if these deals do not materialise and the company takes on self-development of its clinical programmes, we estimate it would need to raise SEK200m per year starting in FY26, until the commercial launch of CS1 in 2029 (counting the SEK100m required in FY25, this adds up to a total of SEK700m between FY25 and FY28). If the company uses equity issues for this funding, we estimate that it would need to issue c 106.9m shares (assuming the current share price of SEK6.55), which would result in our per share valuation diluting to SEK8.4 per share, from SEK9.1 per share currently.