Nicox — Q323 update confirms trajectory for NCX-470

NCX-470 is the second compound developed using Nicox’s proprietary NO-donating platform, where it combines an NO-donating molecule with an established prostaglandin F2α analogue (PGA) drug. NCX-470 is being tested in patients with open-angle glaucoma (OAG) and OHTN in two pivotal Phase III trials: Mont Blanc and Denali. The Mont Blanc trial met the primary efficacy endpoint of non-inferiority to latanoprost 0.005% for the reduction in IOP in patients with OAG or OHTN in Q422. The Denali trial is ongoing, with enrolment and randomisation reported as c 65% complete during October 2023 (up from c 55% in July), which provides us with confidence that the company will complete the trial within its currently projected timeline of 2025. The Phase III data from the Mont Blanc and Denali trials will form the basis for a regulatory New Drug Application (NDA) in the US, and we continue to forecast that NCX-470 could reach commercial launch in 2027. Given the Mont Blanc study met its primary endpoint and NCX-470 offers a favourable safety profile, we believe Denali study has a strong likelihood of showing sufficient efficacy to support a subsequent FDA approval application.

To strengthen NCX-470’s competitive profile versus other PGAs and topical glaucoma drug treatments, Nicox is seeking to demonstrate through two Phase IIIb trials that the drug, likely because of its NO-release properties, may have unique and beneficial properties for the treatment of glaucoma compared to existing drug therapies. As a reminder, current approved glaucoma treatments are designed to reduce IOP, which may not fully prevent retinal ganglion cell degeneration and thus progression of the condition in many patients, particularly those with normal tension glaucoma (NTG). Certain IOP-independent risk factors, including ischemia (inadequate blood supply) or inadequate retinal perfusion, may contribute to optic nerve or retinal cell damage (particularly in NTG), and NO is known to be a potent vasodilator. Further, due to many factors, many (up to 30–40%) of patients (even those taking PGAs) will require additional medication and/or a change in therapy within one to five years of starting first-line therapy (to maintain the desired target IOP level), which opens the need for differentiated treatment approaches that may offer more than one approach to lowering IOP.

Nicox previously reported preclinical data indicating that NCX-470 may improve ocular perfusion and retinal function in damaged eyes compared to vehicle (in an endothelin-1 induced ischemia/reperfusion rabbit model used to mimic glaucoma pathophysiology) and may therefore have protective properties not related to its effect on IOP. To build on this, one of the two Phase IIIb studies planned by the company is designed to assess retinal blood vessel density using OCT angiography (a validated imaging technique) to provide further insights on NCX-470’s effects on retinal blood flow. The company expects to start the study in 2024 and anticipates it should be relatively short, as the relevant endpoints and clinical features will likely be measurable within 30 days of initial patient dosing, and only c 15–50 patients will likely be needed.

The other planned Phase IIIb trial, Whistler, is designed to evaluate NCX-470’s effects on aqueous humour (AH) dynamics, including its ability to lower episcleral venous pressure as well as enhance outflow through the trabecular meshwork (TM). TM-mediated AH outflow, if demonstrated, would represent an IOP-lowering pathway that conventional PGA drugs typically do not exploit since, as stated above, PGA drugs generally increase outflow through the uveoscleral pathway. Patients in Whistler will be dosed NCX-470 once-daily for eight days, and the company plans to start the study in Q423 and provide results approximately one year afterwards.

We do not expect the read-outs from these studies to affect the approval (or relevant approval-related timelines) of NCX-470. However, we expect the data will be released well before product launch, and if data supporting non-IOP related benefits can be established, this may strengthen NCX-470’s competitive position compared to PGA drugs such as Vyzulta and Lumigan, as well as newer drugs such as Omlonti and Rocklatan.

As discussed in a prior note, Nicox provided details in July of a US market survey evaluating the commercial potential of NCX-470 for the treatment of elevated IOP in patients with glaucoma or OHTN. The independent market research agency commissioned by Nicox confirmed that NCX-470’s therapeutic profile, as shown in prior studies including the Phase III Mont Blanc trial, was positively received by stakeholders including ophthalmology key opinion leaders, glaucoma prescribers (US optometrists and ophthalmologists) and payors.

Together with insights from Ocumension Therapeutics, the company’s NCX-470 partner in China and South-East Asia, which provided its own forecasts for NCX-470 sales for regions covered by their agreement, Nicox estimates that annual global net sales of NCX-470 (excluding Europe) could exceed $300m within eight years of the product’s launch in the US and China, with US net sales estimated at $115–165m by year eight.

We maintain that the US estimates may be conservative, given that US branded bimatoprost (Lumigan, AbbVie) sales exceeded $270m in 2021 and that NCX-470 is differentiated through its additional NO-mediated mechanism of action (in addition to its PGA-mediated IOP lowering effects). We continue to believe that NCX-470 has the potential to generate $245m in net US sales in 2032, although we recognise that this is above the range communicated by the company.

The company continues to seek commercial partnerships for NCX-470 in major markets, including the US and Japan. Our base-case scenario assumes that the company will have commercial partner(s) or licensee(s) to market NCX-470 for the treatment of OAG or OHTN, provided the drug obtains regulatory approval. We project the company will partner with well-resourced biopharmaceutical companies with existing commercial infrastructure, resources and experience in commercialising ophthalmic drugs in the key developed markets (US, Europe and Japan).

We continue to assume that a potential US and/or European partnership would occur after the reporting of top-line efficacy results for Denali. While Mont Blanc met its primary endpoint and with a favourable safety profile (and we believe Denali has a strong likelihood of showing similar efficacy), we assume a hypothetical US and/or European market partner would prefer the additional de-risking that would occur after the reporting of Denali study results. As a separate clinical trial conducted in Japan will likely be required for approval in that country, regardless of the Denali outcome, we believe the timing for a Japanese partnership arrangement would not be as dependent on Denali’s conclusion and we anticipate that such a licensing arrangement could occur before year-end 2024. Our model continues to assume Nicox would be entitled to a net royalty of 20% on net sales in both the US and Europe (and that the associated partnership transaction(s) would be realised in H225), and that Nicox’s arrangement with a Japan-based licensee would provide Nicox with a 15% net royalty on net sales from sales in this region.

Our commercial forecasts for NCX-470 are reiterated below. We assume Nicox will receive net royalties on NCX-470 sales in all major markets. Our assumptions do not include any milestone or upfront payments and hence the attainment of such arrangements adds potential upside to our new estimates.

Nicox’s Chinese partner, Ocumension Therapeutics, continues to expect to launch Zerviate (cetirizine ophthalmic solution, 0.24%) in China in 2024. As a reminder, Zerviate is being advanced for ocular itching associated with allergic conjunctivitis and the Chinese regulatory approval application received priority review status in Q223. Ocumension estimates that Zerviate could potentially deliver $100m in annual sales in China within seven years, and Nicox itself would be entitled to royalties between 5% and 9% of net Zerviate sales by Ocumension, as well as sales milestones up to $17.2m. Market research compiled by CIC suggested the prescription market for allergic conjunctivitis products in China will exceed $460m in 2030. We assume that, at peak, Zerviate will account for 15% of ophthalmic drugs used to treat allergy in China, reflecting c $67m in China-derived annual sales by 2030, delivering $4.7m in royalty revenue to Nicox in that year.

We believe Zerviate has a high likelihood of approval given it is also approved in the US (and commercialised by Nicox’s US partner, Santen), and given the positive results from a Phase III study in China on Zerviate, funded and operated by Ocumension and reported in Q122. We model a 90% probability that the drug will obtain regulatory approval in China.

Nicox earns royalties from Santen for Zerviate sales in the US market, although specific figures are not disclosed in the company’s financial reports. Zerviate sales in the US have been relatively limited, because the US ocular allergy market is highly competitive, with the standard of care for mild-to-moderate ocular allergy involving drugs that combine antihistamine properties with mast cell stabilisation, including over-the-counter medications like Pataday. However, we believe there might be a more significant opportunity for Zerviate in the Chinese market due to a scarcity of approved ocular drugs addressing both mechanisms.

Regarding NCX-4251, an ophthalmic suspension of fluticasone propionate nanocrystals developed for DED, we estimate that Nicox will secure a drug development partner to advance NCX-4251 for DED in the US, Europe and other markets outside China in the coming months (previously we assumed a transaction at the end of 2023). We continue to anticipate the initiation of the next Phase II study for DED in 2024, with funding from the partner, followed by a Phase III program in 2025, leading to commercial approval and launch in 2028. Our market assumptions for DED are unchanged. Over 30 million people are affected by DED in the US, of whom more than 75% experience short-term exacerbations, which we model at an average of four events per year. While we consider a sizeable portion of DED patients will not seek medical care for every acute DED episode, we continue to estimate the addressable market to be c 24m potential acute DED episodes per year in the US. Assuming a gross price at launch of $320 per bottle or treatment course (unchanged), we model peak US sales of c $480m in the US market in 2033, resulting in c $72m in net NCX-4251 US royalties to Nicox in that year (assuming a 15% net royalty rate).

Nicox currently receives product sales-related licensing revenue from the sales of Vyzulta and Zerviate. Gross H123 product sales-related licensing revenue (primarily gross royalties from Bausch + Lomb (B+L) from the sale of Vyzulta in the US and other approved markets and, to a lesser extent, Zerviate US royalties from Santen) were €2.8m, up 19% y-o-y. This is largely explained by increased US Vyzulta prescriptions, reported as increasing 26% y-o-y in Q223 and 23% y-o-y in Q123. Nicox is entitled to tiered net royalties of 6–12% on Vyzulta sales from B+L.2 Cost of sales, which reflects royalties on Vyzulta sales that Nicox must pay to Pfizer, were €1.0m. Hence, H123 net royalties were €1.7m, up from €1.4m in H122. While the US market is the predominant driver for Vyzulta sales, the drug has been launched in 15 countries worldwide, and we expect net Vyzulta royalties to continue to grow based on continued growth in prescriptions. Nicox also reported that Vyzulta prescriptions continued to grow at a brisk pace in Q323, up 22% yo-y, leading to Q323 net royalties of €1.1m (up from €0.8m in Q322).

Gross R&D costs, which are predominantly based on NCX-470 development (including the ongoing Denali trial), were €6.7m, down 14% y-o-y, with the decrease largely due to a reduced clinical trial expense run-rate following the completion of Mont Blanc in H222. G&A costs also came in under our expectations, down 6% y-o-y. The normalised PBT loss of €6.6m was below our €9.0m estimate, although a large driver for the difference was a non-cash €2.9m financial income component due to the revaluation of the fair value of put options.

The free cash outflow was €8.4m in H123, slightly above our €8.1m estimate. The company reported an H123 gross cash position of €19.0m, and a 30 September gross cash position of €14.6m. Nicox also disclosed gross financial debt of €21.6m at H123 and €21.1m at 30 September, with the largest contributors to the debt (in both periods) being the €18.8m bond financing agreement with Kreos Capital. We calculate Q323 net debt of €6.5m and a Q323 net cash burn rate of c €3.9m, comparable with the H123 free cash flow run-rate described above.

As discussed above we calculate Nicox’s net debt position at €6.5m as of 30 September. The company maintains its guidance that its gross cash on hand (€14.6m) should be sufficient for it to maintain its operations, based on the development of NCX-470 alone, into June 2024, which is consistent with our forecasts.

Following the H123 results and Q323 corporate update, we have reduced our net R&D expense estimate for FY23 (to €13.7m, vs €15.3m previously) to reflect the expense run-rate shown in H123 and as Denali costs have been lower than anticipated in H123. We have reduced our FY24 net R&D expense forecasts by a lower amount (to €16.6m, vs €17.1m previously) as we continue to expect the two Phase IIIb NCX-470 studies to lead to incremental year-on-year increases in total R&D expenditure. Altogether, our net FY23 and FY24 operating cash burn assumptions are now €17.1m (vs €18.0m previously) and €23.1m (from €24.7m previously), respectively.

Our Nicox valuation continues to apply a risk-adjusted net present value (nNPV) model with a 12.5% cost of capital. While we maintain our existing launch timing estimates, underlying commercial assumptions and peak sales forecasts, as described below, we have rolled forward our estimates, which had a positive effect on the discounted valuations of the included development programmes. We now obtain an rNPV pipeline valuation for Nicox of €125.9m (versus €108.0m previously). After including Q323 net debt of €6.5m, we obtain an equity value of €119.4m, or €2.38 per basic share (up from €2.13 previously).

As stated above, Nicox continues to expect that funds on hand will be sufficient to maintain operations into June 2024 based on the development of NCX-470 alone and our forecasts are similar. Given that we have reduced our R&D spending expectations, we now expect that the company will only require €50m in additional funding to fulfil its requirements for bringing NCX-470 to commercialisation (which we forecast in 2027) and to reach recurring operating profitability (on a self-sustaining basis), down from our prior estimate of €58m.

Nicox has commented that it has initiated strategic discussions, including those involving potential M&A activities, and it has also started discussions with its creditors to restructure its debt. Until there is further clarity on the above initiatives (and/or the signing of definitive engagements), our model continues to assume all additional financings will be raised through illustrative debt, as per our usual methodology. If our projected funding need of €50m is raised through equity issuances at the prevailing market price of c €0.45, our effective value per share would decrease to €0.97.

The amount of fund-raising that we estimate is necessary for Nicox to bring NCX-470 to commercialisation (in collaboration with anticipated partners or licensees) is larger than its current market capitalisation, although we note that funding intervals may be staggered over the next several years, which may alleviate the potential challenges associated with raising sums in excess of a company’s market capitalisation. Furthermore, as stated above, Nicox is actively seeking potential partnership arrangements, which could provide non-dilutive funding and alleviate part of our expected funding requirements.