Genkyotex — Ready to make a dent in the fibrosis market

In late 2017 patient randomisation started in an investigator-sponsored Phase II study in patients with T1D and diabetic nephropathy. The primary endpoint of the study will be the change from baseline in urine albumin-to-creatinine ratio (UACR) after 48 weeks. A key secondary endpoint of the study will be changes in estimated glomerular filtration rate, which measure the effect of GKT831 on renal function. Patients will receive 200mg of oral GKT831 or placebo twice a day for 48 weeks. The study will be conducted at up to 15 centres in Australia under the leadership of Professor Mark Cooper, head of the department of diabetes at Monash University, and Professor Jonathan Shaw, deputy director at the Baker Heart and Diabetes Institute in Melbourne. We note that the study will have a limited impact on Genkyotex’s financials as it will be entirely funded by the Juvenile Diabetes Research Foundation and the Baker Institute. Genkyotex will provide GMP-produced GKT831.

This trial has some important differences with respect to a previous Phase II study with GKT831 in Type 2 diabetes patients with diabetic nephropathy, which read out in 2015. In particular, the new trial is testing a higher dose (200mg twice/day vs the previous 100mg/day for six weeks followed by 200mg/day for six weeks) during a longer duration of treatment (48 weeks vs 12 weeks previously). The 2015 study did not meet the primary efficacy endpoint of reduction of proteinuria at 12 weeks, but results were statistically significant (p<0.05) in the predefined secondary endpoints of changes in liver enzymes such as gamma-glutamyltransferase (GGT) and markers of inflammation. We believe that increasing the duration of treatment and dose may bode well for improved efficacy in the new trial.

GKT831 has been proven safe in four Phase I studies in a total of 117 healthy subjects in a single ascending dose, in multiple ascending doses as well as the food effect and drug interaction. In these studies, GKT831 showed no safety issues and there were no dose-limiting toxicities. Furthermore, adverse events in the previous DKD Phase II trial were significantly lower in the GKT831 arm vs placebo.

Competitors’ trials are being conducted in T2D patients with DKD, in addition to RAS blockade therapy.

GKT831 is undergoing a Phase II trial in primary biliary cirrhosis (PBC). The study is expected to enrol 102 patients with PBC in over 50 research centres in the US, Canada and Europe. Genkyotex will report interim data in the autumn of 2018 (vs mid-2018 previously) and full results in H119 (vs by the end of 2018 previously). The reason for this delay is a slower than expected rate of activation of clinical research centres in four of the nine participating countries. The company recently announced the study had successfully completed its first pre-planned safety review by the ISMB which recommended the trial continues without changes to the protocol. Importantly, no serious adverse events, liver-related adverse events or patient dropouts had been reported at the time of the review. PBC is a rare disease of the liver in which biliary ducts are targeted by antibodies. Bile ducts are blocked causing leakage of bile fluids to the liver parenchyma, which eventually leads to fibrosis, cirrhosis and liver failure. We estimate the number of PBC patients that could be eligible for treatment with GKT831 at c 46,000 in the EU and US and project total peak sales of $1.1bn in this indication, with launch in 2023. We believe that the PBC trial, if successful, could also support development of GKT831 in the larger liver fibrosis opportunity, in particular Nonalcoholic steatohepatitis (NASH), which could target c 60 million people in the EU and US. Other fibrotic indications are IPF, cystic fibrosis, or scleroderma. GKT831 is patent protected in the US, Europe and Japan until 2029.

Preclinical data published in the Journal of the National Cancer Institute showed that inhibition of NOX4 with GKT831 effectively targeted CAFs, delaying tumour growth. CAFs are part of the tumour microenvironment and are thought to be involved in various cancer biological processes and correlate with poor survival in many cancers. Hence, targeting CAFs may be a potential treatment in cancer. Additionally, the authors showed a statistically significant upregulation of NOX4 expression in multiple human cancers strongly correlating with myofibroblastic CAFs. Moreover, the senior author of the study, Professor Gareth Thomas of the University of Southampton, has received a grant from Cancer Research UK (CRUK) to design a potential clinical trial with GKT831 in combination with other anti-cancer drugs.

Genkyotex has announced that its licensing agreement with the Serum Institute of India has been extended to cover additional countries, in particular the US, Canada and Europe. This adds an additional €100m in development and commercial milestone payments to the $57m of the original deal. Genkyotex is also entitled to single digit royalties on sales. Out of the total c €150m value, Genkyotex has received approximately $1.3m in upfront payments associated with the preclinical development of Vaxiclase. The next milestone payments will come from the clinical development of the vaccine. The partnership started in February 2015 and involves evaluating new multivalent vaccines using Genkyotex’s Vaxiclase technology. Vaxiclase is a re-engineered version Bordetella pertussis's adenlylate cyclase (CyA) enzyme. In this deal Vaxiclase is used as an antigen that aims to improve the duration of protection of acellular pertussis (aP) vaccines. Current aP vaccines are of short duration and there is a need for new aP vaccines that provide long-lasting protection and efficacy. Most pertussis vaccines are administered in combination with diphtheria and tetanus. Furthermore, Bordetella pertussis antigens are included in multiple complex vaccination schedules, often for hepatitis B (HB), polio (IPV) and influenza B (Hib).

SIIL is the world's largest manufacturer of vaccines, with more than 1.3 billion doses sold annually. We believe this extension adds a significant opportunity. With this expansion the partners will cover virtually the entire market, on top of the 20% of the market that emerging countries represent. We have included this deal expansion in our valuation applying the same modelling approach as before.

Genkyotex reported operating expenses of €14.8m for FY17 vs. c €6m in FY16, which includes warrants issued to the company’s employees and converted into shares (almost €4m in FY17 vs €0.07m in FY16). The increase in expenses is related to the initiation of the Phase II study with GKT831 in PBC and preclinical work for GKT771. Other operating expenses of €11.4m (vs none in FY16) are associated with the reverse merger between Genticel and Genkyotex and restructuring costs. This results in a net loss of €25.8m in FY17 vs net loss of €5.9m in FY16. We now forecast a net loss of €9.9m in FY18e vs €13m before as we do not forecast further expenses associated with share based payments, restructuring or the strategic combination.

Genkyotex recently provided a corporate and cash update for Q118. At 31 March 2018 cash, equivalents and short-term investments were €12.5m which should be sufficient to fund the company into Q119, according to our forecasts. We project a funding shortfall of €15m at the end of 2019, which for illustrative purposes we include as long-term debt.

Using our standard 12.5% discount rate produces a risk-adjusted NPV of €338.7m, or €4.35 per share, vs €268m or €3.4 per share before. Our updated valuation includes GKT831 in DKD. As in the previous valuation, GKT831 in PBC and the SIIL deal are included. We leave all other product development opportunities and additional indications as an upside. Our assumptions for DKD are as follows:

We do not typically include any contribution for indications until clinical development commences; therefore, our GKT831 estimates do not include any potential in NASH. However, we believe that positive results in PBC could justify future development in other large fibrotic diseases including NASH. Therefore, we have run a sensitivity analysis that suggests that NASH could add between c €30m and €90m, excluding milestones or upfront payments, depending on the commercial strategy. This is based on two scenarios. The first scenario, in which the company conducts the programme itself, would add €90m value. This requires a higher capital investment, but should be significantly more profitable than a simple sales royalty, potentially with a 50-60% pre-G&A margin. In the second scenario the company partners GKT831 after Phase II data, adding c €30m in value, which assumes a standard mid-teens royalty rate and excludes any specific milestone payments. For both scenarios we model launch in 2024 and a 10% probability of success. Given the size of the patient population, we assume that $2bn peak sales are achievable even if there are other competitors in this field.