Regeneus — Update 19 May 2016

Regeneus reported that it has completed recruitment in its Phase I STEP (Safety, Tolerability and Efficacy of Progenza) trial of Progenza in patients with knee osteoarthritis. The trial recruited 20 patients in two dose cohorts. Sixteen of the 20 participants received ultrasound-guided injections of Progenza directly into their arthritic knee joint, while the other four participants received placebo injections.

A pre-specified review of the cumulative safety data on all 20 patients by the study safety oversight committee did not identify any safety concerns. The review included at least one month’s safety data for all patients and substantially more data for the earlier Cohort 1 patients.

While safety and tolerability is the primary outcome of the STEP trial, patients will also be monitored for 12 months to assess the effect of Progenza on knee pain and function, quality of life, knee structures as assessed by MRI, and osteoarthritis biomarkers. We expect 12-month efficacy data from the second, high-dose cohort to be available in mid-2017.

In its FY16 interim report, Regeneus advised that it is in advanced discussions with a large Japanese company regarding licensing Progenza, its allogeneic off-the-shelf mesenchymal stem cell technology, for the Japanese market. Regeneus is seeking to capitalise on the fact that a number of large Japanese companies are seeking access to technology that will allow them entry into the regenerative medicine field to take advantage of the favourable regulatory environment, which includes a fast-track approval pathway. Regeneus anticipates finalising these discussions before the end of the current quarter and the positive safety review in the STEP trial is likely to be an important part of this process, in our view.

Upfront fees and milestone payments from the potential deal could offer a source of non-dilutive funding for the company’s ongoing work on new product development. In addition, we would expect a partner to either fully or partly cover the costs of the planned Phase II trial of Progenza in patients with osteoarthritis of the knee.

The company’s second product in development for human clinical applications is its RGSH4K human therapeutic cancer vaccine. Recruitment is expected to be completed in Q4 CY16 in the ACTIVATE Phase I trial, a single-centre, open label, dose-escalating study of the safety and preliminary efficacy of the vaccine. The trial will recruit 21 patients with a range of advanced cancers.

The RGSH4K therapy, which is produced from a patient’s own cancer cells, is designed to activate the immune system against the cancer cells to initiate a systemic immune response.

The success of the immune checkpoint inhibitor (ICI) class of drugs at producing long-lasting responses to treatment in a range of cancers has led to renewed interest in cancer vaccines. The vaccines may provide a way to initiate an immune response while the ICI drugs effectively “take the handbrake off” immune responses and make them more potent. It is anticipated that combining cancer vaccines with ICI drugs may lead to stronger responses to treatment than either therapy on its own.

Regeneus expects to have a cosmetic cream containing cell secretions commercially available in Australia in the final quarter of 2016. The cream aims to capitalise on the anti-inflammatory properties of the secretions released by MSCs during cell culture. The company has partnered with the CSIRO on scale-up manufacturing and has demonstrated its capacity to produce cell secretions at commercial scale. Clinical testing is planned for the second half of the year. The cosmetic cream would be regulated in Australia under the National Industrial Chemicals Notification and Assessment Scheme (NICNAS).

Initial results from the randomised pre-pivotal study of CryoShot Canine in 80 client-owned dogs with arthritis are expected in Q1 CY17. The trial is being conducted at the University of Pennsylvania School of Veterinary Medicine under the leadership of Professor Dorothy Brown. The trial will assess the change in levels of pain and dysfunction in arthritic dogs by validated questionnaires and force-plate analysis following intra-articular injection of CryoShot or placebo.

The trial is being jointly funded by Regeneus and its unnamed top five veterinary pharma partner. On completion of the trial, the partner will have an option to exclusively license the CryoShot technology for canine applications; under the terms of the licence, Regeneus will receive an upfront fee, milestone payments and a royalty on sales. The results of the study will be used to finalise the design of a pivotal US FDA trial, which would be funded by the partner.

Results are expected in Q2 CY16 in the trial of the company’s Kvax cancer vaccine in dogs with osteosarcoma. The trial is being conducted with Dr Phil Bergman of VCA, which is the largest veterinary services group in the US.

Regeneus is currently recruiting subjects in a separate trial of Kvax in 45 dogs with lymphoma, which began in November 2015. The double-blind, placebo-controlled trial, being conducted by veterinary oncologists at the Small Animal Specialist Hospital in Sydney, Australia, will use Kvax together with chemotherapy to seek to extend remission times in dogs that initially respond to chemotherapy. Lymphoma is the most commonly treated cancer in dogs; remission typically lasts eight to 10 months with chemotherapy, with a median survival of about one year.

Regeneus is part of a research consortium that has been awarded a A$340,000 grant by the Australian Research Council (ARC) for research to better understand chronic pain and how stem cells specially selected for their cytokine profiles can be used to relieve chronic pain in animals and help lay the foundations for future human therapies. The consortium also includes researchers from Macquarie University and the University of Adelaide.

Regeneus has patents and patent applications on the use of stem cells for the treatment of neuropathic pain. The research project is expected to lead to the development of allogeneic stem cell products that have been specially selected for desirable cytokine profiles for the treatment of neuropathic pain in both veterinary and human markets. In our view, this project is consistent with the company’s strategy of focusing on early-stage product development before licensing to partners for late-stage development and commercialisation.

Our valuation of Regeneus is unchanged at A$106m, or A$0.51 per share, although individual product NPVs have changed as we have rolled the cash balance forward to end FY16e. Our sum-of-the-parts DCF valuation model is summarised in Exhibit 1, with key assumptions shown in Exhibit 2.

Our valuation model applies a standard 12.5% discount rate and includes estimated net cash of A$0.5m at end June 2016. We assume that product sales peak six years after market launch, plateau at that level for five years and decline at 10% per year. For simplicity, we do not include upfront and milestone payments from any future licensing deals 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.

Progenza is the key long-term value driver, with peak sales estimated at A$1.75bn. Therefore, clinical and regulatory progress over the next few years would significantly de-risk the product, which currently has a 15% probability of success.

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 a manufacturing and commercial partner for Progenza in Japan would provide significant validation of the commercial value of the company’s technology and represents near-term potential upside.

Regeneus reported an operating loss of A$3.1m in H116 (six-month period ending December 2015). The loss was 46% less than the pcp due to the reduction in operating costs following the closure of HiQCell operations in FY15. Cash burn in Q316 (three months ending 31 March) was A$1.4m. Average quarterly cash burn (excluding an R&D tax incentive of A$3.4m received in October 2015) for the first three quarters of FY16 was A$1.5m compared to A$2.5m/quarter in FY15, showing that the lower operating costs are reflected in the cash flow. The company intends to out-license its programmes for late-stage development to partners that would fund the majority of R&D expenses, which should allow it to maintain cash burn at around current levels. We have reduced our forecast capex for FY16 by A$230k to A$220k given the lower spend (A$183k) in the first nine months of FY16.

Cash at 31 March (end Q316) was A$2.0m. The company expects to receive a payment in excess of A$2.5m in Q217 under the Australian government’s R&D tax incentive scheme. Regeneus has finalised in principle a loan arrangement that allows it to draw down up to A$2.0m, which would be repaid on receipt of the R&D incentive in Q217. The cash balance and loan arrangement will fund operations into Q217, by which time Regeneus expects to have finalised out-licensing its Progenza mesenchymal stem cell technology for the Japanese market.

The anticipated upfront fee from licensing Progenza for the Japanese market may extend the cash runway, but if that does not happen the company may need to raise additional capital this calendar year. In our forecasts, we assume this funding is provided by long-term debt, as per our standard policy, and we assign A$3.5m to long-term debt in FY17 and A$3m in FY18.