Regeneus — Update 1 December 2015

Regeneus is in advanced discussions to secure a manufacturing and development partner for Progenza in Japan. 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 has encountered genuine interest from a number of potential partners, and anticipates finalising these discussions before the end of Q116.

Upfront fees and milestone payments from the potential deal could offer a source of non-dilutive funding for its 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.

Regeneus has treated the first cohort of 10 patients in its Phase I trial of Progenza, with the second of the two dose cohorts expected to begin enrolling subjects in Q116. Trial participants receive ultrasound-guided injections of either Progenza or placebo directly into their arthritic knee joint. In each cohort eight patients will be treated with Progenza and two will receive a placebo injection.

Regeneus has in-licensed technology from Macquarie University that may allow it to develop more potent cell products that secrete higher levels of desired cytokines and growth factors. Acquiring this technology fits neatly with the company’s strategy to focus on its expertise in early-stage product development.

The technology for the first time enables researchers to identify as well as select individual live stem cells that are able to secrete high levels of cytokines. The technology could potentially allow Regeneus to develop designer stem cell products where the cytokine production profile has been matched to the disease being treated.

Importantly, the technology is applicable to a wide range of cell types and is not restricted to mesenchymal stem cells or cells derived from adipose tissue. There are near-term applications of the technology for developing analysis kits for research and diagnostic markets.

While the development team has shown that high-secreting cells selected using the technology maintain that profile through several cell culture passages, there would still be plenty of challenges remaining in ensuring that the cells maintained the desirable cytokine secretion profile when scaled up for commercial manufacture. The in-licensed technology provides a useful tool that could be used in this process to help identify the cell culture conditions that best maintain the cytokine-secreting capacity of the selected cells.

A randomised pre-pivotal study of CryoShot Canine in 80 client-owned dogs with arthritis began on 2 November 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 intraarticular injection of CryoShot or placebo.

The trial will be jointly funded by Regeneus and its un-named top five veterinary pharma partner. At the completion of the trial (results expected in Q316), the partner will have an option to exclusively license the CryoShot technology. The results of the study will inform the design of a pivotal US FDA trial, which would be funded by the partner, and may also provide additional validation for new IP developed by Regeneus that could improve the likelihood of success when using CryoShot.

Regeneus began recruiting subjects in a trial of its Kvax cancer vaccine in 45 dogs with lymphoma in November. The double-blind, placebo-controlled trial, to be 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 8-10 months with chemotherapy, with a median survival of about one year.

The trial of Kvax in dogs with osteosarcoma conducted with Dr Phil Bergman of VCA, the largest veterinary services group in the US, has competed recruitment and is expected to report results in Q116.

As Kvax is an autologous vaccine it can be made commercially available in Australia and the US without specific regulatory approval. Over 100 dogs with more than 14 different cancers have been treated with Kvax in Australia. However, while there are no further regulatory hurdles to be cleared, widespread commercial uptake will depend on positive efficacy data in clinical trials such as those currently underway in osteosarcoma and lymphoma. Regeneus continues to explore global commercial partnering opportunities for Kvax.

Our valuation of Regeneus is unchanged at A$106m, or A$0.51 per share. Our sum-of-the-parts DCF valuation model is summarised in Exhibit 1, with key assumptions displayed in Exhibit 2.

Our valuation model applies a standard 12.5% discount rate and includes 30 June 2015 net cash of A$3.0m. 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, and our valuation is not a price target but a fair value for the stock today. Risk adjustments would unwind as programmes advance through clinical studies, gain regulatory approvals, 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. A commercialisation deal for the secretions technology represents potential upside, as we do not currently include secretions products in our valuation model.

Regeneus reported a loss of A$6.6m for FY15 (ended 30 June 2015). The result included one-off costs totalling A$1.6m incurred in winding-down the HiQCell business. Net cash used in operating activities in the first quarter of FY16 was A$1.6m. With the company continuing to trim costs, we have reduced forecast operating expenses, reducing forecast losses by 13%, 11% and 6% in FY16, FY17 and FY18 respectively. Regeneus had A$1.5m cash at 30 September, and received an A$3.4m R&D incentive rebate in October. Under the Australian government’s R&D tax incentive scheme, approximately 45% of eligible R&D costs can be reimbursed. The combined total of A$4.9m gives it a cash runway to Q416 at an average burn rate of A$1.7m/qtr. We estimate that an additional A$2m funds would provide sufficient working capital to fund operations until the FY16 R&D rebate payment (our estimate A$2.5m) is received in October 2016, with a further A$4m required in FY17. These funds could come from pending partnering deals, or potentially a capital raise. In our forecasts we assume that this funding is provided by long-term debt, as per our standard policy, and we assign A$2m to long-term debt in FY16 and A$3m in both FY17 and FY18.