ReNeuron Group — Update 27 July 2016

ReNeuron is a UK clinical-stage company developing a portfolio of stem cell-based therapies. Three programmes are in clinical development: the lead programme, CTX, is in a Phase II study for ischaemic stroke disability and in a Phase I dose-escalation study for critical limb ischaemia. The company was established in 1998, listed on AIM in 2005 and has 45 employees. In 2013, ReNeuron raised £25.3m (gross) through a placement of 1,014m shares at 2.5p to new investors including Invesco, Abingworth and the Wales Life Sciences Investment Fund, and secured a £7.8m grant package from the Welsh government to build a new manufacturing and research facility in South Wales. Following this, in 2015, it raised £68.4m (£65m net) through a placement of 1,367.4m shares at 5p per share. Woodford Investment Management (WIM) is now the biggest shareholder, with c 35%, having acquired a large part of Invesco’s previous holding, following Neil Woodford’s move from Invesco to WIM. Olav Hellebø was appointed CEO in September 2014.

Our valuation has increased to £249m (vs £233m) or 7.9p per share (vs 7.4p per share), primarily due to a change in the $:£ rate used (1.32 vs 1.5). We have also rolled the model forward to H216 (CY), used FY16 reported cash of £65.7m and pushed the potential launch date of CTX in the treatment of stroke out to 2020 (vs 2019) due to more clarity on the timelines for data readouts and the Phase II/III study. We note that this does not include a contribution for the earlier-stage exosome nanomedicine platform as it is currently preclinical. We expect to revisit this when its first target is taken into the clinic H217. There are a number of potential short-term catalysts, with the CTX Phase II data in stroke expected in Q416, along with the Phase I CLI data.

On our forecasts, ReNeuron is funded to the end of 2018, which should enable significant advancement of the two pivotal clinical studies (stroke Phase II/III study and RP Phase II/III study) and advancement of the CLI Phase II study and Phase I exosome study in GBM. With £65.7m in cash as of March 2016, ReNeuron has the resources to progress to potential valuation inflection points and continue to develop its broad portfolio. We expect ReNeuron to continue accelerating its investment in operating activities, particularly within R&D in line with the progression of its clinical pipeline.

ReNeuron is subject to the risks typically associated with drug development, including the possibility of unfavourable outcomes in clinical trials and regulatory reviews, success of competitors and commercial decisions by partners or potential partners. Specifically, it will be the outcome of the CTX Phase II (PISCES-II) stroke trial that will determine next development steps and the product’s eventual commercial potential. The industry’s track record of R&D in stroke is poor, so this is a particularly high-risk indication. Recruitment of patients into stroke and CLI trials has also historically been a rate-limiting factor for a number of clinical studies and ReNeuron may face similar constraints in the future. Hence, there can be little assurance that our current estimates for completion of the trial programmes and subsequent next steps, particularly the stroke study, will be met. ReNeuron is well-financed and has reasonable visibility on the regulatory and clinical pathways, following discussions with the regulators, compared to a few years ago. Nonetheless, it is still exposed to the sensitivities normally associated with novel drug development.

ReNeuron is a leading, clinical-stage stem cell business. It is developing novel cell-based therapies that target areas of significant unmet or poorly met medical need. Stem cell therapy holds the prospect of revolutionising the treatment of a number of debilitating human conditions. The field of stem cell research has advanced significantly in recent years, with a number of clinical studies producing encouraging early signs of the efficacy of various types of stem cells in treating a range of indications such as immune disorders, neurodegenerative and cardiovascular disease, bone and cartilage repair, and diabetes. The clear clinical and commercial appeal is that, rather than addressing the symptoms of a disease, stem cell therapy seeks to address the cause of the condition, to effect repair or reversal of the disease through the regeneration of the affected tissue.

ReNeuron is one of the pioneers in the field of stem cells, having developed proprietary technology platforms, notably based on the CTX neural stem cell line, derived and immortalised from a single donor cell. It is developing these multipotent adult stem cells specifically for allogeneic administration (as opposed to autologous procedures). The final product can be cryopreserved, stored and transported, with a simple procedure to prepare the cells for injection, thereby offering a genuine “off-the-shelf” cell-based therapy (Exhibit 3). ReNeuron has indicated that it possesses a broad, multi-layered patent estate including patents around the cell cryopreservation technology.

ReNeuron’s lead product is targeting ischaemic stroke disability and is currently in a Phase II study. Following the announcement of completed patient recruitment in June 2016 and including the required three-month follow-up, we now expect data readout by end CY16. We note that the time to data has shifted back six months compared to previous projections (data in mid-2016), but this is not uncommon for stroke clinical trials and the uncertainty of patient recruitment timing. ReNeuron also has a separate hRPC cell line programme that is also in the clinic for use in retinal indications. The lead product is currently in a Phase I/II study with safety and efficacy data due in CY17. Exhibit 1 summarises these platforms.

Finally, ReNeuron has an exosome nanomedicine (nanoparticles that play a key role in cell-to-cell communication) platform (Exhibit 2), which is derived from its CTX cell line. This programme has recently advanced with encouraging preclinical data indicating that the exosomes expressed from CTX cells inhibit the growth and migration of glioblastoma cells in preclinical models of the disease. As a result, ReNeuron has selected GBM, a type of brain cancer, as the first clinical target for this programme. We expect this to enter the clinic in H217.

Following the efficacy and clinical progress of ReNeuron’s product pipeline, a key determining factor in a cell-based therapy’s commercial uptake, is manufacturing capability. Here, ReNeuron is well-placed, having invested significant effort in developing robust and scalable processes for the large-scale manufacture of CTX cells. It has established methods to scale up the manufacture of the cell lines, including rapid cell culture techniques, cryopreservation methodologies, potency assays and the development of protocols for automated manufacturing processes. As part of this, ReNeuron is establishing a manufacturing and development facility at Pencoed Technology Park in South Wales (having received a grant from the Welsh government). The 25,700 sq ft facility has been fitted out to house R&D laboratories, clean rooms for automated cell culture and office accommodation. The GMP facility will have sufficient capacity to support late-stage clinical trials and early commercialisation.

The last aspect to consider is that of pricing. The field of cell therapy has a considerably higher cost of goods than small molecules or biological molecules. ReNeuron appears well-placed in this context as its stem cell treatments can be easily scaled to commercial quantities (at reasonable costs), they are administered “off-the-shelf” and do not have onerous supply chain requirements and currently there is no need for immunosuppressive co-treatments. Alongside this, management has directed the development focus on therapeutic areas where the cost burden is high and current treatments are inadequate, hence providing a strong cost benefit rationale for reimbursement. The pipeline is summarised in Exhibit 4.

ReNeuron has a broad clinical pipeline with multiple data readouts anticipated in the next two to three years. The programmes in the clinic are currently a Phase II trial in stroke, a Phase I trial in CLI and a Phase I/II trial in RP.

CTX: Stroke PISCES-II first data readout by end-2016

Standardised CTX neural stem cells are being evaluated in a 21-patient Phase II trial for reducing disability following an ischaemic stroke. For an overview of stroke and potential therapies, please see our initiation report. The PISCES-II study has been described as a futility study, designed to provide a clear and definitive signal of efficacy with CTX cells. An overview of the Phase II trial is outlined in Exhibit 5. In June 2016, ReNeuron announced that it had completed patient recruitment. The final patient enrolled requires a three-month follow-up and, as a result, we now expect data readout by end CY16. We note that the time to data has shifted back six months compared to previous projections (data in mid-2016), but this is not uncommon for stroke clinical trials due tothe uncertainty of patient recruitment timing.

This follows a promising Phase I study that showed a good safety profile and evidence of sustained reductions in neurological impairment and spasticity. The Phase I (PISCES, Pilot Investigation of Stem Cells in Stroke) study treated 11 patients (males, ≥60 years) who remained moderately to severely disabled six months to five years following an ischaemic stroke. With small patient numbers (and in the absence of a control group), we are wary of reading too much into the efficacy outcomes from PISCES, although it is worth noting that across multiple assessments of disability the data indicate a benefit in favour of CTX treatment. Of particular note, the one-point improvement in mRS in three of 11 patients (~25% response rate) after 24 months (vs 4/11 responders at 12 months) is regarded as clinically meaningful given that each point on the six-point scale (0 = symptom free, 6 = dead) relates to a significant change in a patient’s disability. For an overview of the results please see our update note published on 23 April 2015.

Interim data analysis of the 21 patients is expected by the end of 2016. This is a significant potential catalyst for the stock. ReNeuron has commenced formal discussions with the regulatory authorities of Europe (EMA) and the US (FDA). Subject to the results of the Phase II study, the company is planning for a randomised, controlled, pivotal Phase II/III clinical trial with CTX in stroke disability. We expect this to include between 200 and 250 treated patients with a small placebo group due to the ethics of surgery without treatment. We expect this to start in 2017, with potential data readout in H119. The trial represents another inflection point for the stock if a positive result is achieved.

Interestingly, positive stroke study data could also pave the way for accelerated approval in Japan, now that legislation has been passed that permits regenerative medicines to seek conditional approval (valid for up to seven years and fully reimbursed) on Phase II safety/efficacy data alone. This would be subject to bridging studies and pursued alongside a partner.

The second clinical programme uses standardised CTX neural stem cells to treat critical limb ischaemia (CLI). CLI is the severe “end stage” of peripheral arterial disease (PAD), caused by atherosclerosis (the hardening and narrowing of the arteries that restricts blood flows) and is associated with diabetes, obesity and the common cardiovascular risk factors. CLI may involve the large blood vessels, the small vessels, or both. The number of CLI patients is projected to grow to almost 2.8 million in the US by 2020, but if the prevalence of diabetes continues to rise at the current rate, this could increase to over 3.5 million. The first line of treatment is angioplasty, stents and surgery, but around a quarter of patients progress to limb amputation.

The CTX cell therapy candidate for CLI is in a six-patient Phase I ascending dose trial in the UK. Exhibit 6 gives an overview of the trial.

ReNeuron has stated that it has recently prioritised CTX cell batches towards the PISCES-II stroke study in preference to the CLI safety study. However, it expects to announce the safety data in Q416, with the intention of starting a Phase II (if data support it) in H117. Management has indicated a Phase II will be a control design, with stratification of patients and endpoints including clinical (ulcer size, pain, amputation) and pharmacodynamics (capillary refill, oxygenation, arterial pressure).

The third clinical programme is a product derived from human retinal progenitor cells (hRPCs) for the treatment of retinitis pigmentosa (RP). It is being developed in collaboration with the Schepens Eye Research Institute (part of Harvard Medical School) and the Institute for Ophthalmology, University College London.

RP is a group of hereditary diseases of the eye that lead to progressive loss of sight due to cells in the retina becoming damaged and eventually dying. RP and other degenerative diseases of the retina, such as age-related macular degeneration (AMD), represent some of the most common causes of blindness in the Western world. RP affects around 100,000 patients in the US and 180,000 in Europe, with no effective treatments available as yet and only one Phase III study being conducted by Spark Therapeutics in a specific subset of patients with a single gene deficiency. Industry and academic research efforts focus on gene therapy and stem cell-based strategies, with both approaches demonstrating promising initial results. The contained nature of the eye means retinal diseases are particularly attractive for such novel approaches.

hRPC is currently in a 15-pt Phase I/II study, following encouraging data from the assessment of hRPC in animal models. These studies have shown that hRPCs were well tolerated, safe and that a subretinal injection with hRPC could help to rescue photoreceptors, without causing adverse effects, and therefore prevent loss of visual acuity. The most recently published study reports on injected hRPCs, that they are well tolerated, safe and preserved the retinal structure and vision up to six months post-injection. The cells also integrated into tissue without adverse effects.

The first RP patient has been treated in the ongoing Phase I/II study. The study is being conducted at the Massachusetts Eye and Ear Infirmary (Boston) and is the first clinical trial activity in the US for ReNeuron. An outline of the trial design is shown in Exhibit 8.

hRPC has received both fast track designation (accelerated approval and priority review) and orphan drug status for RP in the US and orphan drug status in Europe, thus ensuring seven and 10 years of market exclusivity, respectively, following any approval. Initial safety readouts are expected in H117, with efficacy data in H217. If positive, it could lead to a pivotal Phase II/III trial starting in 2018, possibly treating 120 patients and with readout potentially in late 2019.

Exosomes are cell-derived nanoparticles (30-100nm) that contain key proteins and microRNAs. They have been known about for over 30 years, but their function was thought to be largely waste management for their specific cells and so they were largely overlooked. However, it is becoming increasingly clear that they have specialised functions and play a key role in inter-cellular messaging, where their cargo of proteins, lipids and nucleic acids can influence vital systems such as adaptive immunity, cell regeneration and tissue repair. The ubiquity of exosomes means their effects can be both beneficial and harmful; for instance, tumour cells can secrete exosomes that promote angiogenesis and metastatic cell migration. There is a growing interest in the clinical applications of exosomes, both as diagnostic tools (for prognosis, therapy and biomarkers for health and disease) and therapeutic agents.

ReNeuron has found that its CTX cell lines release large amounts of exosomes into their surrounding media as they are cultured. ReNeuron is planning to exploit the therapeutic potential of exosomes derived from its proprietary stem cell lines. It has reported that it has identified a unique mechanism by which exosomes expressed from its CTX cells inhibit the growth and migration of glioblastoma cells in preclinical models of the disease. To view published data click here. As a result, it is has chosen GBM, the most aggressive type of brain cancer, as its first clinical target (ExoPr0). GBM accounts for 16% of all diagnosed brain cancers. It has a five-year survival rate of between 4% and 6% and is poorly served by current treatments.

ReNeuron announced recently that it has been awarded a £2.1m grant from Innovate UK for this programme. It plans to use the funds to develop manufacturing capabilities at a commercial scale and preclinical testing. If the outcome of the preclinical work is positive, the company intends to start a Phase I clinical trial in H217, with data readout expected in 2017 and potentially a Phase II start in 2019 (data dependent). It should be noted that, if successful, we expect this to be granted orphan indication status, which has the benefit of market exclusivity post-launch. There is also the potential for ReNeuron partnering with this programme, as exosomes could be a target vehicle for drug delivery.

ReNeuron is subject to the risks typically associated with drug development, including the unpredictable outcomes of clinical trials, the risks of development or regulatory delays (for instance, the FDA requiring additional clinical data), unexpected changes in clinical practice (eg as a result of competitor breakthrough products being developed), an altered reimbursement environment (such as in countries with social healthcare systems) and success of competitors and commercial decisions by partners or potential partners. ReNeuron is well-financed and has reasonable visibility on the regulatory and clinical pathways, following discussions with the regulators, compared to a few years ago. Specifically, it will be the outcome of the CTX Phase II (PISCES-II) stroke trial that will determine next development steps and the product’s eventual commercial potential. ReNeuron has a high reliance on the continued, timely and visible progress of its key clinical programmes which, if positive, would lead to the need for further finance and/or the need to establish worthwhile partnerships with a larger player to further develop and commercialise any eventual product.

Our rNPV-based valuation has increased to £249m (vs £233m), primarily due to a change in the $:£ rate used (1.32 vs 1.5), which has given a 12% increase in sterling sales (no change to sales in US$). We have also rolled the model forward to H216 (CY), used FY16 reported cash of £65.7m and pushed the potential launch date of CTX in the treatment of stroke out to 2020 (vs 2019) due to more clarity on the timelines for data readouts and the Phase II/III study. Note that currently we do not include a contribution for the earlier-stage exosome nanomedicine platform as it is preclinical. We expect to revisit this when its first target is taken into the clinic in H217. Our key model assumptions are summarised in Exhibit 10.

ReNeuron is well-funded, which should enable it to execute on an expanding clinical trial programme, resulting in a number of potential key inflection points over the next 24 months, including:

We note that our peak sales estimates and treatment costs for the hRPC programme and stroke could be conservative as transformational disease-modifying treatments could be priced significantly higher.

FY16 results were in line with expectations. Following the £68.4m (net raise of £65.2m) capital raise in 2015, ReNeuron has been accelerating its investment in operating activities, particularly in R&D, given the proposed clinical programmes for CTX, hRPC and the exosome nanomedicine platform. We forecast a cash runway to the end of 2018, which should enable significant advancement of the two pivotal clinical studies (stroke Phase II/III study and RP Phase II/III study) and advancement of the CLI Phase II study and Phase I exosome study in GBM. At that point, ReNeuron will either raise further funding and/or partner some of its programmes. R&D expenses in FY16 (period ending March 2016) rose 42% to £10.3m. We expect the R&D spend to rise significantly over the next couple of years with a Phase II/III study in stroke, Phase II study in CLI, RP Phase I/II study and subsequent start of Phase II/III, and the exosome nanomedicine platform reaching the clinic. As a result, we forecast R&D in FY17 to rise to £23.1m (vs £10.3m in FY16) and to increase to £28.4m in FY18 (vs £20.9m previously). We also expect G&A costs to continue at a similar level to FY16 (raising slightly), £4.6m in FY17 and £5.1m in FY18, as the ramp-up in costs is already reflected with its scale-up of operations to support the expanded clinical programme and following the completion of the relocation to a new research and manufacturing facility in South Wales. ReNeuron receives R&D tax credits (FY16 £1.4m). We expect this to rise in line with the increase in R&D expenditure. Finally, there was an uptick in ‘other’ cash flow from £91k to £345k. This is predominantly interest received and has increased following the fund-raising and increased amount invested.

ReNeuron is well-funded, with end-FY16 cash of £65.7m, which leaves the company well-positioned to deliver on a range of clinical and operational milestones that could be transformative. The focus is on executing the clinical strategy which, if it delivers, could transition ReNeuron to a commercial organisation.