Newron Pharmaceuticals — Seeing STARS

Xadago is licensed, outside Japan and Asia, to Zambon, a private Italian company. Zambon is strong in Europe with 20% of its sales in the home Italian market. It launched Xadago in Europe during H115 with Newron getting double-digit royalties on sales. Our royalty rate forecasts are around 12–13%. Total product royalties rose in H2 to €2.6m vs €2.1m in H119: €4.7m in total. The Italian price cap has been removed, which may help revenues given Zambon’s local sales strength in Italy.

In the US, Zambon sublicensed Xadago to WorldMeds Pharma, a private US distributor, in Q116; FDA approval was gained in Q117. Under the sublicence, Newron shares 50% of Zambon’s US royalties.1 Given the importance of the US market, this might be a drag on royalty growth. Newron does not disclose sales by region so detailed forecasting is not feasible.

In 2011, Newron entered into an exclusive licensing agreement with Meiji to develop, manufacture and commercialise the drug in Japan and Asia. Under an agreement between Eisai and Meiji in March 2017, Eisai has the exclusive rights to market safinamide in Japan, as well as to develop and market safinamide in Asia. The approval of Xadago in Japan in late 2019 gave rise to a milestone that added €2.3m to H2 revenues.

Xadago is indicated for the treatment of adult patients with idiopathic Parkinson’s disease (PD) as add-on therapy to a stable dose of levodopa (L-DPOA) alone or in combination with other PD medicinal products in mid- to late-stage fluctuating patients. It is a monoamine oxidase type B (MOA B) inhibitor. MOA is the enzyme that breaks down dopamine, so reducing its activity gives more consistent brain dopamine levels.

One of the issues with oral dosing of dopamine (given as the prodrug L-DPOA) is inconsistent blood levels, which lead to ‘off’ periods when Parkinson symptoms return. MOA B inhibitors are used as one of several possible therapeutics to limit off time. Other treatments to deal with this include direct continuous delivery of L-DPOA gel to the small intestine via an external pump, but this is very expensive. Deep brain stimulation is also used.

A noted complication of L-DPOA treatment, the main Parkinson’s therapy, is dyskinesia – uncontrolled tremors that can occur both when treatment is working (‘on’) and in off periods. Dyskinesia is a very complex condition and opinion is still uncertain about why and how to treat it. It develops progressively in many patients after several years of L-DPOA therapy.

In the MOA B class, the leader is Azilect (rasagiline, Teva), approved by the FDA in 2006 and EMA in 2005. Rasagiline is an irreversible MOA B inhibitor, which means it destroys the enzyme activity after it binds. Other MOA B drugs like Xadago and Zelapar (selegiline) are reversible. Rasagiline started to become generic in 2016. Rasagiline has a wide label for use alone or in combination with other Parkinson’s disease medications. Azilect had peak sales in 2014 of $519m (Evaluate Pharma) but generics are now under $50m in Europe and the US combined. Due to a late approval, it is a branded product in Japan (Takeda) accounting for about half of global sales. Selegiline seems never to have gained a significant market share with very low sales.

Newron expects to start a pivotal label extension study to support Xadago use in L-DPOA induced dyskinesia (LID). This trial has been expected for some years and may start in H220, as indicated by management in conference call questions. The design is stated (5 March presentation) to be a six-month double-blind, placebo-controlled study. This will take about two years to recruit, run and analyse. It could announce data by early 2023, implying a 2023 filing. It could, with a fast review as an additional indication, start sales in the H223 to H124 period. Our previous valuation assumed that this indication would launch in 2021. Currently, starting the study depends upon a final agreement with Zambon.

Newron will fund the study up to a capped investment of €10m and now run the trial with Zambon and its sublicensee selling the product. In return, Newron will receive a €4m milestone on approval and a marginally enhanced royalty rate on all Xadago sales. Management has indicated in a conference call that the deal is viable if overall sales rise by 6% or more.

Newron in licensed sarizotan from Merck in 2011; sarizotan is a serotonin (5-HT1A) agonist. It has been developed as a pharmacotherapy for Rett syndrome, an orphan indication. As an orphan drug, it will have seven and a half years’ US exclusively, that is to 2028/29, and 12 years’ orphan drug exclusivity in the EU, to around 2033. It will gain an orphan paediatric voucher (PRV) giving priority FDA review to a subsequent product.2 These vouchers can be sold; a recent transaction was by Bavarian Nordic in December 2019 for US$95m (€88m, see later discussion of value).

Rett syndrome is an X-linked genetic disease.3 Males die soon after birth. Females have a longer life expectancy but experience progressive and irreversible deterioration from six months old and especially in their teenage years. Sarizotan is a symptomatic treatment to prevent short duration breathing cessation (apnoea). As this leads to low oxygen levels affecting patient morbidity and perhaps accelerating disease progression, alleviating apnoea could be very beneficial. Pricing is hard to assess without data on the impact on disease progression and improvements in care, but we assume $75,000 per year in long-term chronic use. Newron estimates that the prevalence is 16,000 US cases and 20,000 in Europe. This could therefore develop into a substantial market.

There are limited potential competitor products in development, and none address the underlying genetic defects, so if any or all of these show efficacy, they might be combined.

Newron’s pivotal STARS trial (NCT02790034) with 129 patients completed recruitment in Q419. The endpoint is ‘reduction in respiratory abnormality in patients with Rett syndrome measured over 24 weeks’. This will be assessed as the percentage reduction in the number of apnoea episodes per hour while awake. This is measured using an ambulatory home monitoring system.

In December, the FDA asked Newron to request a Type A emergency meeting. This was held in early 2020. In a statement on 11 March, Newron commented that it and the FDA had agreed on the Statistical Analysis Plan (SAP), the primary and key secondary efficacy measures, and the statistical analyses to be performed for efficacy. Newron is now finalizing the SAP and will submit it shortly to the FDA. Following the FDA’s review and approval of the plan, the contract research organization will finish the software required and then unblind the results. Newron expects to announce the top-line results in the second quarter of 2020.

The regulatory submission could follow in late H220 with a fast track review in 2021. Given disease severity and the lack of other treatments, sarizotan could have a rapid uptake and be transformative for Newron. Newron will commercialise this asset alone in the US with a small but targeted salesforce; a European and broader commercialisation strategy is yet to be defined.

In H119, the FDA delayed the planned pivotal studies of schizophrenia drug Evenamide due to safety concerns. Newron is now doing additional preclinical work. On 9 January, Newron announced that a four-week exploratory study in patients with schizophrenia will be run. As yet, this trial has not been posted on the usual clinical trial databases.

Newron anticipates that the new data, due from Q320 will allow the FDA to permit a Phase III programme to start in two indications, perhaps in late 2020/H121. Newron estimates that these studies could take 18 months to run. Trial designs have not been published.

The ideal target indication will be patients who are refractory to clozapine, a common anti-psychotic agent. These patients currently have no other treatment options; Newron estimates there are 20,000 patients in the US. An approval in this indication would give a solid market base that Newron estimates could be worth several hundred million dollars. Note that meeting the primary endpoint in the single clozapine resistant study would potentially suffice for this indication.

Newron will also seek a general schizophrenia indication for patients who are not well controlled on their current anti-psychotic medicine, about 70% of cases. In Newron’s estimates, this could have a market potential of over US$1bn a year. In the general anti-psychotic market, the leading agents are now generic but Evenamide might add onto current therapy rather than seek to replace it. Both the general and clozapine studies need to be successful for FDA approval in this wider indication and safety would need to be acceptable.

If a filing is made by mid-2023, the product could be marketed from H224. Any delays could push this to 2025. The form of matter patent expires in 2028 but the duration of the clinical program means that additional US patent cover, up to five years, could be gained by patent extensions.

Newron estimates that as the studies are on an out-patient basis, they could be funded from company resources. The trials will need to be large enough to show safety, given current concerns and the use by patients of multiple medicines. A marketing partner for a mass-market anti-psychotic will be needed, but Newron plans to sell direct to the smaller clozapine resistant market. Newron envisages partnering once Phase III data is available to get the optimal deal value.

Our previous valuation has been updated by the following short-term forecast adjustments and model enhancements.

In the short term, 2020 and 2021, we see Xadago sales growing steadily but see no reason for a much higher sales growth rate. Japanese royalties are not assumed by us to be high but increase the growth rate. We now assume the main market growth will occur after 2024 once the LID indication is obtained (probability adjusted at 50% (unchanged)). We assume €10m trial expenditure and a €4m milestone in 2023. We continue to keep the Xadago forecast under review.

We assume sarizotan sales start from H221 after the delayed read-out. We expect that the dossier might be FDA filed by late 2020 for an expedited review. Other than minor timing changes we have not adjusted the forecast. This will be reviewed once we have primary outcomes data from the study. We assume pre-marketing costs from H220 and then direct marketing.

Approval of sarizotan could give Newron a saleable PRV valued in a recent transaction at €88m. We have not yet added this into the value due to lack of visibility on timing and realisable value. Sale of the PRV might give a useful cash boost in, for example, 2022. However, Newron may decide to retain it for use with Evenamide.

We have not changed the Evenamide peak sales potential, but our overall value has risen as we include additional revenues from a longer protected period. We now assume launch in 2025, patent expiry in 2028 and US patent extension to 2033. In the EU, there will be 10-year exclusivity to 2034.

R&D in 2020 is assumed to reduce as no major clinical studies are running other than the possible small Evenamide study, which is not a high cost. However, trial costs are assumed to increase from 2021. Newron has given guidance of €35–38m in clinical trial costs over the next few years.

Debt has risen due to use of the EIB loan facility. This has a discounted (fair) value of €16.7m in the 2019 balance sheet reflecting €17.5m face value of debt. The fair value has been included as this is largely the source of the cash. A further €22.5m can be drawn down. Cash use in 2019 was €22m.

We have added a line to reflect core cash flows from R&D and general and administrative costs. These are discounted at 10%, as commercial costs, and adjusted for tax. Individual product estimates include sales, additional R&D and clinical trial costs. The base assumption is core 2020 R&D of €7.5m and administration costs of €8m a year (net of warrant gains) inflated at 5%.

The rNPV valuation, which uses a 12.5% discount rate for clinical-stage assets and a 10% discount rate for commercial assets (Xadago in PD), is shown in Exhibit 2. We have rolled forward the model to 1 January 2020 and used 31 December 2019 FX rates.

Xadago reduces in importance from CHF11.3/share to CHF8.7/share as we do not now foresee full sales development until the dyskinesia approval extends the label. By rolling forward the model, sarizotan becomes more important at CHF11.8/share vs CHF9.2/share formerly. Evenamide’s value rises to CHF3.7/share, formerly CHF3.1/share, due to the inclusion of the additional protected period.

Over 2020, the value driver is sarizotan, which as an orphan drug with direct marketing could generate strong revenues. Consequently, the top-line data will be crucial to value re-assessment.

Reported revenues grew during FY19 to €4.7m (FY18: €4.0m) plus a €2.3m milestone from the Japanese approval – as this did not pass through Zambon, Newron gained the full benefit. Costs in FY19 were predominantly R&D: €22.5m offset by a tax credit of €5.0m and a tiny payment of €50k from Zambon. Tax credits in Italy are complex and the reclaim value on eligible expenses is reduced to 25% from 50% so we are cautious about the offset going forward. R&D tax credits taken via the R&D line in the P&L are non-cash. We have adjusted for this in our cash flow forecast. Some tax credits are used and offset employee taxation costs.

We have decreased our revenue expectations for Xadago royalties in Europe and the US (sublicence), but now include Japan. The Japanese milestone expected in 2020 was received in FY19.

We expect a decline in R&D costs in 2020 as only the small Evenamide exploratory study might be run. There will potentially be preparation costs for pivotal dyskinesia and Phase III Evenamide studies. These are assumed to raise R&D costs in 2021 but timing and magnitude are not certain. The STARS analysis and sarizotan regulatory dossier preparation will require funding in 2020.

We do not expect a major increase in general costs, €9.9m in FY19 and we assume this contains €2.1m of non-cash share option expenses. However, if Newron intends to sell sarizotan direct from H221, investments in a pre-launch sales capability from H220 will be needed so we have added €2.5m in pre-sales costs. Newron might opt for a marketing partner if terms are good.

Newron reported cash and equivalents of €39.2m at 31 December. There is a €22.5m EIB loan facility available and we expect this to be drawn, at least in part, in 2021. This gives Newron cash to beyond 2021. Given timing and trial uncertainties, exact cash flows are uncertain and will be reviewed at the interim stage. Nonetheless, Newron has the cash reserves to develop its products for the next two years. Given the given the current volatile market conditions due to the viral epidemic, this is a big advantage.

Financial forecasts are shown in Exhibit 3.