Sequana Medical — On track to meet key milestones

Sequana reiterated in its H123 results that it continues to expect to submit a US Premarket Approval (PMA) application for the alfapump in RRA in Q423, which we estimate could lead to US market launch in H224. As explained in a recent note, Sequana Medical initially reported positive results in Q422 from the POSEIDON North American pivotal study of its implantable alfapump device in patients with RRA due to liver cirrhosis. The alfapump met its objective in significantly reducing the need for TP procedures in recruited RRA patients, whom on average required 3.2 TP procedures per month prior to implantation. The near elimination of the need for TP is very meaningful, given that ascites episodes themselves and TP procedures place a significant burden on patients’ quality of life (QoL). The company reported that reduction in the need for TP in POSEIDON (and the implied reduced ascites burden) led to clinically relevant and statistically significant QoL improvements (n=26, p<0.001) in both the physical component score of the SF-36 scale and the Ascites-Q scores. Patients in the pivotal cohort (n=40) also showed a 70% one-year survival rate, which compares favourably to literature citing a c 50% one-year survival rate for refractory ascites patients.

Altogether the POSEIDON results demonstrate that the alfapump is very effective at controlling RRA, virtually eliminating the need for large volumes of TP procedures and significantly improving patients’ QoL at life at six months post-implantation. This, combined with favourable safety and encouraging survival data, bodes well for the product’s potential US approval, in our view.

Our forecasts assume alfapump’s net unit price at US launch would be $25,000 (comparable to the current selling price in Europe). When assessing net reimbursement for alfapump in the US, two key elements should be considered: coverage and coding. The role of Medicare is critical given that we estimate the majority of potential alfapump patients will be over 65 years of age and thus potentially covered by Medicare. We see existing and new initiatives by the US Centers for Medicare & Medicaid Services (CMS), as providing favourable conditions for reimbursement levels consistent with (and potentially even above) our expectations and for quick reimbursement decision timelines upon US approval .

Diagnosis Related Group (DRG) codes are used for reimbursement of hospital in-patient procedures and they determine a fixed Medicare payment that covers all hospital-related costs, including physician fees, room and board, and all drugs and medical devices that may be used. The alfapump is intended to be used in a hospital in-patient procedure and there are existing DRG codes that can be used for the alfapump. The alfapump’s reimbursement will be part of this overall DRG code payment.

Existing DRG codes suggest that a price of at least $25k for the alfapump is achievable. DRG codes reflect the primary ICD-10 diagnosis code (ICD-10-CM), ICD-10 procedure code (ICD-10-PCS) and the severity of the patient's condition during their stay. Based on the current ICD-10 codes that can be used for the alfapump, the company believes that the likely DRG code for alfapump implantation would be 423 ‘Other Hepatobiliary or Pancreas O.R. Procedures’, which is expected to result in an average DRG payment of $60–70k in 2025. Assuming this reimbursement amount for the overall implantation procedure supports our assumption of $25,000 net pricing for the alfapump device itself. In addition, the new technology add-on payment (NTAP) process adds further support to the prospect of elevated alfapump pricing, and may even lead to net US revenues per alfapump coming in above our estimates. Certain qualifying products may be eligible for a payment above the standard DRG code through the NTAP designation, generally for up to three years after the introduction of the new technology. After these three years, the prospective DRG rates can be recalibrated to reflect the utilisation of the new technology. Eligibility is based on three criteria: newness, cost and substantial clinical improvement (ie the technology ‘must represent an advance that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries’). The alfapump would meet the newness and substantial clinical improvement criteria given that it has already received Breakthrough Device designation by the FDA. If an alfapump NTAP application to the CMS is accepted by the agency, we see the potential for alfapump to achieve an even higher price than our base case of $25,000.

The CMS in June 2023 announced that it was seeking public comment on a newly proposed Medicare coverage pathway termed transitional coverage for emerging technologies (TCET), which aims to provide more timely access for Medicare-insured patients to emerging technologies as product sponsors gather additional evidence to support longer-term Medicare reimbursement. Products that would receive coverage under the TCET pathway would automatically be provided with between three and five years of Medicare coverage upon regulatory approval. The TCET pathway is intended to be a voluntary process for product sponsors and is designed to facilitate immediate and predictable reimbursement coverage for promising technologies shortly upon FDA approval or clearance, and it sets parameters to permit the participating sponsors to gather additional evidence (on potential benefits of the technologies) and to support longer-term ongoing reimbursement. Products potentially eligible for the TCET pathway must fit defined criteria, including having FDA-designated Breakthrough Device status, falling within an existing Medicare benefit category, but not already being subject to an existing Medicare national coverage determination (NCD) category. The alfapump fits all of these criteria, and hence if the proposed TCET pathway is formalised and officially adopted, we anticipate that Sequana would seek to nominate itself to participate in the TCET pathway. We note that under the proposed guidelines, the CMS anticipates only accepting up to five TCET candidates per year due to resource limitations. Hence, while TCET may provide a promising pathway for accelerated national coverage by CMS/Medicare, it is not yet certain if alfapump would necessarily receive such expedited automatic coverage at launch.

Sequana remains on track to report interim data from the non-randomised cohort (n=3) of its MOJAVE Phase I/IIa study assessing the safety and efficacy of its second-generation DSR 2.0 programme in diuretic-resistant CHF patients across two cohorts. The company announced the enrolment of the first patient in the non-randomised cohort in July 2023, and it expects to report initial data from the three-patient, open-label cohort by year-end 2023, which may demonstrate proof-of-concept and provide an early efficacy signal of DSR 2.0’s potential as a disease-modifying CHF treatment.

As a reminder, DSR 2.0 is designed to provide an improved therapeutic and a more favourable safety profile compared to the first-generation product (DSR 1.0), which showed in the SAHARA trial that it can resolve persistent congestion in diuretic-resistant CHF patients. More importantly, all evaluable patients improved their New York Heart Association status by at least one class (in a four-class scale) and experienced no congestion-related hospital readmissions during the study. These findings, combined with a 33% mean reduction in NT-proBNP (a marker of cardiac function) and a stable eGFR (a marker of kidney function), both at 16 weeks post the intensive DSR therapy period versus baseline, suggest DSR’s potential as a disease-modifying CHF therapy, in our view.

In the open-label MOJAVE cohort, three patients will receive DSR 2.0 via a peritoneal dialysis (PD) catheter on top of optimised usual care for up to four weeks. An independent data safety monitoring board will then determine whether the study can proceed to the randomised cohort. This cohort is designed to enrol 30 patients, with 20 patients randomised to DSR 2.0 administered via a PD catheter on top of optimised usual care for CHF for up to four weeks, and 10 patients randomised to intravenous loop diuretic treatment as part of maximised usual care for CHF. Both cohorts will have a three-month safety follow-up period after the four weeks of DSR therapy.

The company expects to report top-line data from the randomised cohort in 2025, and interim data from this cohort in H224. Nonetheless, initial data from the open-label cohort, expected in Q423, could provide an early indicator of DSR 2.0’s potential efficacy in reducing congestion and demonstrating disease-modifying properties, given the very significant effects already shown for DSR 1.0 in the SAHARA and RED DESERT studies.

Hence, the non-randomised cohort of MOJAVE may provide a strong efficacy signal and provide a meaningful clinical validation of the DSR 2.0 product and its method of administration (through a PD catheter), which may provide the opportunity for a re-rating of the shares ahead of the company’s next fund-raising need.

Sequana reported an H123 operating loss of €15.4m, above our estimate of €12.2m. The primary driver for the higher than expected loss was H123 R&D expenses at €11.7m, which was above our €8.0m estimate, mainly due to the quality and regulatory, supply chain and engineering costs, which are largely associated with the alfapump programme. The operating cash burn rate was €16.4m, higher than our €13.5m estimate.

We have increased our H223 and FY24 R&D cost estimates to reflect recent trends, and as a result we now expect higher operating losses in FY23 (€30.4m) and FY24 (€30.3m) than previously (€25.2m and €25.6m, respectively). We have also slightly increased some of our longer-term R&D cost assumptions for the DSR programme. The result of these changes is that we now anticipate that the company will require €130m in additional financing through the end of FY27 prior to reaching operating profitability (which we continue to anticipate in H128), versus €105m previously, and including €35m (vs €30m previously) before the end of FY24. As per our usual policy, we model all future fund-raising requirements as illustrative debt. We continue to assume that the company’s gross cash on hand (€17.1m at 30 June) will be sufficient for it to maintain operations into Q124.

We have rolled forward our model and adjusted our forex estimates to reflect a $1.07/€ assumption (vs $1.10/€ previously), with both adjustments having an upward effect on our valuation. Following these changes, we now obtain an rNPV valuation of €359.5m versus €334.1m previously. After adding €0.3m H123 net cash (€17.1m gross cash offset by €16.8m in total debt, excluding €0.85m in lease liabilities), we obtain an equity valuation of €359.8m or €12.76/share (€11.64 fully diluted given options outstanding), versus €12.22/share (€11.14 fully diluted) previously.

As a sensitivity, our equity valuation per basic share would be adjusted to €7.30/share if we assume that total future funding need (€130m) is met through equity issuances at the current share price (c €3.2/share).