Incannex Healthcare — Spotlight on Incannex’s progress in psychedelics

While there has been significant progression in the acceptance of cannabinoid-based therapies in recent years, we believe that it is important to differentiate from psychedelic therapies, and highlight here an overview of this emerging field. Much like the use of cannabis-derived compounds, and perhaps exacerbated by the COVID-19 pandemic, interest in the use of psychedelics to treat mental illnesses is gaining significant momentum in psychiatry. However, we note that the field is still very much in its infancy and the clinical utility of these compounds is not yet concrete.

The most widely recognized psychedelics include lysergic acid diethylamide (LSD) and 3,4-methylenedioxymethamphetamine (MDMA or ecstasy). Further to these, one of the most popular psychedelics in clinical research is psilocybin, a naturally occurring psychoactive compound that, in combination with psychotherapy (such as cognitive behavioural therapy, CBT, or acceptance and commitment therapy, ACT), is becoming increasingly understood as a potential treatment for mental health conditions. This family of drugs works by stimulating the formation of new neural pathways and down-regulating serotonergic 5-HT2A receptors in the brain, which are believed to be overactive in patients with mental health conditions such as depression. According to an analysis conducted in 2022, based on a systematic search of the clinicaltrials.gov database, psilocybin was found to be the most prevalent psychedelic drug being investigated in current clinical trials, with c 2x more trials than MDMA, and c 7x more trials than LSD. However, we note that the search results from this analysis were dominated by cannabinoids (Exhibit 1).

As an example, in previous clinical trials sponsored by various academic groups (NCT00465595, NCT00957359), psilocybin has been investigated for the treatment of cancer patients suffering from anxiety. In these trials, psilocybin was shown to have a positive effect on patients, with low toxicity and no serious adverse events reported. We believe that this has provided a positive foundation for ongoing clinical trials in this field, such as Incannex’s Psi-GAD study, based in Australia, which is discussed in more detail below. We also wish to highlight that in the largest psilocybin trial to date, the drug has been found to have a significant impact in reducing symptoms of depression when used alongside psychological support, providing further evidence for the potential of such therapies.

With Incannex being an Australian-based biotech company, we wish to highlight some recent news that reflects a shift in Australia’s view of psychedelic drugs. In February 2023, the Australian regulatory authority (the Therapeutic Goods Administration, TGA), announced that it will permit psychiatrists to prescribe medicines containing psilocybin for treatment-resistant depression (TRD), and medicines containing MDMA for post-traumatic stress disorder (PTSD). These new regulations will be effective as of 1 July 2023. We view this step as softening the stigma attached to the use of psychedelics, which is a critical milestone in the path to broader acceptance from both providers and patients. We note that the FDA has already granted the ‘breakthrough therapy’ designation to two ongoing psilocybin clinical programs in the US and believe that real-world patient data may further support regulatory decision-making. With this ruling, Australia has become the first country to formally recognise psilocybin and MDMA as potentially clinically efficacious therapeutics. Psilocybin and MDMA will now transition from ‘Schedule 9 drugs’ (prohibited for patient use) to ‘Schedule 8’ or ‘controlled drugs’ in these indications, enabling them to be prescribed under strict conditions by qualified psychiatrists for patients suffering from these mental health conditions.

GAD is characterised by a persistent feeling of anxiety or dread that interferes with how an individual lives their life. Occasional anxiety is normal, and to a certain extent, a healthy part of life, especially in the face of stressful events. However, people who suffer from GAD tend to feel extremely nervous more frequently about things for months or years, even when there is little or no rational reason to be worried. We highlight here a list (not comprehensive) of common characteristics that people with GAD may possess, as outlined by the US National Institute Of Mental Health:

Global spending on medicines for anxiety-related disorders is expected to reach c $5bn by 2026 (according to IQVIA). Furthermore, it is estimated that c 6.8 million adults suffer from GAD in the US (c 3% of the population), representing a significant potential patient population. First-line treatment for GAD typically involves psychotherapy followed by medications, including anti-depressants (such as pregabalin, an anxiolytic) or benzodiazepines (a type of sedative). However, approximately 50% of patients treated for GAD do not respond to first-line treatment, and long-term use (>3 years) of existing medications such as benzodiazepines has been associated with serious adverse side effects, including dependence, withdrawal symptoms and suicidality.

In our view, there is a significant opportunity for new and improved treatment options for patients suffering from GAD. While the current market is dominated by generic drugs that show unsatisfactory efficacy in a considerable proportion of patients, the use of psychedelics to treat GAD represents a promising prospect. We recognise that there may still be some stigma surrounding the use of such drugs, though we believe that psychedelics are on the road to mainstream acceptance, especially given the limitations associated with current treatments for GAD.

There are a range of ongoing clinical trials seeking to develop medicines for the treatment of GAD, and these range from more traditional small molecule drugs through to less traditional psychedelic treatment options. However, since GAD is a mental health condition, it can be challenging to take objective measurements to assess the progression of the condition, unlike in oncology programmes where objective measures of tumour size can be taken. Instead, one of the most widely used approaches to measure the severity of GAD symptoms is the Hamilton Anxiety Rating Scale (HAM-A), which uses a clinician-rated scoring system.

The HAM-A was one of the first rating scales developed to measure anxiety symptoms, and is still frequently used as a clinically recognised method for such assessments. The scale has 14 items, defined by a range of psychic anxiety (ie mental agitation and psychological distress) and somatic anxiety (ie physical complaints relating to anxiety). We note that, while the HAM-A does not provided any standardised probe questions, the reported levels of inter-rater reliability for the scale have been deemed acceptable for research and clinical applications; the HAM-A has been used to support FDA approvals of treatments for GAD.

For each of the 14 items on the scale, the subject is scored on a scale of 0 (not present) to 4 (severe), giving a final total score ranging from 0–56, where <17 indicates mild severity, 18–24 indicates mild to moderate severity, and 25–30 is indicative of a subject with moderate to severe anxiety. An overview of the list of phrases that describe certain feelings that people may have, used in the HAM-A, is shown here:

While Incannex has several ongoing clinical trials focused on cannabinoid combinations for a range of chronic conditions (IHL-675A for inflammatory lung disease, rheumatoid arthritis, inflammatory bowel disease; IHL-42X for obstructive sleep apnoea), the company is also engaged in a program investigating the use of psilocybin to treat GAD patients (Psi-GAD). The treatment entails two administrations of psilocybin in combination with psychotherapy in a controlled clinical setting as part of a 10-week course. The Psi-GAD study is a triple-blind (treatment unknown to the patient, individual(s) administering the treatment, and individual(s) assessing the outcomes), active placebo-controlled Phase II clinical trial (ACTRN12621001358831) aiming to recruit 72 patients. The primary endpoint of the trial is a reduction in HAM-A score at 11 weeks relative to baseline.

Patient recruitment for the Psi-GAD study commenced in Q1 CY22 and, to date, at least 55 participants have been enrolled. In Q1 CY23, Incannex reported that a review (of the first 37 patients enrolled) by an independent DSMB identified no safety concerns, and recommended that the trial could continue without any changes to the design of the study. Additionally, Incannex conducted an interim analysis (of the first 29 patients to complete the 10-week treatment protocol) and projected a more than 85% probability that the psilocybin arm will provide a statistically significant benefit versus placebo. This projection assumes that the effect size observed for 29 participants is representative of the effect size for the remaining 43 participants. While we advise caution in the interpretation of modelling projections to predict trial outcomes, these early observations of safety and potential efficacy, in our view, support the continuation of Incannex’s Psi-GAD program. This trial is expected to be completed by Q4 CY23, and we see the top-line results from the study as a key upcoming catalyst for Incannex.

Outside of Incannex’s ongoing clinical trials, the company has also recently communicated several advancements in the development of its psychedelic clinics. In March 2023, Incannex revealed plans to commercialise this psychedelic-assisted psychotherapy business. Shortly after, in May 2023, the company announced that it has entered into a lease for riverfront premises in Abbottsford, Melbourne, which will form the first ‘model’ clinic. Fitting out and commissioning of the premises is underway, due to be complete in August 2023, and it plans to open and facilitate patient treatments in September 2023.

According to a company update from Psychennex (a division of Incannex Healthcare which holds all of its psychedelic-related assets), the psychedelic clinics business will be delivered through Clarion Clinics Group, a subsidiary of Incannex. Clarion Clinics Group is 84.5% owned by Psychennex, and 15.5% owned by a group of Australian psychedelic clinical experts, who have extensive experience in clinical psychedelic research, treatment and training (Exhibit 2).

In line with Australia’s change to the classification of psilocybin and MDMA, Incannex has ordered initial supplies of the drugs through its arrangement with PharmAla Biotech. This will enable the prescription of psilocybin for patients suffering from TRD, and MDMA for the treatment of PTSD. Incannex also plans to treat alternative depression- and anxiety-related disorders through ketamine-assisted psychotherapy, and provide psilocybin-assisted psychotherapy for GAD patients, provided regulatory approval is received.

The model clinic will serve as a prototype for Incannex’s planned rapid roll-out of additional sites, provided sound operations are observed; the company is targeting multiple further sites from 2024–28 (Exhibit 3). At each step, the company will assess whether to own or license/franchise the clinics, based on speed to market, financial returns and management capability. The subsequent stage of the expansion plan is to open international sites, though the company has stated that this will be dictated by the regulatory and competitive environment of the target geographies.

The market for psychedelic-assisted psychotherapy is estimated to be worth over A$2bn annually in Australia within three years (according to management). In our view, even if these psychedelic clinics take only a modest portion of the total market, this could be lucrative for the company, based on licensing fees, product sales, clinic operations, psychotherapist training and franchising. With the down-scheduling of psilocybin and MDMA in Australia, we anticipate that a number of providers will enter the psychedelic-assisted psychotherapy space. However, Clarion Clinics Group believes that it will have a strong advantage over competitors due to the extensive experience within the group.

Post Q323 results, our valuation for Incannex adjusts to US$750.7m or US$11.83 per ADR from US$745.8m or US$11.75 per ADR previously. The upside in valuation comes from rolling forward the model and FX update (AUD$0.65/US$ from AUD$0.67/US$), which was partially offset by lower pro-forma net cash position of US$24.1m (A$37.1m) by end Q3FY23 from US$27.8m at 31 December 2022. With a cash balance of A$37.1m at end-March 2023, management has guided for operating cash runway into CY25 at the current quarterly burn rate (A$4.3m),

While we recognise that Incannex’s psychedelic clinics business has the potential to provide an incremental stream of multiple revenues, based on licensing fees, product sales, clinic operations, psychotherapist training and franchising, we await further details from management before updating our valuation. Our valuation is currently based on a risk-adjusted NPV for IHL-42X (a novel cannabinoid combination product) for the treatment of obstructive sleep apnoea (OSA), and psilocybin in GAD, Our model applies a discount rate of 12.5%. We have currently excluded IHL-675A from our valuation until we obtain further context on the drug candidate’s development and commercialisation strategy; however, this has potential to offer further upside. Our underlying assumptions and long-term outlook remain unchanged. A breakdown of our rNPV valuation is shown in Exhibit 4.