Incannex Healthcare — Strong cash position supports clinical progression

Incannex Healthcare (NASDAQ: IXHL)

Last close As at 18/05/2024

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Research: Healthcare

Incannex Healthcare — Strong cash position supports clinical progression

Following its Q223 cash flow report in February, Incannex has reported detailed interim H123 results. The period was mainly focused on enhanced clinical efforts across its drug development portfolio, including initiation of a bioavailability and bioequivalence study for its lead clinical asset IHL-42X, a positive pre-IND meeting with the FDA on IHL216A (for concussion and traumatic brain injury) and the completion of patient dosing in the Phase I trial of IHL-675A. IHL-675A is being considered for rheumatoid arthritis (RA), inflammatory bowel disease and lung inflammation, and the company started a Phase II study in late February 2023 in RA. We expect continued clinical progress over CY23, including anticipated IND applications and additional clinical study starts. With the recent private placement of A$13m (US$8.7m), the company’s net cash position stood at A$41.4m (US$27.8m), which, based on our estimates, provides a cash runway to the second half of FY24. We value Incannex at US$745.8m or US$11.75/ADR (US$736.6m or US$11.7/ADR previously).

Adam McCarter

Written by

Adam McCarter

Associate Analyst

Incannex mother and child

Healthcare

Incannex Healthcare

Strong cash position supports clinical progression

H1 results update

Pharma and biotech

1 March 2023

Price

US$2.6

Market cap

US$150m

ADR/Ord conversion ratio 1:25

US$/A$ 0.67

Net cash (A$m) at 31 December 2022

41.4

ADRs in issue

63.5m

ADR code

IHXL

ADR exchange

NASDAQ-GM

Underlying exchange

ASX

Depository

DBK

Share price performance

%

1m

3m

12m

Abs

(29.3)

(41.8)

N/A

Rel (local)

(27.8)

(41.10

N/A

52-week high/low

US$35.5

US$2.5

Business description

Incannex Healthcare is an Australian dual-listed biotech company focused on developing medicinal cannabis pharmaceutical products and psychedelic medicine therapies. These therapies are being designed to target indications with unmet need, including obstructive sleep apnea, generalized anxiety disorder, trauma and inflammatory conditions.

Next events

Open FDA IND for IHL-42X

Q1 CY23

Analysts

Dr Adam McCarter

+44 (0)20 3077 5700

Nidhi Singh

+44 (0)20 3077 5700

Incannex Healthcare is a research client of Edison Investment Research Limited

Following its Q223 cash flow report in February, Incannex has reported detailed interim H123 results. The period was mainly focused on enhanced clinical efforts across its drug development portfolio, including initiation of a bioavailability and bioequivalence study for its lead clinical asset IHL-42X, a positive pre-IND meeting with the FDA on IHL216A (for concussion and traumatic brain injury) and the completion of patient dosing in the Phase I trial of IHL-675A. IHL-675A is being considered for rheumatoid arthritis (RA), inflammatory bowel disease and lung inflammation, and the company started a Phase II study in late February 2023 in RA. We expect continued clinical progress over CY23, including anticipated IND applications and additional clinical study starts. With the recent private placement of A$13m (US$8.7m), the company’s net cash position stood at A$41.4m (US$27.8m), which, based on our estimates, provides a cash runway to the second half of FY24. We value Incannex at US$745.8m or US$11.75/ADR (US$736.6m or US$11.7/ADR previously).

Year end

Revenue (A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/21

2.0

(8.2)

(0.83)

0.0

N/A

N/A

06/22

0.8

(14.9)

(1.25)

0.0

N/A

N/A

06/23e

0.1

(20.7)

(1.43)

0.0

N/A

N/A

06/24e

0.1

(33.4)

(2.10)

0.0

N/A

N/A

Note: *PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.

Clinical development across the portfolio

During H123, Incannex recorded developments across its clinical pipeline. For its proprietary inhaled drug product, IHL-216A, the company received detailed feedback for the future clinical development plan from the FDA, followed by a positive pre-IND meeting and pre-IND package submission in August 2022. Additionally, Incannex plans to submit an IND application in the first quarter of CY23 for IHL-42X in obstructive sleep apnea and, if approved, may initiate an international, multi-site Phase II/III study in the first half of CY23. Furthermore, Incannex has now started a Phase II study assessing the efficacy and safety of IHL-675A in RA patients.

A$13m private placement to extend the cash runway

In December 2022, Incannex raised a total of A$13m (gross proceeds) through a private placement, issuing 63.4m new common shares at A$0.0205/share. In addition to this, the subscribers were offered an equal number (63.4m) of new options, exercisable at A$0.285 per option. The options, if exercised in full, might raise a further A$18.1m in proceeds. Post the private placement, we now expect Incannex to need A$55m in additional funding before reaching profitability in FY26.

Valuation: US$745.8m or US$11.75 per ADR

Our valuation for Incannex increases slightly to US$745.8m or US$11.75 per ADR (US$736.6m or US$11.7 per ADR previously), mainly due to rolling our model forward and foreign exchange movements. With a net cash position of A$41.4m, based upon our projections, we estimate an operational cash runway into H224.

Aiming for FDA studies in 2023

Incannex continues to make headway in advancing its busy clinical pipeline and 2023 is shaping up to be a critical year for the company’s lead assets. Management intends to submit an investigational new drug (IND) application with the FDA in the first quarter of CY23 for IHL-42X (dronabinol and acetazolamide) in the treatment of obstructive sleep apnea (OSA), which, if approved, would set Incannex up to initiate an international Phase II/III clinical study in the first half of CY23. Interim data from the Australian Phase II trial (Psi-GAD1) of psilocybin-assisted psychotherapy in the treatment of generalized anxiety disorder (GAD) is currently being reviewed by an independent data safety monitoring board. We expect to see these interim trial results in the first quarter of CY23, representing a near-term potential clinical catalyst for Incannex. Finally, the results of an Australian Phase I study of IHL-675A (cannabidiol (CBD) and hydroxychloroquine (HCQ)) found the anti-inflammatory cannabinoid combination treatment to be safe and well tolerated in healthy volunteers. While IHL-675A potentially has a broad scope across anti-inflammatory indications, Incannex is initially focusing on RA and has now initiated an Australian Phase II trial in this setting. Global sales of RA drugs reached c US$29bn in 2021 (source: Evaluate Pharma), highlighting the potential scope in this target market.

Exhibit 1: Incannex clinical pipeline

Source: Incannex company website

IHL-42X leading the way in the clinic

IHL-42X continues to be Incannex’s flagship asset, and is now closest to progressing into what would be the company’s first FDA-regulated clinical studies. Incannex has already begun preparatory activities to support such trials through the initiation of a bioavailability/bioequivalence (BA/BE) study for IHL-42X in November 2022. Results from the BA/BE study are a prerequisite to pursue the FDA’s 505(b)(2) new drug application regulatory pathway, which forms a critical part of management’s expedited clinical development strategy. As a reminder, the FDA’s 505(b)(2) approval pathway allows companies to leverage pre-existing safety data for marketed therapies, potentially negating the requirement for certain safety studies, which, ultimately, may help conserve cash resources and accelerate commercialization. The BA/BE study will be conducted in Australia by CMAX Clinical Research and Novotech CRO and will recruit 116 participants to assess the pharmacokinetic and tolerability profile of the combination of dronabinol and acetazolamide.

IHL-42X has previously demonstrated an encouraging safety and efficacy profile from its key proof-of-concept Australian Phase II study, which we believe will significantly support its planned IND application in the first quarter of CY23. Should the IND for IHL-42X be approved, Incannex intends to initiate an international, multi-site Phase II/III study in H1 CY23 that would include trial sites in the United States. The study would assess the efficacy of IHL-42X in patients with OSA across a 12-month treatment period at the doses established from its Australian Phase II study.

Positive developments towards greater psychedelic acceptance

Incannex’s ongoing Australian Phase II Psi-GAD1 study is a triple-blind, active placebo-controlled trial to assess the safety, efficacy and tolerability of psilocybin-assisted psychotherapy in patients with GAD. A team of experienced clinicians is conducting the Psi-GAD1 trial at Monash University’s BrainPark. The study aims to recruit a total of 72 patients and, when interim analysis commenced in January 2023, it had enrolled 45 participants, with 29 having completed the 10-week treatment protocol. The interim analysis will be conducted by an independent data safety monitoring board formed of subject experts. Incannex’s management intends to use the interim analysis to make key decisions on regulatory strategy and potential pivotal studies.

Additionally, a significant regulatory development that, in our view, could potentially have a positive impact on the clinical utility, uptake and overall sentiment surrounding psychedelics, as well as support Incannex’s psychedelic program’s future development, was the Therapeutic Goods Administration’s (TGA’s) decision to grant patients access to psychedelic medicines under certain treatment settings. The TGA, which is the Australian regulatory authority, announced it will permit psychiatrists to prescribe (off-label) therapeutics containing psilocybin (for treatment-resistant depression, TRD) and MDMA (for post-traumatic stress disorder, PTSD). Following the TGA’s decision, Australia has become the first country to officially recognize MDMA and psilocybin as potentially clinically efficacious medicines. Under the ruling, psilocybin and MDMA will now transition from being Schedule 9 drugs (prohibited for patient use) to Schedule 8 or controlled drugs (for PTSD and TRD, respectively), allowing them to be prescribed under certain strict pre-conditions by qualified psychiatrists, effective 1 July. Given there are currently no ‘approved’ products containing these psychedelics, usage is likely to be off label for now and limited to the most extreme cases. Lack of reimbursement at present is also likely to restrict usage, although we believe data from these first users would be crucial to inform broader clinical development and regulatory decision-making.

An initial focus on rheumatoid arthritis for IHL-675A

Incannex’s latest asset, IHL-675A, has already generated initial clinical results in the form of safety data from an Australian Phase I study. The Phase I trial recruited three patient cohorts (n=12 per cohort), with each group being treated with either IHL-675A, CBD or HCQ. The results of the study recorded no serious adverse events among patients in each of the study arms. Following these positive results, Incannex has continued to progress the development of IHL-675A and, more recently, initiated a blinded, placebo-controlled Phase II study, focusing on the treatment of RA patients. The trial intends to recruit up to 120 patients across trial sites in Australia and New Zealand, investigating the safety and effect on pain and function of IHL-675A, with trial participants being assessed over a 24-week period. The results of the study, if positive, will form a key component of the data package Incannex intends to use when approaching the FDA in the support of future clinical trial design and pursuit of the 505(b)(2) new drug application regulatory pathway.

If approved in RA, we expect IHL-675A would be competing with several multi-billion-dollar drugs for market share such as AbbVie’s Rinvoq (2021 global sales US$1.6bn) and Eli Lilly’s Olumiant (2021 global sales US$1.0bn) as well as competition from biosimilars of AbbVie’s longstanding multi-billion-dollar Humira (2021 global sales US$6.8bn). Owing to this, we believe it will be exceptionally important for Incannex to differentiate IHL-675A in the RA market possibly through long-term safety and/or use in highly specific subsets of patients as well as through pricing.

Valuation

We value Incannex at US$745.8m or US$11.75 per ADR (versus US$736.6m or US$11.7 per ADR previously), based on a risk-adjusted NPV for IHL-42X in OSA and psilocybin in GAD and a net cash position of US$27.8m (A$41.4m) at 31 December 2022. 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 commercialization strategy; however, this has potential to offer further upside. Our latest valuation is little changed overall and reflects the effects of rolling forward our model, foreign exchange movements and updating the net cash amount. However, our underlying assumptions and long-term outlook remain unchanged. A breakdown of our rNPV valuation is shown in Exhibit 2.

Exhibit 2: Incannex Healthcare rNPV valuation

Product

Launch

Peak

Peak sales (US$m)

Value
(US$m)

Probability

rNPV
(US$m)

rNPV/ADR (US$)

Obstructive sleep apnea – IHL-42X

2026

2032

3,065.8

3,568.5

20%

710.1

11.19

Psilocybin (Psi-GAD) in generalized anxiety disorder

2027

2032

186.6

129.7

10%

8.0

0.13

Net cash at 31 December 2022

27.8

100%

27.8

0.44

Valuation

3,725.9

745.8

11.75

Source: Edison Investment Research

Financials

As expected, Incannex reported no revenue in H123. However, it recorded other operating income of A$1.0m pertaining to an R&D tax refund. Total operating expenses for H123 were A$9.7m, a 65.1% y-o-y increase and largely in line on an annualized basis with our estimate for FY23 operating expenses (A$20.7m). The higher operating expenses year-on-year were mainly driven by increased R&D expenses, which rose 83.8% y-o-y to A$4.4m in H123, indicating expanded clinical activity across its development pipeline (IHL-216A, IHL-42X, IHL-675A and Psi-GAD1 study). We estimate R&D costs to come in at A$9.8m in FY23 and A$21.6m in FY24, with the anticipated initiation of the Phase II/III IHL-42X study as well as additional trials for Psi-GAD and IHL-675A. Other factors contributing to an increase in operating expenses were share-based payments and payroll expenses. Operating cash outflows were A$8.1m in H123, higher than A$5.4m in H122.

In December 2022, Incannex announced a fund-raise of A$13m in gross proceeds through a private placement to a healthcare-focused group of institutional investors. The company issued 63.4m new shares of common stock at A$0.205/share, as per the placement terms. Also, the subscribers were offered an equivalent number (63.4m) of new options, exercisable at A$0.285 per option. If fully exercised, these options may raise a further A$18.1m in proceeds. The company intends to utilize the proceeds of the raise to develop its clinical pipeline (including 22 cannabinoid developmental assets acquired as part of the APIRx acquisition). After the private placement, Incannex had a net cash position of A$41.4m at 31 December 2022, which management has communicated should be adequate to fund its clinical programs and working capital requirements into the first quarter of CY25. However, we anticipate higher operating expenses in FY24 due to likely clinical advancements across Incannex’s drug development pipeline and estimate a cash runway into the second half of FY24 as per our projected burn rates. We note that our expenditure forecasts differ from the company’s current guidance, which guidescalls for a funding runway into CY25. Furthermore, we expect Incannex will require A$55m in additional funding (excluding the effect of the attached options in the December fund raise) before reaching profitability in FY26 with the launch of IHL-42X. We account for this raise as illustrative debt in our model. Alternatively, if the funding is realized through an equity issue instead (assuming at the current trading price of US$2.6/ADR), Incannex would have to issue 14.2m ADRs or 355m shares, resulting in our per ADR valuation coming down to US$9.7/ADR from US$11.89 currently (ADRs outstanding would increase from 63.4m to 77.7m).

Exhibit 3: Financial summary

Accounts: IFRS; year end 30 June; A$000s

 

 

2020

2021

2022

2023e

2024e

PROFIT & LOSS

 

 

 

 

 

 

 

Total revenues

 

 

822

1,973

789

77

79

Cost of sales

 

 

(450)

(912)

(6)

0

0

Gross profit

 

 

372

1,061

782

77

79

Total operating expenses

 

 

(4,301)

(9,225)

(15,686)

(20,729)

(33,482)

Research and development expenses

 

 

(2,111)

(4,750)

(5,372)

(9,848)

(21,600)

SG&A

 

 

(864)

(1,236)

(3,027)

(3,399)

(4,157)

Operating income (reported)

 

 

(3,929)

(8,164)

(14,904)

(20,652)

(33,403)

Finance income/(expense)

 

 

0

0

0

0

0

Exceptionals and adjustments

 

 

0

0

0

0

0

Net loss from discontinued operations

 

 

(768)

0

0

0

0

Profit before tax (reported)

 

 

(4,698)

(8,164)

(14,904)

(20,652)

(33,403)

Profit before tax (normalized)

 

 

(4,698)

(8,164)

(14,904)

(20,652)

(33,403)

Income tax expense (includes exceptionals)

 

 

0

0

0

0

0

Net income (reported)

 

 

(4,698)

(8,164)

(14,904)

(20,652)

(33,403)

Net income (normalized)

 

 

(4,698)

(8,164)

(14,904)

(20,652)

(33,403)

Basic average number of shares, m

 

 

684.0

978.0

1,191.2

1,439.7

1,587.0

Basic EPS (cents per share)

 

 

(0.69)

(0.83)

(1.25)

(1.43)

(2.10)

Adjusted EPS (cents per share)

 

 

(0.69)

(0.83)

(1.25)

(1.43)

(2.10)

Dividend per share (cents per share)

 

 

0.00

0.00

0.00

0.00

0.00

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Tangible assets

 

 

0

0

0

147

96

Intangible assets

 

 

0

0

0

52,717

52,717

Right-of-use assets

 

 

0

0

0

224

224

Other non-current assets

 

 

0

0

0

0

0

Total non-current assets

 

 

0

0

0

53,088

53,037

Cash and equivalents

 

 

3,603

9,124

37,501

29,635

21,330

Current tax receivables

 

 

0

0

0

0

0

Trade and other receivables

 

 

413

169

295

292

307

Inventory

 

 

183

0

0

0

0

Other current assets

 

 

36

36

84

259

259

Total current assets

 

 

4,236

9,329

37,880

30,186

21,896

Non-current loans and borrowings

 

 

0

0

0

0

25,000

Non-current lease liabilities

 

 

0

0

0

182

182

Other non-current liabilities

 

 

0

0

0

0

0

Total non-current liabilities

 

 

0

0

0

182

25,182

Accounts payable

 

 

955

755

2,011

1,240

1,302

Illustrative debt

 

 

0

0

0

0

0

Current lease obligations

 

 

0

0

0

50

50

Other current liabilities

 

 

117

0

0

0

0

Total current liabilities

 

 

1,072

755

2,011

1,291

1,353

Equity attributable to company

 

 

3,164

8,574

35,869

81,802

48,399

 

 

 

0

0

0

0

0

CASH FLOW STATEMENT

 

 

 

 

 

 

 

Operating income

 

 

(4,698)

(8,164)

(14,904)

(20,652)

(33,403)

Depreciation and amortization

 

 

37

0

0

51

51

Share based payments

 

 

565

1,172

1,465

1,640

0

Other adjustments

 

 

97

91

(594)

0

0

Movements in working capital

 

 

91

(10)

1,226

(943)

47

Cash from operations (CFO)

 

 

(3,907)

(6,910)

(12,807)

(19,904)

(33,305)

Capex

 

 

13

0

0

(166)

0

Acquisitions & disposals net

 

 

0

29

0

0

0

Other investing activities

 

 

0

0

0

0

0

Cash used in investing activities (CFIA)

 

 

13

29

0

(166)

0

Capital changes

 

 

7,469

12,401

41,185

12,222

0

Debt Changes

 

 

(65)

0

0

0

25,000

Other financing activities

 

 

0

0

0

(23)

0

Cash from financing activities (CFF)

 

 

7,404

12,401

41,185

12,199

25,000

Cash and equivalents at beginning of period

 

 

93

3,603

9,124

37,501

29,635

Increase/(decrease) in cash and equivalents

 

 

3,510

5,520

28,377

(7,871)

(8,305)

Effect of FX on cash and equivalents

 

 

0

0

0

5

0

Cash and equivalents at end of period

 

 

3,603

9,124

37,501

29,635

21,330

Net (debt)/cash

 

 

3,603

9,124

37,501

29,635

21,330

Source: Incannex Healthcare company accounts, Edison Investment Research. Note: Intangible assets of A$52.7m in FY23 (and also reflected in subsequent years) are related to the acquisition of APIRx Pharmaceuticals in August 2022.

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This report has been commissioned by Incannex Healthcare and prepared and issued by Edison, in consideration of a fee payable by Incannex Healthcare. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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OSE Immunotherapeutics has announced that the data from its earlier Phase I study for OSE-127/S95011, initially released in 2019, has been published in the Journal of Immunology. The study, involving 63 healthy volunteers, was a first-in-human, randomised, double-blind, placebo-controlled trial that demonstrated a promising safety and tolerability profile for OSE-127. This candidate is a monoclonal antibody therapy being assessed as a treatment for primary Sjögren’s syndrome (pSS) and ulcerative colitis (UC) in two ongoing Phase IIa studies (NCT04605978 and NCT04882007). Patient enrolment for the pSS trial was completed in Q422, with updates expected in H123; readouts for UC are expected in FY23. While we caution read-across between studies, we believe the high target occupancy observed in the Phase I study, along with a favourable safety profile, support the ongoing clinical programmes involving OSE-127.

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