Actinogen Medical — Taking steps to mitigate funding headwinds

Actinogen is refining the design of its XanaMIA Phase IIb study of lead candidate Xanamem in patients with CI associated with mild-to-moderate AD. The adjustments are intended to help reduce study costs before the attainment of interim data and, therefore, reduce the need for significantly dilutive additional financing ahead of this key milestone and potential value-driver.

Xanamem is an inhibitor of enzyme 11β-Hydroxysteroid dehydrogenase type 1 (11β-HSD1) designed to penetrate the brain. Much scientific literature suggests that excessive cortisol is associated with CI in patients with various chronic conditions, including age-related CI and AD. As the naturally present enzyme 11β-HSD1 normally converts cortisone to cortisol inside cells, Xanamem is designed to reduce excessive cortisol production in the brain.

The initial XanaMIA Phase IIb study design involved the recruitment of c 330 patients across three once-daily dose arms: 10mg, 5mg and a placebo. This design had received investigational new drug (IND) clearance by the US FDA and this plan involved the inclusion of US study sites. Under the revised plan, the study will forego the lower 5mg dose group and concentrate on the 10mg dose, which has already shown effectiveness in the subgroup analysis of the XanADu study, as reported in Q4 CY22 and described further below. The XanaMIA Phase IIb study will now recruit c 220 patients in total, but it will continue to assess c 110 AD patients in the 10mg dose cohort, as well as in the placebo arm, and will concentrate on Australian test sites for the first 100 enrolled patients. Altogether, these measures are expected to significantly reduce study costs, as the company expects c A$30m in cost savings between now and June 2025 compared to its initial plan. The new study design maintains the same endpoints (including a cognitive composite of several tests as the primary endpoint) and the same 36-week treatment length.

Actinogen plans to provide interim efficacy data in H1 CY25 (vs prior guidance of late CY24 or early CY25), which should correspond to results from 24 weeks of treatment in the first c 100 patients (ie from the Australian study sites). The interim data could be a meaningful value driver for the company and potentially lead to a material re-rating in the share price (ahead of a subsequent need for further financing), if data from this study can demonstrate, on a prospectively defined basis, trends towards a significant improvement in the chosen primary and/or secondary AD efficacy measures versus placebo.

The Phase IIb study now aims to assess Xanamem 10mg once daily versus placebo by recruiting patients with an elevated level of pTau-181 protein in their blood. Actinogen reported biomarker data in Q4 CY22 using blood samples from a subset of patients in the prior 185-patient XanADu study in AD patients showing clinical activity and a relatively large effect size at 12 weeks using the FDA-recognised Clinical Dementia Rating Sum of Boxes (CDR-SB) in biomarker-positive AD patients (as determined through patients who had elevated pTau). The 34 patients (16 on Xanamem 10mg daily, 18 on placebo) with pTau levels at or above 6.74pg/ml showed a 0.6 mean difference (effect size) in CDR-SB (representing a 60% relative reduction in disease progression versus placebo) at 12 weeks between the placebo and treatment arms. As mentioned above, the primary endpoint of the XanaMIA Phase IIb study will be the change in a cognitive composite of several tests and the CDR-SB functional score will be a secondary endpoint.

In late CY22, Actinogen initiated the XanaCIDD Phase II study in patients with major depressive disorder (MDD) and CI, despite standard-of-care anti-depression therapy. Patients are administered Xanamem at a daily dose of 10mg or a placebo in addition to their existing anti-depression treatment. The study assesses cognitive improvement using the Cogstate Cognitive Test Battery and evaluates depression changes through the Montgomery-Asberg Depression Rating Scale. Actinogen expects to report study results in H1 CY24. Positive results from the trial could lead the company to advance Xanamem into pivotal studies for patients with CI and/or depression. Positive data could also lead to a re-rating in the share price and facilitate future fund-raising activities for CI and/or AD programmes.

To this end, the company now suggests that the timing of the expansion of the XanaMIA Phase IIb study (to sites outside Australia) will occur when new positive data are received in the XanaCIDD study (by mid-CY24), and/or following the interim analysis for XanaMIA Phase IIb (as discussed above). Hence, we interpret this as Actinogen waiting for a positive value inflection point before committing to expanding the study to sites outside of Australia and, most particularly, to the US, given that US site study costs are likely to be significantly higher than in Australia. We also note that net R&D costs for Australian sites are dampened by the Australian government R&D tax incentives for up to 43.5% of study costs.

Given the phased approach for XanaMIA Phase IIb (with initial recruitment to focus only on Australian study sites), our base case now assumes that US study site recruitment will not likely occur for another c 12–18 months. Further, the removal of the 5mg arm (the dose-ranging portion of XanaMIA Phase IIb) may add additional regulatory complexity, given that the approved US IND had been based on the inclusion of a 5mg dose arm. Given that Actinogen will accumulate safety data from the Australian study sites on the 10mg arm as the XanaMIA Phase IIb study is ongoing, we believe it is very likely that the company will be able to satisfy any potential FDA concerns on the removal of the 5mg arm, before it intends to proceed with US study site enrolment. We estimate that if regulators require a 5mg dose-ranging arm, this could now be part of a forthcoming Phase III pivotal study programme.

Nonetheless, given that US sites may not begin recruitment for another c 12–18 months, we are pushing back our base case projection for XanaMIA Phase IIb study completion until CY26 (from H2 CY25 previously), and our timeline for potential Xanamem commercialisation in AD into CY29 (from CY28 previously). However, we note that the company retains significant optionality on XanaMIA Phase IIb study progress. In particular, should circumstances arise (such as the attainment of material non-dilutive funding or partnership arrangements) that permit the company to open global sites sooner, it could accelerate progression of the study compared to our new base case forecasts.

The AD market presents an attractive opportunity, given its size (accounting for c 60–70% of the 55 million individuals with dementia worldwide) and high unmet need. Even with the first proper disease-modifying treatments emerging (such as anti-amyloid beta monoclonal antibodies like Leqembi), we believe there remains tremendous potential for alternative AD treatment approaches (such as the 11β-HSD1 inhibition approach used by Xanamem resulting in lower brain cortisol), particularly those that can be taken orally (such as Xanamem), given better convenience and ease-of-use compared to the intravenous (IV) approach required by the anti-amyloid beta drugs. AD pathophysiology is complex and there are many potential mechanisms involved with disease progression. Exhibit 1, compiled by Cummings et al, illustrates the diverse mechanisms of actions sought for therapeutic agents in clinical development for AD, including, among others, neurogenesis, synaptic plasticity, inflammation, tau, amyloid and neurotransmitters/receptors.

In Exhibit 2, we provide a selected list of small-molecule drugs investigated for AD and currently listed on ClinicalTrials.gov with ongoing Phase II and Phase III studies, along with relevant upcoming catalysts. We believe that small-molecule therapeutics are more likely to be potential competitors to Xanamem, if approved, given the significant differences in mode of administration (eg IV or injection for biologics vs potentially oral for small-molecule), cost of manufacturing and sought mechanisms of action, compared to biological drugs (such as the anti-amyloid monoclonal antibodies).

Actinogen’s FY23 results (ending 30 June 2023) showed a normalised operating loss of A$9.2m (up from A$7.9m in FY22), with net R&D costs of A$8.9m (vs A$8.2m in FY22). The increase in R&D costs was largely due to the initiation of the XanaCIDD study in late CY22, as well as activities required for the preparation for the XanaMIA Phase IIb study, including final development of the tablet Xanamem formulation to be used as part of the study (and intended for use in subsequent Xanamem trials and potential commercialisation, as discussed in a prior note). Due to favourable year-on-year working capital dynamics, including those relating to the timing of Australian government R&D tax rebates and grants, Actinogen had a lower net operating cash burn rate of A$8.7m in FY23 (vs A$9.5m in FY22). The company’s quarterly cash burn rate in Q124 (ending 30 September) was A$4.9m.

Given the changes to the XanaMIA Phase IIb study, which we estimate will significantly curtail R&D expenses for the initial c 100 patients recruited (as these will now only involve lower-cost Australian sites vs the global site rollout including US sites previously assumed), we have reduced our FY24 and medium-term R&D cost expectations. We now project FY24 R&D costs and net operating cash burn of A$22.2m and A$23.7m, respectively, versus our prior assumptions of A$36.4m and A$37.2m, respectively. We expect costs to rise substantially in FY25 as we model US study site expansion for XanaMIA Phase IIb as well as the initiation of a larger, potentially pivotal, global study for Xanamem in patients with CI associated with MDD. We project an FY25 net operating cash burn rate of A$60.4m, driven by A$55.6m in projected R&D expenses.

With the funding from the rights offering now complete and the changes in our near-term R&D expenses, we now model Actinogen to be funded into Q424 (Q2 CY24) versus Q1 CY24 previously. We continue to model that the company will raise an additional A$20m before end-FY24, given our expectations of increases in R&D expenses as the Phase IIb portion of the XanaMIA study ramps up.

As stated previously, given that we now expect XanaMIA Phase IIb results in CY26, we have pushed back our projected launch timeline for Xanamem in patients with AD to CY29 (from CY28, previously) although we continue to assume commercialisation of the drug for patients with MDD in CY28. Our base-case projection assumes that Actinogen will independently fund all studies needed for regulatory approval in these indications. Given the push back in our assumed commercialisation timeline in AD and the decrease in the US dollar versus the Australian dollar since our prior note (A$0.63/US$ vs A$0.66/US$ previously), we have increased our total projected future funding need to recurring operating profitability to A$495m (vs A$445m previously). Reasons for the increase include higher R&D costs (in Australian dollar terms) through FY29, given that the development programme is expected to have a significant contribution from US-based sites, as well as the resulting anticipated need for the company to cover selling general and administrative, and operating costs over a longer period without operating revenues from Xanamem in the AD indication.

Our valuation continues to be based on a rNPV analysis, which includes A$13.1m in net cash at the end of September 2023. We apply a discount rate of 12.5% and include Xanamem in the two lead indications. We continue to use a probability of success of 10% for Xanamem to reach the market in the AD indication and 12.5% in the MDD indication. We have adjusted our model for our revised expenditure forecasts, our new assumed AD commercialisation timelines (CY29 vs CY28 previously) and revised forex assumptions, and have rolled forward our estimates. We now obtain a total rNPV valuation of A$528m (vs A$645m previously), or A$0.24 per share (vs A$0.36 previously). The pushback in the commercialisation timeline in AD is largely responsible for the decrease in total rNPV, with the estimated value per share further reduced by the issuance of 400m shares as a result of the Q3 CY23 shareholder rights offering.

As stated earlier, we forecast A$495m in additional financing will be required before FY29 to fund the development of both the CI-MDD and AD programmes, after which, provided it receives regulatory approval, Actinogen should be able to generate sufficient operating revenues to reach recurring profitability. Our model assumes all financing will be raised through illustrative debt, as per usual Edison methodology. If our projected funding need of A$495m is raised through equity issuances at the prevailing market price of c A$0.02, our effective value per share would decrease to A$0.038.

The amount of fund-raising estimated to be necessary for Actinogen to independently bring Xanamem to commercialisation in these indications is larger than the company’s current market capitalisation. Although we note that the funding intervals may be staggered over the next several years, which may alleviate potential challenges associated with raising funds in excess of a company’s market capitalisation. We also believe Actinogen will seek non-dilutive funding arrangements and/or partnership arrangements (actions towards the latter would likely particularly increase after the XanaMIA Phase IIb portion is completed), which may reduce the overall funding need, but such scenarios are not included in our forecasts.

Considering that AD pivotal trials are reported to cost more per patient than studies in nearly any other therapeutic area, we believe Actinogen will likely explore partnerships or non-dilutive funding strategies if the XanaCIDD data (expected in H1 CY24) or interim XanaMIA Phase IIb data (expected in H1 CY25) are positive.