Vivesto — Turnaround strategy beginning to deliver

Vivesto continues to make progress on its revised business strategy, and the impending launch of Apealea in the two largest European markets, the UK (mid-2022) and Germany (H222), will be the first milestone delivered as part of this strategy. Management has stated that Inceptua has secured a list price with the Department of Health and Social Care in the UK and Apealea will be made available in the UK market in mid-2022. We expect royalties to come from these two geographies in H222 and have factored in a $1m milestone payment in our FY22 estimates. Inceptua has employed a staggered approach to launch in various European countries and Vivesto mentioned (during its Q321 earnings conference call) that Spain and Italy could be next in line. Commercialisation rights in Russia and the Commonwealth of Independent States (CIS) are held by the Switzerland-based FarmaMondo Group (out-licensed by Vivesto in September 2021), although all activities in Russia remain on hold due to the conflict in Ukraine.

While Apealea’s commercialisation plans look to be gaining momentum in Europe, the US plans offer less visibility, with Vivesto stating that partner Elevar is continuing to evaluate the optimal clinical and regulatory pathway for Apealea in the country. The US Apealea business is a key piece of the pie in our valuation of Vivesto, contributing 23% to our net asset value. We expect an update in the coming months and, while this focus on optimising the development plan could potentially de-risk the developmental pathway, we expect a slight delay in our estimated timelines to the market. We now expect Phase II/III trials (ovarian cancer) in the US to commence in 2023 (versus 2022 previously), with a similar delay in commercialisation (now expected in 2026). However, our peak sales estimate is largely unchanged.

Apealea is a water-soluble, intravenous formulation of the widely used chemotherapy drug paclitaxel (Taxol). Paclitaxel uses a solvent, Cremophor EL to make the drug soluble for administration but the solvent is associated with allergic reactions, resulting in a mandatory requirement to premedicate with corticosteroids. As it is solvent free, Apealea removes the requirement for corticosteroids and reduces infusion time, thereby significantly improving on the profile of conventional paclitaxel. Apealea received approval in the EU for the treatment of second-line platinum-sensitive ovarian cancer in 2018 and out-licensed the global rights to Elevar Therapeutics in March 2020. Elevar subsequently sub-licensed the European operations to Inceptua Group, which holds exclusive rights to distribute and commercialise Apealea in the EU, UK, Norway, Iceland, Liechtenstein and Switzerland.

The core premise of Vivesto’s turnaround strategy is developing a diversified portfolio of oncology assets (targeting hard-to-treat cancers), both to maximise income-generating potential and de-risk the pipeline. A key constituent of this plan is the company’s ‘string of pearls’ strategy, which aims to bolster its portfolio through the in-licensing and M&A of early- to mid-stage clinical assets. The first addition under this strategy was the in-licensing of Cantrixil (for advanced ovarian cancer) from Kazia Therapeutics in March 2021. In addition to the partnered Apealea programme and Cantrixil, the company is developing another early-stage asset, docetaxel micellar in advanced prostate cancer. The company announced key development updates on both clinical assets during H122.

Cantrixil is the first asset in-licensed by Vivesto as part of its ‘string of pearls’ strategy. It consists of the pharmaceutically active ingredient TRXE-002-01, a third-generation benzopyran SMETI inhibitor, encapsulated in a cyclodextrin excipient to improve its solubility. Cantrixil is a potential first-in-class anti-cancer agent (which inhibits the development of tumours) and, while its novel mechanism is still poorly defined, it is believed to target an array of cancer cells, including tumour-initiating cells (cancer stem cells) which are thought to play a key role in metastasis and disease relapse. Proof of concept for the drug was successfully established in 16 relapsed and refractory ovarian cancer patients in an open-label Phase I study in the US and Australia (19% objective response rate including one patient who achieved a complete response lasting three years). While initial development will focus on ovarian cancer (Vivesto is currently working with clinical experts and regulatory authorities to design the Phase II trial), Cantrixil also has potential in other cancers that have spread to the abdominal cavity (bladder and colorectal cancer), as well as potential use as a first-line treatment (it may complement the use of standard-of-care, platinum-based chemotherapy). In March 2022, the company expanded its R&D facility in Uppsala to develop new Cantrixil formulations (including intravenous) using its proprietary drug delivery platform.

We had previously estimated that Vivesto would commence the Cantrixil Phase II trial in 2022, but note that the complex manufacturing process for the drug, together with the need to secure a proper manufacturing supply chain means that further studies can only be initiated towards end-2023/early 2024. We have updated our model to account for these new timelines. In Q122, Vivesto signed an agreement with the Swiss Lonza Group to manufacture the active pharmaceutical ingredient (API), TRXE-002-01, for the drug. This marks an important first step, but is likely to be followed by at least two additional manufacturing agreements to finalise the required drug substance. This will be followed by further agreement(s) to develop the final drug product/formulation before commencing Phase II trials in advanced ovarian cancer. We continue to see peak sales potential of c $290m (globally) for this indication.

In June 2020, Vivesto signed a partnership agreement with the Swiss Group for Clinical Cancer Research (SAKK) to conduct the first clinical trial (open-label, multi-centre) of docetaxel micellar in patients with metastatic castration-resistant prostate cancer (mCRPC) in Switzerland. SAKK has been running the Phase Ib trial (n=18), with Vivesto supplying the drug and funding the costs of the trial, which are not deemed material. The primary objective of the study is to determine the maximum tolerated dose, with a secondary objective of evaluating safety, pharmacokinetics and preliminary anti-tumour activity. During Q122, the company announced that the first patient had completed the study and two of the three dosing groups have been successfully recruited. The trial remains on track to complete enrolment by the end of 2022 and top-line results from the study will determine the future development path. The company also announced that it is evaluating another formulation of the drug using its newer-generation XR-18 drug delivery platform. We expect the drug to reach the market (contingent on successful clinical development) by 2027 (previously 2025) and expect global peak sales of c $230m for this indication.

As a reminder, docetaxel micellar is a nanoparticulate formulation (using Vivesto’s XR-17 platform technology) of docetaxel, the pharmaceutically active ingredient in Sanofi’s Taxotere, one of the most commercially successful and widely used chemotherapies (global sales in excess of €2.2bn in 2009, before the expiration of the patent in 2010).

In 2020, Vivesto initiated R&D activities to develop a newer-generation drug delivery platform, XR-18, an upgrade to the current XR-17 platform. The aim is to offer enhanced formulations, applications and delivery of APIs for cancer treatment. Although the platform is at an early stage of development, Vivesto claims that it has shown improved stability of drug formulations (both new and existing). During H122, the company announced progress on the development of XR-18, including the identification and synthesis of an unnamed novel candidate for use in the drug delivery platform (currently being tested in combination with a well-known oncology compound). Vivesto also signed a research agreement with Visikol, a US-based contract research organisation, to evaluate the cellular effects of new and existing anti-cancer drug formulations developed using its XR-17 and XR-18 platforms. Furthermore, Vivesto is evaluating an additional formulation of docetaxel micellar using the XR-18 technology platform. An overview of the company’s asset pipeline is shown in Exhibit 1.

Vivesto has announced several changes at both board and management level, which we believe are aligned with the company’s turnaround strategy and future plans for development and commercialisation of its pipeline. Recent C-level appointments include Daniel Tesfa as chief medical officer and Kai Wilkinson as chief technical officer. In addition, Peter Zonabend has been promoted to chairman of the board. In a recent development, the company announced that CEO Francois Martelet will be stepping down from his role as CEO, with effect from July 2022. We also note that the CFO, Fredrik Järrsten, will be leaving in September 2022. We expect the incoming management to focus on accelerating the clinical development of the company’s pipeline as well as its portfolio diversification strategy.

We have updated our model to reflect our revised (slightly later) expectations for clinical and commercial timelines across the developmental pipeline (discussed above). Due to the longer discounting period for the expected revenue stream, our updated value resets lower to SEK2.24bn versus SEK2.89bn previously. We continue to base our valuation on a risk-adjusted net present value (NPV) model of Apealea for the treatment of ovarian cancer (US, Europe and RoW), Cantrixil for resistant ovarian cancer and docetaxel micellar in prostate cancer, plus an indicative value of the animal health business (based on the balance sheet figure of capitalised development costs for the programme at 31 March 2022). We highlight that development work on the animal health business has been put on hold with the aim to either out-license or divest. For Apealea, we have expanded the scope to include Europe as a whole (versus EU5 previously). This is offset by our lower peak penetration assumptions for RoW (5% versus 10% previously) to factor in the diversity of geographies and the relative difficulty in making inroads and/or gaining reimbursement. Overall, our peak sales estimates for Apealea remain largely unchanged. The decline in our implied valuation is partly offset by a higher pro forma net cash position following the March rights issue, but also reflects a higher number of shares outstanding (538m versus 448m previously), resulting in our per-share valuation reducing to SEK4.17/share from SEK6.45/share previously.

Note that our valuation does not include Vivesto’s proprietary technology platforms (XR-17 and XR-18) and unconfirmed candidates at an early stage of preclinical development. Consequently, additional indications for Apealea, Cantrixil and docetaxel micellar, plus advancing new candidates into the clinic, would provide further upside.

The quarter ending March 2022 continued to show improved cost controls and operational efficiencies, introduced as part of Vivesto’s turnaround strategy. No sales were recorded in Q122, (in contrast to Q121, which included licensing revenue of SEK37,000). FY21 revenue was SEK26.2m, but primarily comprised transfer of the remaining Apealea inventory to Elevar (SEK25.6m). The Q1 operating loss of SEK26.3m was a significant y-o-y improvement over the SEK40.8m reported in Q121. The improvement was driven by a SEK12.9m reduction in other external expenses primarily related to legal and consultancy fees. With the company having cleared the legal overhang from the legacy operations (see our previous note for details), we expect the operating cost base to stabilise (as a proportion of revenue) in the forecast years. Further support should come from lower inventory levels (following the sale of all remaining Apealea inventory to Elevar in FY21) and employee expenses (SEK10.4m versus SEK11.2m in Q121) due to planned headcount reductions (19 employees versus 22 in Q121) as part of the restructuring.

Given the delay in clinical and commercial timelines across the portfolio, we have reduced our revenue estimates for FY22 by c 60% to SEK18.3m (previously SEK46.8m) and by 30-40% for FY23–24. For FY23, we estimate revenue of SEK66.3m, which assumes a full year contribution from Apealea in the UK and Germany, as well as an expected payout of $5m (SEK49.2m) in milestones from further Apealea roll-out in Europe. Overall, our peak sales estimates are unchanged but we have pushed back the timelines for achieving these by a couple of years. This is counterbalanced by our lower expectations for operating expenses, primarily inventory and employee-related expenses in FY22–23 and R&D related in FY24 (in line with the expected lag in clinical development). We now forecast an operating loss of SEK123m in FY22 versus SEK129.4m previously.

In March 2022, Vivesto announced that it had successfully completed arights issue for gross proceeds of SEK151m (SEK135m net) at a subscription price of SEK1.68/share. A total of 48,367,120 shares (53.9% of shares offered), were subscribed for by the exercise of subscription rights. 1,519,430 (1.7% of shares offered) were allotted to people who had subscribed for shares without the use of subscription rights and the remining 39,787,359 (44.4% of shares offered) were allotted to guarantors. Cash inflow from the issue will be recognized in Q222 (it was recorded as a receivable in the end March balance sheet). Vivesto ended Q1 with net cash of SEK74m (including short-term investments). Adding the net SEK135m proceeds of the rights issue takes the pro forma, end-March cash figure to SEK209m, which should be sufficient to fund operations into early 2024 based on our operating cash burn projections of SEK83.6m in FY22 and SEK122m in FY23. We estimate that a further SEK150m in funds will be required before achieving maiden profitability in FY26 (versus our previous expectation of FY25).