TxCell — Update 24 June 2016

Regulatory T-cells (Tregs) naturally block autoimmune and inflammatory disorders and control the cell-killing T-cell immune response. The Treg area is underdeveloped and TxCell offers a rare investment opportunity, targeting major conditions like Crohn’s disease and, in future, lupus nephritis and other immune indications through direct immune control. TxCell has two technology platforms, Exhibit 1. If the resumed Ovasave Phase IIb delivers a clear and positive primary endpoint success by early 2018, this should validate the general concept of using Tregs to control autoimmune disease and inflammation, two major markets with remaining unmet medical needs. Management aims to enter platform and preclinical Treg deals in 2016 and 2017.

The funding arrangement is for €20m in total plus €10m if all warrants are issued and exercised. Two tranches of loan notes are already agreed in August and November 2016 for €3m and €2m, respectively. Until mid-2019, TxCell can draw down further loan notes of up to €15m in face value in €0.1m tranches. Warrants to the value of half the tranche amount will be issued at the same time.

The indicative effect on dilution is shown in Exhibit 3. Only the two loan notes in 2016 totalling €5m are certain to be drawn down, subject to EGM approval on 1 August 2016, and the price will depend on the market conditions at the time. Other tranches may never be used.

For illustrative purposes, it is assumed that the 2016 notes all convert in 2017. The 2016 notes come with warrants that will provide €2.5m if and when exercised but this can happen at any time up till H2 21 so the cash from these is not included in the Edison forecast. However, they are a source of potential dilution. This makes the diluted number of shares in issue (excluding management options) 14.5m if all convert, up from 13m in June 2016.

From 2017 onwards, our calculations assume the same 2016 base price of €5.00. This would give diluted shares in issue of 19m after 6m new shares in total are potentially issued. However, if the value of TxCell rose to €300m by 2018 due to a successful Phase IIb study and partnering, fewer than 16m diluted shares might be in issue, depending on price and timing. Equally, if the share price fell for any reason, many more shares would need to be issued.

The €4.96m net cash agreed for 2016 will only cover the baseline running costs of TxCell for about 12 months. The cost of the Phase IIb CATS29 clinical trial, €15m over two years, is not covered and TxCell will need to find additional funding or deals. This may hinder the restart of this crucial study.

The major sensitivity relates to the current CATS29 Phase II and TxCell’s ability to fund the €15m study and ongoing R&D including the important CAR Treg cell platform. French tax credits are expected to pay about 30% of each year’s cost; the cash is received in the following year. The Crohn’s market is complex to forecast, with uncertainties in patient numbers and significant regional market differences. A core assumption is that a partner is found by the end of 2018. Ovasave may not progress unless this occurs.

Steroid resistant uveitis (eye inflammation) is a niche market of about 15,000 cases per year where TxCell could sell Col-Treg directly. However, it will need to fund the trials. The evidence here is less clear overall and the product is in preclinical development with no disclosed timeline to a Phase I.

Finally, the new CAR Treg opportunity appears to be potentially applicable to many indications in theory, but as a technology platform it is hard to value and is at least three years from a clinical trial, possibly for lupus nephritis, the current lead. Exercising the option (at unknown cost) over the 2008 academic blocking patent has strengthened TxCell’s position and TxCell is filing new patents. However, the patent still has to be granted in the crucial US market. The CAR platform does have a high deal potential, probably from 2017.

The YAG funding deal introduces a higher level of uncertainty over share dilution if it is used as a major funding route from 2017. The deal minimises dilution in a rising market, but could lead to high dilution levels if market conditions prove difficult due to the high level of warrant leverage.

The valuation of TxCell currently depends on Ovasave as the sole clinical-stage project. This combines two success probabilities: a clinical risk set at 33% multiplied by an 85% probability of achieving a commercial manufacturing system by late 2018. This gives a 28.05% combined probability. If the Phase IIb, which has yet to restart, shows a positive primary endpoint, the probability could rise to 45%. Edison has assumed a €25m upfront in a €175m overall deal with a 16.5% royalty. This is lower than the level of some deal upfronts paid for CAR T-cell cancer therapies, but this is a less prominent indication, although it offers a valuable, orphan market.

The important CAR Treg platform is valued at a nominal €20m, reflecting its importance to the company but noting that it is currently not possible to value it on the basis of candidate products. As a CAR area, it has the potential for substantive deals, perhaps of €300m overall value, although no substantive deal is expected before 2020. The new patent license strengths this position.

A further funding need of €22m net of current cash and the €5m of tranche warrant notes is projected until late 2017, with more possible thereafter. The agreed notes and warrants take the diluted shares in issue to 14.5m by November 2016 at a base price of €5.00 (note: at that date no notes or warrants need to have been converted). This takes the pre-dilution value from €7.08/share previously to €6.30/share. Including 1.47m management warrants and options, the diluted value would be €5.71/share.

An important aspect is the potential for value development. If the value of the CAR Treg platform rises to €50m nominal and Ovasave progresses to a Phase III with a partner and a deal worth at least €175m with a €25m minimum upfront, the indicative market value by late 2018 could rise to over €300m. Note that this is one of several possible value scenarios and is not a forecast. TxCell management expects significantly higher deal values if proof of concept is obtained on the Ovasave project in Phase IIb leading to overall validation of the regulatory T-cell concept.

At year-end 2015, TxCell had €9.2m cash; cash on 31 March 2016 was €5m with a €3m tax credit due. An update on Q2 cash is due in late July with H1 results due in September. Financial estimates are in Exhibit 4. Cash expenditure will rise once the Phase IIb trial resumes in H216; this trial is costed by management at €15m with €4.5m assumed by Edison in 2016. The 2015 core operating cash costs (before funding) were €12.3m. TxCell has stated that the cash burn in 2016 will be €15m. This covers increased investment in the CAR Treg area and the resumed CATS29 trial costs, depending on the date from which it resumes.

To cover all cash requirements and give a cash cushion for 2018, after the €5m expected in H2 from the YAG notes, Edison assumes that €31m more will be needed over the next two years (after tax credit funding). There was €9.2m cash available at the 2015 year end. This implies a funding gap of €22m by 2017.

Edison treats future funding as illustrative long-term debt and additional capital of €2m in 2016 and €20m in 2017 is assumed. The 2016 balance sheet forecast has €7m of loan funding and now comprises €5m in YAG tranche notes and €2m from other sources. Some of the 2017 forecast funding need of €20m might be met by tranche loan notes or other funding sources might be identified; note that €2.5m of this might come from exercise of the 2016 warrants.

TxCell has a liquidity contract with Oddo Finance worth €200k. As of 31 December 2015, €95k had been used to buy 16,280 shares leaving €105k in cash.