TxCell — Update 28 October 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, potentially in future, lupus nephritis and other immune indications through direct immune control. An indication to control transplant rejection is the basis of a new academic collaboration. TxCell has two technology platforms; Exhibit 1 shows the technology concepts and Exhibit 2 supplies additional background. The technology was reviewed in the Edison note Two valuable and versatile platforms published 31 May 2016. Management aims to enter platform and preclinical Treg deals in 2016 and 2017.

The main feature of the last four months has been the rapid evolution of the CAR Treg platform with five indications identified and another five in the consideration. Three of the main programs already have leading academic collaborators and are therefore well placed to progress rapidly.

TxCell has a collaboration with a leading, prestigious European immunology institute, the San Raffaele Scientific Institute in Milan. The collaboration aims to develop a CAR Treg product for lupus nephritis. Lupus nephritis is a particularly severe and potentially fatal form of lupus, the systemic chronic inflammatory disease, in which the immune system causes the kidneys to fail.

A further collaboration with the Lübeck Institute of Experimental Dermatology will develop CAR-Treg approaches in bullous pemphigoid, a rare chronic skin inflammation where the lower layers of the skin are attacked by the immune system causing blistering. The condition can cause dehydration which can be fatal.

TxCell announced in October 2016 a collaboration with Professor Levings of the University of British Columbia on solid organ transplantation. This is an exciting collaboration as there is already preclinical work published showing that CAR Treg cells developed by the collaborator could control graft vs host disease (MacDonald 2016). It is planned to extend this work to develop a new CAR Treg construct to control organ rejection by the transplant host.

The academic collaborations will enable these programs to progress more rapidly. Clinical trials are still some way off but the first ones are planned by management to start from 2018 onwards.

Edison also views the CAR Treg platform as much more flexible and powerful than the established ASTrIA technology. It is therefore a better basis for multiple deals with partners interested in entering the new CAR Treg space especially as it is covered by a granted patent.

To boost its development of CAR Tregs, TxCell has appointed a leading scientist, Dr Li Zhou, PhD, as vice president, cell engineering. Dr Zhou previously worked at the Novartis Biologics Center in Cambridge, leading the discovery and engineering activities on CAR T-cells for cancer immunotherapy. He also led the preclinical development of next-generation CAR T-cells.

Exhibit 3 shows the new timeline announced September 2016 by TxCell. The Ovasave Phase IIb study start is now postponed until 2018 while the faster manufacturing process is finalised and validated. This will give a better basis for partnering as it improves the economics of the product. Full automation is planned for Phase III. However, the delay means that the CAR Treg portfolio may be in Phase I/II at the same time. The Phase IIb postponement also delays any clinical validation of the Treg concept to control autoimmune disease and inflammation until 2020 or later. CAR Treg ENTrIA technology may overtake ASTrIA technology over the next few years.

Exhibit 4 gives details of the projects.

The funding arrangement with Yorkville Advisors Global is for up to €20m in cash from convertible loan notes (€0.1m each) plus a further €10m cash if all warrants are issued and exercised. The first tranche of 30 loan notes (€3m face value) were drawn in August. A further €2m face value of loans can be drawn in November 2016. Until mid-2019, TxCell can draw down further loan notes of up to €15m in face value. Warrants to the value of half the tranche amount will be issued at the same time. Details are in Exhibit 5.

The current and projected December situation is in Exhibit 6. Of the 30 tranches issued in August, five have been converted to date. Note that the conversion price will vary, so future tranches are assumed to be converted at 93% of the current share price (see Exhibit 5). The conversion timing is also controlled by YAG. This may affect future share price performance.

From 2017, there could be a further €15m loan drawdown. At the current price, that would mean 6.1m new shares and 2.5m warrants giving, if all were converted and exercised, possibly 24.4m shares in issue. However, conversion terms and prices are too uncertain to be definitive. In particular, a major deal that increased the share price would reduce the number of shares issued and reduce the need for additional loan tranche drawdowns. Edison notes that the warrants are currently out of the money but over the next few years, success in CAR Tregs could enable the conversion of these warrants; they have a five year life. That would yield up to €10m in cash. There are additionally management options over 1.47m shares.

Previously, the major sensitivity related to the Phase IIb and TxCell’s ability to fund the €15m required for the study plus the ongoing R&D including the increasingly important CAR Treg platform. These concerns have slightly receded. The YAG facility funds the required R&D but the trial costs will require a deal by late 2017; Ovasave may not progress unless this occurs. If the CAR Treg platform proceeds well, it may supersede the older ASTrIA technology used for Ovasave.

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.

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 would need to fund the trials. The evidence here is less clear 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 clinical trials cannot start before 2018, possibly for lupus nephritis, the current lead or maybe for controlling transplant rejection, a major market.. Exercising the option over the key 2008 academic blocking patent has strengthened TxCell’s position; 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 has been adjusted for the following factors.

The changes are summarised in Exhibit 7. The pre-funding, pre-dilution value has fallen from €91m to €76m. On the expected dilution from convertible loans and warrants, the indicative value has changed from €6.30 to €4.82 per share. Including 1.47m management warrants and options, the diluted value would be €4.41/share.

An important aspect is the potential for value development. While value development for Ovasave is possible over the next few years, the majority of value gains in 2017 will probably come from the CAR Treg platform, which offers a much more flexible approach to candidate development and enables a wider range of indications to be targeted and therefore partnered.

At year-end 2015, TxCell had €9.2m cash; cash on 31 March 2016 was €5m with a €3m tax credit due from 2015. This credit was received in Q216 making 30 June cash €3.2m, down from €9.2m in June 2015. French tax credits are expected to pay about 30% of each year’s R&D cost. The cash is normally paid in the following year, but TxCell will benefit from €2.1m of advanced payments in 2016. It is assumed that advanced payments continue in 2017, otherwise there will be a cash hole.

In H1, R&D costs were €5.6m with administration at €2.5m (excluding depreciation and provisions). The reported costs in H1 were €600k higher due to the setting up of new process industrialization laboratories and an increase in legal and consultancy fees, especially for collaboration and license agreements signed during the reporting period. There was led to a net non-cash €0.4m depreciation and provisions write back. Overall, this implies €8.5m cash costs in H1. There were also €0.4m of share-based payments. A tax credit for €1.3m plus a grant for €0.1m were claimed. Cash outflow in H1 was €7.2m before working capital gains of €1m, making a €6m cash outflow. This is after the €3m tax credit payment, so cash outflow in H1 was €9m.

Net operational cash expenditure was planned by management to rise to €15m for 2016 as a whole. This has now been curtailed to €12m. Edison assumes H2 savings of about €1.7m over H1, making cash expenditure for 2016 about €15.7m. This gives a 2016 operational cash use after tax credits, as guided by management, of €12m. The €15.7m cash need is estimated to be funded by €5.1m of cash tax credits and €4.9m net of convertible loans. This gives a net outflow of €5.7m leaving forecast year end cash of about €3.5m.

Additional capital of €12m net of tax credits in 2017 is assumed to be required. This is within the YAG agreement scope, but ideally will be partly funded by deal income to minimise dilution.

TxCell has a liquidity contract with Kepler Cheureux (formerly Oddo Finance up until 31 July) worth €200k. As of 31 July 2016, €146k had been used to buy 28,137 shares, leaving €54k in cash.

Financial estimates are in Exhibit 8.