IRLAB Therapeutics — Valuation uplift supported by IRL757

IRLAB’s broad portfolio is focused on central nervous system (CNS) diseases (particularly PD), and IRL757 is the company’s third asset in the clinic, after mesdopetam and pirepemat, which are both nearing major value inflection points (initiation of pivotal Phase III programme and Phase II data readout, respectively). IRL757 is being developed as a once-daily oral treatment for apathy related to neurological disorders, a debilitating condition associated with faster cognitive and functional decline, significantly affecting quality of life for both patients and caregivers. Apathy is characterised by indifference and lack of emotion and has particularly high prevalence rates in PD (20–70%)1 and AD (20–90%)2 and is associated with increased probability of disease progression. Despite the prevalence, there are no FDA-approved treatments for apathy, with the current standard of care limited to off-label use of dopamine agonists (such as rotigotine/Neupro), antidepressants (such as olanzapine/Zyprexa), cholinesterase inhibitors (such as donepezil/Aricept and rivastigmine/Exelon) and CNS stimulants (such as methylphenidate, sold under the brand names Ritalin and Concerta).

IRL757’s potential efficacy in treating apathy has been demonstrated in several preclinical animal models, which tested varied aspects of cognitive function, including signals of improved motivation. The drug works by reversing the disruption in cortical to sub-cortical nerve signalling, believed to be an underlying cause for apathy in neurological disorders. In December 2023, IRLAB received a US$2m (c SEK22m) grant from the Michael J Fox Foundation (MJFF) to support the Phase I trial for the programme, and in May 2024, the McQuade Center for Strategic Research and Development (MSRD) expanded its collaboration with IRLAB by signing an exclusive R&D agreement to support IRL757’s clinical development (post-Phase I) to PoC, through efficacy signal readouts in PD and AD patient populations. IRLAB received a US$3m (c SEK33.6m) payment and could potentially receive US$5.5m in additional development-related milestone payments. The collaboration is open to further expansion, subject to negotiations. If the agreement is not extended, MSRD could be entitled to low single-digit royalties under certain circumstances.

While we await more details from management on the trial design, in terms of the cohort size, dosage and treatment duration, we are encouraged by the speedy trial initiation and dosing following clearance earlier in early May. Management has indicated that the Phase I trial is likely to complete before the end of 2024, with top-line readouts expected in Q125.

IRLAB has recently announced the appointment of Kristina Torfgård as its new chief executive officer (CEO), ending its extended (more than one-year) hunt for a new corporate head. She will succeed the interim CEO, Gunnar Olsson, from 1 August 2024. Kristina Torfgård has extensive experience (more than 30 years) in the pharmaceutical and biotech industry and was most recently CEO of the Swedish clinical-stage biopharma company, Alzinova, focused on neurodegenerative diseases, in particular AD. She was previously associated with AstraZeneca, where she held senior positions in early and late-stage R&D as well as marketed products. We expect IRLAB to leverage her experience in the neurodegenerative space to support continued development of its clinical and preclinical programmes. Gunner Olsson, who took over as interim CEO in February 2023 (following the exit of previous CEO, Richard Godfrey) will continue in his role as a member of the board of directors, focusing on the broader business strategy, while the CEO takes charge of execution. IRLAB has been working on optimising its management structure, under which it had previously appointed ex-CEO Nicholas Waters as head of R&D. We believe that this split of responsibilities has allowed to company to increase the productivity of its development and business activities.

We update our forecasts and valuation for IRLAB, now including the potential contribution from its latest asset to enter the clinic, IRL757. The programme is already funded to PoC trials and our model assumes that further development work (pivotal trials), regulatory filing and subsequent commercialisation will also be undertaken by a partner. As previously highlighted, this could either be MSRD, if new deal terms are negotiated successfully, or another partner.

We expect IRL757 to target both PD and AD patient populations given the high prevalence of apathy, and assume the US and EU plus the UK to be the primary markets. Our current estimates do not include Japan, but we note the upside potential from expansion into this key market.

Based on average apathy prevalence rates of 40% and 44% in PD and AD, respectively, we estimate the target patient populations to be 550,000 (in PD) and 3 million (in AD) in the US, and 530,000 and 3.9 million in the EU. We assume a 2.5% y-o-y growth in the patient population. Given the sizeable target population and the untested market for a targeted treatment for apathy, we conservatively assume a peak penetration rate of 5%, with peak sales achieved in 2037. We estimate market entry in 2031 and our forecasts extend to 2040. We assume a treatment cost of US$6,000 per patient in the US (based on the US$500 monthly price for branded Aricept, used off-label as a treatment for apathy in AD), with a 50% discount to this price in the EU (US$3,000). We have set the probability of success at 7.5% (the average of the Phase I assets).

For simplicity, we assume a global licensing deal following PoC studies (Phase II studies, which we expect to complete by the end of 2026). To account for the uncertainty in likely licensing terms (given that apathy is an untapped indication), we assume a blended royalty rate of 20% (higher than the typical high-single-digit/low-double-digit royalty rates for Phase II/III assets) to reflect any licensing and milestone contributions otherwise. These assumptions are subject to revision as clinical development work progresses.

After incorporating IRL757, our valuation for IRLAB increases to SEK4.56bn or SEK87.9/share (from SEK4.25bn or SEK81.9/share previously). For IRL757, we estimate peak sales of US$2.3bn (c SEK25bn). Since we assume a licensing deal for IRL757, our net present value (NPV) calculations are based on the potential royalty income (which we believe to be 20%), adjusted for the low single digit pay away to MSRD (we assume this to be 3% of sales) and a 20% tax rate. We also use a discount rate of 12.5%, Edison’s standard rate used to value clinical stage biotechs. This translates to an NPV of SEK4.2bn and a risk-adjusted NPV (rNPV) of SEK320.3m, based on a 7.5% probability of success. On a per-share basis, this comes to SEK6.1/share or 7% of the current group valuation. Our underlying assumptions for the other two clinical assets remains unchanged. Exhibit 1 presents a breakdown of our rNPV valuation for IRLAB.

We keep our FY24 and FY25 financial estimates largely unchanged following IRL757’s entry to the clinic. As noted above, the R&D expenses for the clinical programme will be funded by partners, and we therefore see no change to our R&D estimates following the recent announcement. We continue to estimate R&D expenses of SEK152.2m in FY24 and SEK140m in FY25. Note that the Q124 R&D run-rate (SEK28.9m) is below our full-year estimate and we will reassess this assumption as we get more clarity on the mesdopetam and pirepemat development plans. We also remind readers that we now reflect the US$3m upfront payment from MSRD as licensing income in FY24. However, we have not included the potential US$5.5m milestone payment due to lack of clarity on the payment tiggers.

IRLAB recently announced that it has drawn down the remaining SEK25m from the original SEK55m loan facility announced in December 2023. This drawdown was conditional on the company’s market capitalisation exceeding SEK550m (SEK820m currently). The loan matures in May 2025 and carries an interest rate of 3m STIBOR+10%. There is no change to our forecasts based on this development because we already assumed this drawdown in FY24 in our model. Note that the lender (Fenja Capital, formerly Formue Nord) holds the right to convert up to SEK10m of the debt to equity at a 30% premium to the 10-day volume-weighted average price, prior to the signing of the loan agreement (which translates to a conversion price of c SEK8/share according to our calculations, below the current trading price of SEK15.75).

We estimate that the additional funds of SEK25m, along with gross cash of SEK73.1m at end Q124 and the SEK32.6m payment received from MSRD (pro forma gross cash of SEK130.7m) will be sufficient to fund operations into Q125, past the aforementioned inflection points related to the mesdopetam and pirepemat programmes. In the absence of a licensing deal for mesdopetam, we estimate the need to raise SEK550m before IRLAB turns profitable in 2028 following the expected launch of mesdopetam. We account for this capital requirement as illustrative debt in our model, assuming a SEK150m raise in FY24 and SEK200m each in FY25 and FY26. If these funds are raised through an equity issue instead, IRLAB would have to issue 34.9m shares (assuming the current trading price of SEK15.75), resulting in our per-share valuation decreasing to SEK58.9 from SEK87.9 currently (the number of shares outstanding would increase from 51.9m to 86.8m).