Pixium Vision — Back to basics as Second Sight deal is called off

Pixium announced on 3 April it had been notified by Second Sight of its unilateral decision to terminate the January 2021 MOU relating to the proposed business combination of both entities. According to Pixium, this notification came after Pixium had offered Second Sight an opportunity to renegotiate the MOU to preserve the possibility of a business combination following Second Sight’s $27.9m private placement in March, which Pixium states was explicitly prohibited under the MOU and detrimental to the company’s interests. Pixium indicates that Second Sight never responded to the proposals it made in good faith and the MOU did not allow Second Sight to unilaterally terminate the MOU. Pixium stated it will ‘consider all measures available (including any legal proceedings, in particular with the relevant stock exchange authorities) to preserve its rights and obtain compensation for its entire damages.’

To this end, Second Sight indicated on 5 April it has offered Pixium $1m liquidated damages contemplated by the MOU or a licence to certain Second Sight patents to settle matters between the parties. According to Second Sight, Pixium stated in writing that it considered this termination wrongful, rejected its offers and demanded €6m in damages, indicating it would pursue litigation. Second Sight indicates it plans to pay the $1m termination fee as provided in the MOU, but it appears from this chain of events that Pixium will be seeking higher amounts.

We will refrain from analysing the merits of the legal dispute between these parties and on speculating what may be the final net amount Pixium will receive from Second Sight. We are not entirely disappointed the business combination plan fell through and the termination of this arrangement may even turn out to be a positive outcome for Pixium’s shareholders, as they will now fully benefit from the future economics of the Prima system. Under the MOU, Pixium shareholders would have had their interest in Prima assets diluted by c 40% (pre-financing) as contemplated by the MOU and in exchange would have received a c 24% interest (pre-financing) in Second Sight’s assets (primarily those relating to the Orion Visual Cortical Prosthesis System, as well as Second Sight’s de-prioritised Argus II) and indirect access to Second Sight’s US exchange listing. The applicable details of the proposed combination were discussed in our prior note. Altogether, the Prima system is much more clinically advanced than Orion (as Prima is in pivotal EU studies and has shown strong evidence of utility, as described below) and has a clearer development and commercial path (and less invasive implantation procedure, as in retinal surgery versus neurosurgery). The Argus II retinal implant had been de-prioritised (we believe largely due to limited commercial success) and the numerous advantages of Prima compared to Argus were discussed in our prior outlook report. Effectively, the main benefit of the transaction to Pixium, in our view, was the expanded access to US investors (for subsequent financings) offered by Second Sight’s Nasdaq listing.

With the Second Sight transaction now off the table, Pixium will need to accelerate its efforts to shore up short and longer-term financing solutions and seek an alternate strategy to access US markets and investors, and preferably with less dilution than the Second Sight deal would have entailed. We still see merit in the company’s goal to seek closer ties to US markets, as that should facilitate longer-term funding needs. It plans to update shareholders on potential alternative financing solutions at its annual general meeting (planned for May 2021). In January 2021, Pixium raised another €1.25m tranche from its European Select Growth Opportunities Fund (ESGO) convertible debt financing facility and we estimate that its current funds on hand should last into FY22.

As announced on March 30, a recent paper covering updated data from the European feasibility study (PRIMA-FS) was released showing the second-generation and transparent AR glasses and improved analytics system (from the second-generation pocket computer) has fulfilled its promise of enabling Prima-implanted patients to integrate their natural peripheral vision with the ‘prosthetic vision’ supplied by the Prima Bionic Vision System (which comprises the 378-electrode photovoltaic chip implanted into the retina, along with externally worn AR glasses and the supplied pocket computer). As a reminder, in mid-2019, patients from the PRIMA-FS trial were transitioned towards use of the second-generation glasses and pocket computers instead of the initial-generation components. One of the key benefits of the second-generation AR glasses is that they are transparent and would allow patients to combine both prosthetic and natural residual (ie peripheral) vision, as the initial-generation glasses were opaque. On 31 March 2020, the company reported 18-month data on four of the five EU patients implanted in PRIMA-FS (one of the five patients implanted has passed away due to health reasons completely unrelated to Prima implantation or usage), showing several promising aspects from this transition. Use of the second-generation components has led to some measurable improvements in VA, in part due to some of the features of the external device components, which include improved magnification capabilities. The new paper reported that under room lighting conditions, these patients could simultaneously use prosthetic central vision and their remaining peripheral vision in the implanted eye and the fellow eye.

Further, VA improvements from the Prima chip were maintained at 24–30 months follow-up post-implantation, suggesting continued safety and stability of the implant over this period. Using electronic magnification, which allows up to 8x magnification/zoom, patients (n=4) gained VA in the range of 20/63 to 20/98 (reflecting 32% to 20%, respectively, of the normal 20/20 VA in healthy persons), which exceeds the threshold of legal blindness (20/200). The raw or unassisted (ie, without magnification) prosthetic VA among all the patients was very consistent (20/438 to 20/564), which is very close to the theoretical pixel size of the device. This suggests further improvements in pixel density (and raw resulting prosthetic VA) may be contemplated in subsequent higher-resolution iterations of the implant chip, but we believe Pixium’s focus remains on obtaining market approval for the current Prima system (based on the 378-electrode current implant) before considering studies on potential subsequent, higher-resolution implant devices.

We have made no significant local currency changes to our forecasts, but have rolled forward our valuation by a quarter, which increases our rNPV to €142.8m (from €138.7m, previously). We have also adjusted the net cash component of our valuation, to reflect our Q121 net cash estimate of €2.1m (versus €3.3m from Q420, previously).

The company had a Q420 net cash position of €3.3m (€10.6m in gross cash and €7.2m gross debt), excluding €1.3m in lease liabilities. As stated above, since YE20, the company raised another €1.25m tranche from its ESGO financing facility and converted about €1.28m of its outstanding ESGO debt into equity. We forecast Pixium’s Q121 cash burn rate was €2.5m and hence we estimate Q121e net cash of €2.1m (and Q121e gross cash of €9.3m).

After adding €2.1m in Q121e net cash, we obtain an equity valuation of €144.9m, or €3.07 per share, versus our prior values of €142.0m and €3.23, respectively. The per-share value has decreased due to increased shares outstanding.

As stated above, we estimate that Pixium’s funds on hand should last into FY22. Our model assumes Pixium will need to raise €33.7m (from €35m, previously) in additional funds before year-end 2023, modelled as illustrative long-term debt, to complete the PRIMAvera pivotal study, all EU-related regulatory and preparatory commercial activities and bring Prima to commercial launch. We expect part of this requirement will be fulfilled using the remaining (or unused) €5.0m in tranches from the ESGO funding facility.