Bioasis Technologies — Bringing brain drugs into the 21st century

Bioasis is a biopharma company focused on developing therapies to cross the BBB. It has developed a technology named xB3 that uses a small peptide to ferry molecules across the BBB in a process called receptor-mediated transcytosis. This tag can be linked to monoclonal antibodies, enzymes, oligonucleotides and small molecules. The company’s lead program is xB3-001 for the treatment of BM in HER2+ mBC patients and is in preclinical testing, targeting entering the clinic in H221. The drug is the conjugation of the xB3 peptide to trastuzumab, the drug commercially sold as Herceptin.

We arrive at an initial valuation of C$47.8m or C$0.71 per basic share based on a risk adjusted NPV analysis. We model the commercialization of xB3-001 for two programs: the initial approval for treatment of HER2+ mBC patients with BMs in 2027 and a label expansion to earlier-line mBC therapy in 2032. These have valuations of C$20.05m and C$23.88m respectively. We expect initial approval through an accelerated clinical pathway as there is currently no treatment approved specifically for BM on the market.

The company significantly reduced its operational spending over 9MFY20 (fiscal year-ending in February) and the most recent report for Q3 showed reductions by over half: C$0.694m for Q320 compared to C$1.482m for Q319. We expect spending, particularly on R&D, to increase as xB3-001 completes IND-enabling studies and enters the clinic. We forecast operational spending of C$11.6m in FY21. We forecast the company will require C$130m before approval (recorded as illustrative debt: C$20m in FY21, C$50m in FY23, C$60m in FY26), but expect the company to attempt to meet these obligations through licensing agreements.

Bioasis faces the hurdles typically associated with an early-stage company with limited capital. The company’s lead development program is very early stage and is not expected to have an IND filed until 2021. This carries the unavoidable risks of clinical development as well as the financial risks of financing a clinical program through completion. The clinical risks are at least partially mitigated because xB3-001 is based on the very well understood drug Herceptin. However, the xB3 platform and its ability to penetrate the BBB has not been tested in humans to date. In other words, we expect the active drug to be biochemically active, but it may not penetrate the brain in sufficient quantities to be clinically active. Moreover, the patient population being targeted in the initial clinical program (mBC patients with pre-existing BM) are very sick, which may complicate the clinical trial. Once approved the drug will likely compete with tucatinib (Tukysa) from Seattle Genetics, which has clinically demonstrated activity in this population. If the drug undergoes label expansion, we expect it to compete with Herceptin, trastuzumab biosimilars and other HER2 targeting agents. Finally, the company will need significant additional capital to complete this clinical program: C$130m before approval. We expect it to seek this capital through business development and licensing activity, but it cannot be certain that it will be able to find willing partners. If it cannot secure attractive partnerships, the company may need to seek this money in the capital markets, which could result in substantial dilution.

Bioasis was founded in 2007 and became publicly listed in 2008 through acquisition by a special purpose acquisition company (SPAC) on the Toronto Venture Exchange. The company was founded on technology licensed from the University of British Columbia on methods to increase the concentration of certain drugs in the brain, but it has subsequently internally developed independent intellectual property in this space that surpasses the original technology. The company’s xB3 technology uses a small peptide that can be fused to a range of molecules to improve their entry into the brain. This technology has wide-reaching potential applications and is the subject of two current development partnerships (with Prothena, and an undisclosed large pharma) and one past development partnership (with MedImmune). Additionally, the company has one ongoing internal development program, xB3-001, a derivative of Herceptin (trastuzumab, Roche) with potentially improved brain-penetrating properties. The goal with this program is to address BM in patients with HER2+ mBC. We expect the company to file an IND in 2021. The company also has a series of earlier-stage preclinical programs that may serve as future directions for the company (but are largely outside of the scope of this report). These programs are for a range of diseases including brain cancers, lysosomal storage disorders, neuroinflammation, and neurodegenerative disorders.

Bioasis’s platform is centered on technology to deliver drugs to the brain and a necessary component of getting drugs into the brain is crossing the BBB. The BBB is not a discrete structure but rather the network of cardiovascular endothelium that lines the blood vessels of the brain, which control what type of molecules can exit the blood and enter the mass of brain tissue. It is primarily composed of endothelial cells, which form the physical barrier, and pericytes, which maintain the barrier and control its permeability. Unlike in other areas of the body, the endothelial cells in the BBB form tight junctions with each other, which prevent the diffusion of molecules between cells.

The BBB prevents a wide range of substances from entering the brain. These substances cross all scales from small molecules and proteins (such as antibodies) to whole organisms such as infectious viruses or bacteria. One of the primary functions of the BBB is to prevent infectious agents from entering the brain, which is why infectious brain diseases are rare. However, by the same token, the BBB largely prevents the body’s own immune system from entering the brain and therefore alternative mechanisms of preventing infection have evolved in the central nervous system (CNS). Because of this, under normal circumstances circulating antibodies (IgG) are largely blocked from entering the brain. This has implications for antibody-based drugs targeting structures in the brain (more below).

Additionally, the BBB is effective at preventing a wide range of toxins, drugs and other small molecules from entering the brain. Neurotoxins can be extremely potent, so there is significant evolutionary pressure to limit their ability to enter the cerebral space. Additionally, the BBB must prevent the crossing of endogenous molecules that have specialized functions in the brain. For instance, glutamate is an amino acid that circulates in the blood in high concentrations as an essential nutrient, but is a neurotransmitter in the brain so its entry into the brain must be controlled. This BBB barrier effect is achieved by multiple mechanisms depending on the structure of the molecules. First, the endothelial cells of the BBB form a physical barrier that prevents the diffusion of water-soluble drugs into the brain. More lipophilic small molecules can diffuse across the cell membrane of endothelial cells, but many of these are scavenged by P-glycoprotein (PGP or multidrug resistance protein). The protein binds a wide range of drug-like molecules and actively transports them out of BBB endothelial cells. Interpersonal variation in the expression levels of this protein is a major factor determining how susceptible different people are to treatment with CNS-targeted drugs.1 PGP is one of several efflux transporters that ferry molecules out of the brain, each of which recognizes different sets of structural motifs on small molecules and prevents these classes from crossing the barrier. The design of drugs to target the CNS involves generating a sufficiently lipophilic molecule that does not interact strongly with any of these classes of efflux transporters.

Because it effectively blocks such a range of substances from entering the brain, the BBB must therefore selectively privilege those molecules that are important for brain function and downstream signaling. These include molecules important for normal metabolism such as oxygen, glucose and essential vitamins as well as hormones and other signaling molecules either produced by or targeting the brain. Most of these privileged molecules have dedicated transmembrane transporters and there are some examples of these dedicated transporters being used to facilitate the transport of therapeutics to the brain. For instance, the widely used Parkinson’s drug levodopa is actively transported into the brain using the L-type amino acid influx transporter 1. However, because these transporters have a high degree of structural selectivity for their substrates, the applications for drug delivery are limited.

The above mechanisms are specific to small molecules. Macromolecules cross the BBB through the process of transcytosis. Transcytosis is when a macromolecule binds to the plasma membrane on the blood side of the barrier and is drawn into an intracellular vesicle. This vesicle is then exocytosed on the brain side. This process can either be mediated by a receptor that binds to specific macromolecules (eg transferrin, insulin) or mediated by the direct binding of the plasma membrane via electrostatic interactions (adsorptive transcytosis, eg albumin). Bioasis’s technology is centered on leveraging the receptor mediated transcytosis pathway to deliver molecules to the brain.

The proprietary xB3 platform developed by Bioasis uses a 12 amino acid peptide (the xB3 peptide) derived from the protein melanotransferrin that can be conjugated to a range of molecules to ferry them across the BBB. This is an evolution of the company’s previous Transcend technology platform, which employed full-length melanotransferrin. Melanotransferrin is a serum protein of poorly described function that shares a homology with other members of the transferrin family of proteins. Both melanotransferrin and other transferrins are actively transcytosed across the BBB. The titular member of this class, transferrin, is important for iron homeostasis in the brain and is being investigated as a ligand to facilitate drug delivery across the BBB (see below). The xB3 peptide is the minimal region of the protein important for binding to its receptor on endothelial cells, the low-density lipoprotein receptor-related protein (LRP1) receptor. This peptide can be fused to a range of substrates such as antibodies, enzymes, oligonucleotides, and small molecules, and its small size limits potential disruption to the substrate’s properties. Bioasis’s development approach is therefore to take drugs with established efficacy outside of the brain and convert these into brain penetrating drugs to address new indications or the shortcomings of the existing drug.

LRP1 is expressed on the surface of a range of different cell types, including brain cells such as neurons and glia. This means a drug directed to the brain with the xB3 peptide can also be taken up directly by brain cells, opening the potential to target intracellular proteins. This is of particular importance for certain neurodegenerative diseases, such as Parkinson’s where intracellular bodies are made and rare diseases such as lysosomal storage disorders. Interestingly, LRP1 is involved in regulating amyloid-β peptides present in Alzheimer’s disease, although many questions regarding its role in that disease remain.2 Additionally, because the receptor is expressed on a wide range of cell types, it may reduce the effective concentration of drug delivered by targeting it, because it will be absorbed by other tissues. However, this is not a feature unique to this system and is common in the various programs leveraging transcytosis.

LRP1 is not the only receptor responsible for receptor mediated transcytosis. Most research into the phenomenon since its discovery has been focused on transferrin receptor (TfR). Research into using it as a method of delivering drugs to the brain date back to the early 1990s.3 Because of this, it is the most widely employed receptor in other preclinical and clinical development programs targeting transcytosis (see below). TfR, as the name implies, binds to transferrin, the major mediator of iron homeostasis across the body. Similar to LRP1, TfR is expressed on a range of cell types, including brain cells, which may allow it to be used to target these drugs intracellularly, but also allow it to be taken up by off-target tissue.

Bioasis, however, believes LRP1 is a superior receptor to target compared to TfR and can achieve higher brain concentrations, which is supported by some preliminary research in excised human brain (Exhibit 3).

Bioasis is not the only company developing technology to allow drugs to cross the BBB. There are a number of other companies looking to leverage the receptor-mediated transcytosis pathway to improve the brain exposure of drugs for a variety of applications. Most of these programs use TfR as the effector of transcytosis, although the ligands employed vary.

Denali Therapeutics is preparing to enter the clinic with its BBB program. The company has engineered the antibody constant domain (Fc) to bind to TfR, presumably through the inclusion of a sequence from transferrin. Although it employs a portion of an antibody, this domain can be fused to a range of macromolecules (in addition to its use in a simple antibody) to ferry them into the brain. Denali recently published two proof of concept papers5,6 showing delivery of active molecules to the brain in animals, which is supportive of this methodology. The company is investigating the technology for a range of lysosomal storage disorders and is preparing to enter the clinic with its treatment for Hunter syndrome (mucopolysaccharidosis type II, MPS II) in H120.

The Roche Brain Shuttle technology is similar in that it targets TfR, although the ligand in this case is a fragment of an antibody (Fab) that binds TfR. This is a much larger polypeptide than employed by Bioasis or Denali and the company has previously encountered issues with it interfering with the function of the therapeutic portion of the construct.7 Roche recently entered Phase I with the first drug engineered with this technology in November 2019, a treatment for Alzheimer’s disease targeting amyloid plaques. To complicate matters, Roche subsidiary Genentech had an independent program to develop a bispecific antibody targeting TfR and BACE1 (beta-secretase) for the treatment of Alzheimer’s, but we consider this program is likely to be discontinued in favor of the more modular program from Roche, and in light of the failure of other BACE1 inhibitors in the clinic.

Angiochem is the only other company we are aware of that is using LRP1 to cross the BBB, similar to Bioasis. Also similar to Bioasis, the company’s lead program is the development of a drug to treat leptomeningeal disease in mBC patients, albeit in HER2-negative patients. The company has a special protocol assessment with the FDA for a Phase III study in these patients, but has not started recruiting. Otherwise we know little about the company.

The most advanced program that we have been able to identify is at JCR Pharmaceuticals in Japan, which has a treatment for Hunter syndrome that has completed pivotal Phase III clinical studies in that country. This technology uses an enzyme fused to an anti-TfR mAb. The company also has a collaboration with Sumitomo Dainippon for the development of CNS targeting drugs (although it is unclear if the Hunter syndrome program is included), and it is planning on submitting a marketing application for its Hunter syndrome drug in September 2020. Additionally, JCR recently completed the acquisition of private US pharmaceutical company ArmaGen, which developed a BBB platform targeting the insulin receptor (IR) to drive uptake of its drugs. This receptor, similar to LRP1 and TfR, is also widely expressed and carries the same advantages and drawbacks. ArmaGen’s lead program is for the treatment of Hurler syndrome (MPS I) and completed a Phase II study in 2018.

Transcytosis is not the only mechanism companies are exploring to deliver drugs to the brain. It is worth noting that there have been programs using biologics to target diseases of the CNS without any special targeting technology, albeit with little success. These include programs using mAb to target amyloid plaques for the treatment of Alzheimer’s disease, although most programs to date have failed in the clinic (Biogen’s aducanumab is still in the clinic and has shown mixed results). Herceptin and Kadcyla (trastuzumab emtansine, Genentech) have both been investigated for efficacy in mBC BMs with little effect found on existing tumors (although they may prevent the initial formation of these tumors or improve survival through better systemic disease control).8,9 The logic behind all of these investigations is that the BBB can be partially disrupted in some diseases, which may allow for these molecules to enter the brain without special modifications and have a therapeutic effect, but this has not been born out in practice.

The Spanish company Iproteos has taken a unique approach to delivering ‘biologics’ to the brain by developing peptidomimetics that replicate the function of certain peptides but can freely diffuse into the brain like small molecules. The company has announced that it planned to enter Phase I studies in 2019 with its lead program for cognitive impairment in Parkinson’s patients.

One of the only biologics ever successfully designed to cross the BBB is Zolgensma (onasemnogene abeparvovec, AveXis/Novartis) for the treatment of spinal muscular atrophy (SMA). SMA is a disease of the spinal cord in which spinal motor neurons are progressively lost, but the spinal cord, as part of the CNS, is also protected by the BBB (despite the potentially misleading name). The drug is a gene therapy that uses an AAV9 vector to deliver its genetic payload, which is known to cross the BBB. However, although an impressive accomplishment on many scores, this technique of using viral vectors is likely limited to genetic therapies.

Finally, there are multiple ongoing studies investigating the use of ultrasound to disrupt the BBB. These techniques involve using focused ultrasound to induce cavitation bubbles in the microvasculature of the brain by physically disrupting its structure. The technique is being investigated primarily for intractable diseases such as glioma due to worries of peripheral tissue damage. However, it is not limited to a specific therapeutic.

One of the most compelling value propositions for Bioasis is that xB3 is a platform technology potentially extendable to a wide range of indications. The company has an ongoing internal development program, but we believe the potential of the platform far surpasses what can be accomplished through a single drug. We believe there are ample opportunities to realize this value through licensing and even at this early stage the company has been able to find partnering deals.

In October 2018 the company entered into a licensing agreement with Prothena, in which the latter would use xB3 in certain preclinical development programs. The agreement included a US$1m upfront payment and up to US$33m in milestones and royalties on sales. However, the company subsequently sold a large portion of the interest in this program to Xoma for US$300,000 upfront and US$225,000 in development milestones. Xoma will receive 100% of royalties and 10% of opt-in option payments and 10% of milestone payments from the original Prothena agreement (ie Bioasis will receive 90% of the original option payments and milestones).

In January 2019, the company signed a research agreement with an undisclosed ‘leading pharmaceutical company’ in which the latter would provide a US$500,000 upfront payment and up to US$3m in support for research employing the platform. We assume any potential drugs that arise from this program will be subject to future licensing deals.

Finally, the company previously had a collaboration agreement with MedImmune to develop a brain-penetrating antibody targeting interleukin 1 receptor antagonist for the treatment of neuropathic pain.10 The xB3 platform was selected from eight platforms from different companies that were under evaluation by MedImmune as the best candidate. The program showed positive results in preclinical studies, which we view as an independent validation of the technology. However, the program did not progress to the clinic for undisclosed reasons and is no longer partnered.

The company has patents covering the xB3 platform (US9,364,567 and US9,993,530), which expire in 2034 and can potentially be subject to five years of patent term extension if any drugs using the platform are approved.

The company’s lead development program is xB3-001 for the treatment of HER2+ mBC. xB3-001 is a fusion of the xB3 peptide with trastuzumab designed to help address the phenomenon of BMs in breast cancer patients. The program is in preclinical testing in preparation for an IND filing in 2021 and initiation of clinical studies thereafter.

The National Cancer Institute estimates that 268,600 new cases of breast cancer were diagnosed in 2019 in the US, which corresponds to an age-adjusted incidence of 127.5 per 100,000 women.11 Of these, approximately 20% are HER2+. Metastatic disease is initially diagnosed in approximately 5% of these women. However, a much larger fraction of women will progress to metastatic disease from stage I to III breast cancer following their initial diagnosis, at approximately 15%.12 Combined, this corresponds to approximately 10,700 new diagnoses of HER2+ mBC per year in the US.

BMs are a major complicating factor in breast cancer patients, especially those with HER2+ mBC. One retrospective study of patients in Belgium found that among HER2+ breast cancer patients, 10.8% had BMs at their initial screening and 41.7% developed BMs within their lifetime.13 Survival of these patients was significantly reduced, from 46.7 months for those with no CNS involvement to 20.8 months for those with BMs. The standard of care for these patients is surgery and/or radiotherapy. There are no available pharmacological solutions for BMs outside of better general disease control. However, this is a double-edged sword because as treatments have improved and mBC patients are living longer, this allows for more time for these patients to develop BMs. Herceptin in particular is associated with a significant increase in the rate of BMs at the first recurrence of disease, despite unequivocally improving survival: in one study the use of Herceptin increased the rate of BMs at four years of follow-up by over sixfold (in patients with stage I to III invasive BC at initial diagnosis).14 The theory is that because they are living longer, these patients have more time to develop BMs, and they accumulate because they cannot be targeted by the drug.

Although xB3-001 is designed to cross the BBB, the majority will be present systemically and should have activity against the primary tumor site and other non-CNS metastases. This is supported by mouse xenograft data collected by the company (Exhibit 5). Importantly, significant activity of this construct is also seen in the brains of mice with brain invasive mBC xenografts (Exhibit 6). Although there can be no guarantees these results will translate into activity in humans, these data are highly encouraging that the drug’s activity is in accordance with its design.

xB3-001 is in preclinical testing and the company is performing the necessary animal toxicology data needed to proceed to the clinic. The timeline for entering the clinic is somewhat contingent on the evolving COVID-19 situation and the company’s ability to raise capital in this environment, so we conservatively expect the company to at minimum be able to file an IND in 2021. There is potential upside if Bioasis is able to finance and complete its IND enabling studies by the end of 2020, which should also enable the program to enter the clinic before the end of 2021.

The company has a multi-stage development strategy for the product centered on a stepwise expansion of its addressable indications and expansion of its addressable market. The plan is to initially seek approval specifically for the treatment of HER2+ mBC patients with already established BMs. This is the path of least resistance for an initial approval because Herceptin is not approved specifically for the treatment of BMs, and therefore the drug will not need to meet the higher statistical burden of non-inferiority. We model the company performing a Phase Ib/II dose escalation/expansion study in the population of patients with BMs following progression after surgical or radiological treatment. Given the well-established safety parameters for Herceptin, we expect the study to quickly progress through dosing phases. There is little reason to expect that the xB3 tag will have an impact on safety, because this would be highly unusual for a small peptide and it is not associated with the targeted effects of the drug (only its delivery).

The clinical program for xB3-001 will be one of the first of its kind to specifically target BMs as part of its trial description. In our opinion, this program would be a good candidate for accelerated approval. Accelerated approval allows for the use of surrogate endpoints (besides survival) to support approval. Given that BMs are strongly correlated with survival in these patients, these could be used as a biomarker to predict outcomes. Moreover, we believe that the agency will likely have a high degree familiarity with the safety profile of xB3-001 given its long history with Herceptin.

We expect the company to expand the clinical program for xB3-001 beyond the initial indication of BM treatment. Although the results need to be replicated in humans, it stands to reason that it will retain peripheral activity (outside the brain) and can be used in place of Herceptin (or other HER2 targeting treatments). In this scenario it could have the same peripheral effects as Herceptin, while also having CNS activity, which could prevent the formation of BMs to begin with. We expect the company to pursue expansion into these patients at some time in the future, but this will likely depend on progress in the initial indication and financial resources.

We should note that this current clinical plan is subject to change, given the rapidly evolving landscape for treatment of these patients. The recent approval of tucatinib (see below) may have an impact on the study populations that can reasonably be enrolled.

There are currently no approved medications specifically designed to address BMs in mBC. Additionally, relatively few drugs have been investigated for activity in this population as they are frequently excluded from clinical studies.

One recent exception is the drug tucatinib from Seattle Genetics, which was approved in April 2020. Tucatinib is a small molecule inhibitor of HER2 that is designed to pass the BBB, and the drug completed a pivotal study in a mixed population of previously treated HER2+ mBC patients with and without BMs.16 Patients in the study were treated with or without tucatinib in combination with Herceptin and capecitabine. The study met its primary endpoint in of improvement in progression-free survival (PFS) in the initial study population (there was an expanded trial population for secondary endpoints): 7.8 months vs 5.6 months for placebo (HR=0.54, p<0.001). Moreover, improvement in overall survival (OS) was seen in the expanded trial population (21.9 months vs 17.4 months, HR=0.66, p=0.005) and improvement in PFS was seen in patients with BMs (7.6 months vs 5.4 months, HR=0.48, p<0.001). The drug was approved for patients, with and without BMs, who have received one or more prior HER2-targeted treatments.

The most immediate impact we see from the approval of tucatinib will be on the xB3-001 clinical program. The existence of an approved medication for the treatment of BMs may have a negative impact on the ability of Bioasis to enroll patents. If xB3-001 is ultimately approved, we can envision a scenario in which they are used concurrently, given the label for tucatinib includes combination with trastuzumab (for which xB3-001 can serve as a better alternative). Although these results are significant for this patient population as the first medication expected to directly address BMs, there remains ample room for continued improvement of the treatment regimen in the future.

There are also a number of other programs to develop ‘better’ HER2-targeting antibodies and antibody-drug conjugates such as margetuximab from Macrogenics (Phase III) or trastuzumab deruxtecan from AstraZeneca and Daiichi Sankyo (filed, decision in Q220), but these programs fundamentally do not address the issues of penetrating the brain and treating BM.

In addition to xB3-001, the company has a series of other programs in the proof-of-concept phase. These programs serve as a useful demonstration of the xB3 platform and its extensibility. The company’s four proof-of-concept programs fall into two classes: xB3-002 and xB3-003 for the brain cancers glioblastoma and glioma, respectively, xB3-007 and xB3-008 for the lysosomal storage disorders Gaucher’s and MPS II, respectively, and xB3-004 for neuroinflamation

The brain cancer programs (xB3-002 and xB3-003) are a natural evolution of the BMs program for xB3-001. Brain cancers are among the most difficult to treat in part due to limited treatment options from the resistant nature of the disease. The programs are the xB3 peptide covalently attached to Avastin and doxorubicin respectively, the latter being interesting because it additionally serves as a proof of concept for using xB3 to tag small molecules.

The lysosomal storage disorder programs (xB3-007 and xB3-008) could potentially address a significant treatment gap that exists for these diseases. There are enzyme replacement therapies for Gaucher’s and MPS II, but unfortunately these treatments only alleviate peripheral symptoms and cannot address their cognitive symptoms. The goal is to effectively deliver these enzymes to the brain to provide a more complete profile. Moreover, xB3-007 may potentially be extended to the treatment of GBA-1 associated Parkinson’s disease and Lewy body dementia. And finally, the company has the xB3-004 program (formerly partnered with MedImmune/AstraZeneca, but deprioritized) targeting IL-1RA that is being examined for the future potential indications of neuropathic pain, epilepsy and multiple sclerosis.

The risks faced by Bioasis are typical of an early-stage biotechnology company. The company faces the unavoidable risks associated with clinical development. Some clinical risks are mitigated as xB3-001 is a derivative of a well-understood molecule, trastuzumab, but the ability to deliver effective concentrations of this molecule to the brain has not yet been tested in humans. We expect early clinical studies to be highly illustrative of the potential of this platform. Moreover, the patient population being studied are very sick, which may complicate the data in these studies.

There are some risks to the company associated with the ongoing COVID-19 pandemic. Based on feedback from Bioasis, it intends to perform a non-human primate (NHP) study, and the availability of animals may be affected as they are diverted to COVID-19 studies. An NHP study may not be a strict requirement and other toxicology studies may be sufficient (contingent on FDA feedback). Additionally, the ability to complete these studies is contingent on the financing situation in light of the pandemic. We conservatively expect the company to be able to file an IND in 2021, but we may accelerate this timeline if the company is able to progress these preclinical studies with few delays.

We also expect xB3-001 to face commercial risk. Tucatinib was recently approved, so we expect xB3-001 to face a well-established competitor if it is approved. If the company seeks approval in the future for the prevention of BMs in early-line therapy, the product will compete with many other HER2 targeted therapies, including low-priced Herceptin biosimilars.

Finally, the company faces financing and partnering risks. We expect it to require a minimum C$130m in additional financing to reach approval for xB3-001, including C$20m forecasted for CY20. The company will likely be required to seek licensing opportunities to meet this obligation, but there can be no guarantees that it will be able to find deals on favorable terms. We believe there is potential for licensing of the platform itself, but this is unlikely sufficient to meet all the company’s financing needs and it may therefore resort to dilutive sources of capital.

We arrive at an initial valuation of C$47.8m or C$0.71 per basic share. This is based on a risk adjusted NPV analysis of two clinical programs for xB3-001: the initial approval for treatment of mBC BMs (C$20.05m) and a follow-on approval for prevention of mBC BMs during first-line HER2 targeted treatment (C$23.88m). These valuations depend on a number of assumptions for these programs. We model commercialization in the US and Europe. We assume a launch pricing of US$11,500 per month in the US and US$7,500 in Europe. This pricing is roughly on par with Kadcyla, adjusted for 2% price growth until launch. We include a gross/net sales discount of 30%. We also include costs of selling in our models: US$10m +10% of revenue for each geography and indication. We model revenue through 2039, assuming a five-year extension on the patent terms for xB3. For each indication, we use our standard discount rate for pre-commercial products of 12.5%.

For the initial indication of treatment of BCBMs, we expect patients to remain on the drug for 10 months on average. We expect the company will capture 30% of the addressable market (HER2+ diagnosed mBC patients with existing BMs; we estimate that 51% of mBC patients will develop BM). In our model, we assume approval through an accelerated clinical pathway, requiring approximately 600 patients, at a cost of US$61m. We assign a probability of success for this program of 10% based on the available evidence supporting the program. The program’s prospects for success are bolstered by the fact that it is based on a very well understood molecule (trastuzumab) with definitive activity and an understood safety profile. We therefore do not expect any surprises with toxicology. The majority of the risk in this case is on whether the xB3 peptide can deliver the drug to the brain and in sufficient quantities to achieve efficacy. Getting cancer drugs to cross the BBB has been a challenging hurdle for many drug development companies.

For the expansion indication, we assume patients will be on the drug for an average of 12 months but expect the company to achieve a lower 10% market share. We also expect an additional Phase II and Phase III study enrolling approximately 850 patients combined. We assign a 5% probability of success for this program, because it is predicated on the prior success of the initial approval.

We also include potential milestones from Prothena associated with the licensing agreement in our valuation. We have very limited visibility on this program, including which indications will be targeted, the timing of programs or the precise milestones payable. The company reported that the Prothena deal included US$33m in milestones and option payments (and potential royalties), but it subsequently sold 100% of royalties and 100% of option interest to Xoma (and 10% of future milestones). We provisionally include US$20m in clinical milestones (before payables to Xoma): US$3m upon selection of a lead (CY20), US$3m entering Phase I (CY21), US$5m on entering Phase II (CY22) and US$9m on entering Phase III (CY24), and a US$13m option payment on successful approval (CY27). We assign a 2.5% probability of success for this program, which encompasses both the program’s early stage and our lack of visibility.

We acknowledge there may also be unrealized value in the xB3 platform as a whole. We envision this being realized primarily through licensing and other business development activity. However, it is difficult to estimate the value of future unrealized partnerships as these may not materialize through no fault of the technology itself. We are therefore withholding any platform value from our models until such deals are signed. Moreover, the value of the platform will likely be substantially higher once it has been vetted in the clinic through success in the xB3-001 clinical program.

The company had operational expenses of C$0.694m for Q320 compared to C$1.482m for Q319. However, we expect costs to increase in FY21 as the company prepares to enter the clinic with xB3-001. Based on guidance from the company, it will need to manufacture drugs for the studies and perform toxicology studies (among other preparations), including an NHP study. We forecast operational spending of C$11.6m in FY21 associated with these activities.

The company ended Q320 with C$0.590m in cash and a carry value of C$0.506m in debt (a C$0.751m bridge loan of convertible debentures taken in November 2019). In April 2020 it converted this debt for 4,129,207 shares valued at C$0.20 each. We expect the company to need C$130m in additional capital to complete the development of xB3-001, which we record as illustrative debt: C$20m in FY21, C$50m in FY23 and C$60m in FY26. We expect the company wholly or in part to meet these financing obligations though the licensing of xB3-100 or the xB3 platform, as seeking this funding in the capital markets is likely to result in substantial dilution.