Sequana Medical — Pushing back alfapump PMA to mid-2023

Sequana Medical recently provided a H121 update, with the primary takeaway being that the planned submission of a US PMA application for the alfapump is now anticipated for mid-2023, compared to prior guidance of Q422. This delay is primarily attributed to the worldwide shortage of electronic components. As part of the PMA submission, the company will be required to conduct verification and validation activities (VVA) using the many components and subcomponents to be deployed in the prototype model designed for US commercial use. The alfapump is a complex electronic medical device with more than 1300 components in total, including over 600 electronic components from over 200 suppliers. Following recent planning discussions with its suppliers, Sequana learned the lead time for obtaining some of the (sub)components needed for VVA is much longer than usual given the global shortage, and consequently it now estimates the completion of VVA would push the PMA submission timing to mid-2023.

Regarding the POSEIDON pivotal study in patients with RRA due to liver cirrhosis, Sequana reported positive data in July from the second interim analysis in patients in the roll-in cohort.1 At the time Sequana announced that, based on an analysis of attrition rates between study enrolment and alfapump implantation, it anticipated c 10 additional patients will need to be enrolled in the pivotal cohort (above the pre-specified study size of 60 for the pivotal cohort approved by the FDA) to meet its target of 40 evaluable implantations for the primary efficacy analysis. Initially the company planned to enrol 60 patients in the pivotal cohort, to implant at least 50 of these patients with the alfapump (following the three-month pre-implant observation period and eligibility reassessment) and have at least 40 of the implanted patients evaluable for the primary endpoint analysis at six months after implantation. Due to the higher attrition rate between initial enrolment and implantation, Sequana is seeking to enrol 10 additional patients to still have 50 patients for alfapump implantation and 40 for the primary endpoint analysis (as originally planned).

Sequana had submitted a protocol amendment to the FDA to extend the patient enrolment and has had discussions with the agency on the topic, but has not yet received approval for the requested enrolment expansion. As a result, the company has withdrawn its prior guidance for POSEIDON enrolment completion (previously Q321) and the attainment of the primary endpoint readout (previously Q322). The company plans to provide an update once it receives clarity from the FDA on study expansion. Company management remains very optimistic the agency will approve its request, but the process is taking longer than the company had originally envisioned.

In the unlikely event that the FDA does not agree to the expansion of enrolment, Sequana would still proceed with its pivotal efficacy analysis as intended, but we estimate the study’s evaluable pivotal cohort would then consist of c 35 patients, thereby dampening the statistical power compared to the planned target of c 40 in that cohort. As a reminder, the primary effectiveness outcomes of POSEIDON include:

As outlined in our recent note, the second interim analysis of the study roll-in cohort showed that subjects had a greater than 90% reduction in mean frequency of TP versus baseline, and all patients experienced at least 50% reduction in mean TP frequency per month versus baseline. As these trends substantially exceed the primary endpoints as defined for the pivotal cohort, it appears there could be a sufficient efficacy buffer or margin (assuming the pivotal cohort data would be similar to the roll-in cohort data to date) for the pivotal cohort to still potentially meet the primary endpoint targets despite the lower number of patients. Nonetheless, allowing the study to reach the company’s intended target for pivotal cohort implantations would provide it with the desired (pre-planned) statistical power and thus the highest likelihood, in our view, of meeting the primary endpoint. We expect Sequana will continue to actively seek FDA clearance for cohort expansion and in any event, we are confident the company will report the completion of enrolment before Q222 and primary endpoint data no later than Q123.

Given the new guidance for the alfapump PMA submission, we have revised our US and Canadian launch expectation to mid-2024, from H223 previously.

Sequana had a 30 June 2021 net cash position of €14.7m (€21.8m in cash offset by €7.1m in long-term debt) excluding €0.3m in lease liabilities. The H121 normalised operating loss (EBIT) was €11.5m, up from €9.0m in H120. H121 net operating cash burn was €11.9m, coming in higher than our €8.9m assumption. This was primarily due to higher than anticipated R&D-related costs (consisting of clinical, quality and regulatory, supply chain and engineering activities), collectively coming in at €7.9m versus our €6.0m forecast and to a lesser extent on higher than expected SG&A costs (€3.7m versus our €3.2m estimate). Given these trends, we have increased our R&D and SG&A forecasts for H221 and future years, resulting in increased net operating cash burn rates for 2021 and 2022 of €22.6m and €23.9m, versus our prior assumptions of €17.6m and €18.9m, respectively.

We continue to expect Sequana’s funds on hand should be sufficient for it to maintain operations into Q222, but the projected higher cash burn rate and the additional c 9 months to our forecast of a North American alfapump launch increases our forecast cash need until the point at which the company would become cash-flow positive (whereby alfapump sales in RRA will exceed R&D and other opex costs). We now anticipate the company will start to generate positive operating cash flows in H127 (from H226 previously). We now also model the company will need to raise a total of €125m up until this milestone, up from our prior estimate of €85m. We now model the company will raise €20m in 2022, €25m in 2023, and additional €80m before FY27. As per our usual policy, we model these financing requirements as illustrative debt.

We continue to value Sequana Medical using a risk-adjusted NPV model with a 12.5% cost of capital for alfapump in North America and alfapump DSR, and a 10% rate for alfapump in ex-North American markets (where it is commercialised). Given the added uncertainty relating to the timing of the POSEIDON study completion and on whether the FDA will eventually accept the company’s pivotal cohort expansion request (although we believe it is very likely it will), we have reduced the probability of success for alfapump in the North American market to 55%, from 60% previously. We continue to remain confident in alfapump’s efficacy profile to date (given the interim POSEIDON data cited above) and expect to return the success probability estimate to 60% if the company receives approval to expand POSEIDON enrolment.

We now obtain a pipeline rNPV valuation of €219.8m versus €248.2m, previously. Altogether, the reduced rNPV is attributable to the revised North American alfapump success probability estimate, the increase in our operating expense forecasts and the pushing back of the forecast North American alfapump launch date, offset by the rolling forward of our estimates and the slight revision in our forex assumptions ($1.19/€ versus $1.21/€ previously). After adding H121 net cash of €14.7m (excluding lease liabilities), we obtain an equity valuation of €234.5m or €12.62 per share (€11.54 fully diluted).