Nicox — Continuing NCX-470 development strategy

Nicox’s headline FY22 results were in line with the Q422 update reported in January, but the additional granularity provided on gross royalties and operating expenses provide helpful insights on current operating trends, and allow us to adjust our forecasts accordingly.

Gross product sales-related licensing revenue (primarily gross royalties from B+L from the sale of Vyzulta in the US and other approved markets and, to a lesser extent, Zerviate US royalties from Eyevance/Santen) came in at €5.2m (+39% y-o-y), above our €4.9m estimate.

Cost of sales, which reflects royalties on Vyzulta sales that Nicox must pay to Pfizer, were €2.0m. Hence, FY22 net royalties were €3.3m, up from €2.3m in FY21. The company also noted a c 100% y-o-y elevation in Q422 net royalties to €1.0m (having reached the €1m quarterly run rate for the first time). As a reminder, as part of Nicox’s arrangement with Vyzulta global licensee B+L, it is entitled to tiered net royalties of 6–12% on net sales, which takes into account the Vyzulta-related royalties that Nicox must pay to Pfizer.

It also appears that earlier pricing issues in Vyzulta reimbursement (whereby Vyzulta revenue growth lagged prescription growth) have now abated. Altogether, we believe these yearly increases are largely due to strengthened Vyzulta-related revenue, as total US Vyzulta prescriptions grew c 20% in Q422 according to B+L, with B+L’s reported Vyzulta revenue growing 31% in FY22. While the US market is the predominant driver for Vyzulta sales, the drug has been launched in 15 countries worldwide, and B+L expects it be launched in 10 additional countries in 2023 and beyond. Nicox expects net Vyzulta royalties to continue to grow based on growth in prescriptions and geographic expansion.

The company recognized €4.8m in licence revenue in its FY21 results as part of a €15m payment from Ocumension received in FY20.

Gross R&D costs, which are predominantly based on the company’s Denali and Mont Blanc trials (the latter of which was completed in Q422) for lead candidate NCX-470, came in at €18m, above our €15.8m estimate.

Financial and other income in FY22 included non-recurring €3.0m income to reflect the change of the present value of the put option granted by Nicox to Armistice in the Q422 €10m equity financing.

Nicox reported gross cash of €27.7m at 31 December 2022 (versus €25.6m at end September), boosted by the €10m (€8.9m net) private placement announced last November. It reported gross financial debt of c €24.6m at end FY22, consisting of a €18.7m Kreos Capital loan, a €1.8m French state-guaranteed loan (both unchanged versus prior periods) and €4.2m of present value assigned to the put option granted in the Q422 equity financing. We calculate net cash ex-leases of €3.4m after including €0.3m in non-current financial assets.

Nicox reiterates that it expects to report top-line results in 2025 for Denali, its second Phase III study of lead candidate NCX-470 in patients with open-angle glaucoma or ocular hypertension. NCX-470 is a second clinical-stage compound based on the company’s proprietary NO-donating platform that combines a nitric oxide (NO) donating molecule with an established prostaglandin F2α analogue (PGA) drug. As explained in an earlier note, Mont Blanc results in Q422 represented the first registration trial whereby a monotherapy drug candidate was able to show statistical non-inferiority to a PGA drug. Given the favourable safety profile also shown, we believe these results bode well for the product’s likelihood of obtaining FDA approval, provided Denali demonstrates similar efficacy parameters. We continue to anticipate potential FDA approval and launch in 2027.

To strengthen NCX-470’s positioning, in Q422 Nicox announced a refined development strategy aiming to build on previously reported preclinical retinal data to help demonstrate that, in addition to lowering intraocular pressure, NCX-470 may improve retinal perfusion and/or retinal cell health and thereby provide a supplemental therapeutic benefit in patients with glaucoma. The company is planning to start two Phase IIIb clinical studies in H123 and additional non-clinical activities to work towards this objective. One of these studies will assess the drug’s possible retinal blood flow effects using optical coherence tomography angiography and the other will assess the drug’s capability to reduce episcleral venous pressure and enhance aqueous humor outflow through the trabecular meshwork. We note that most PGA drugs reduce intraocular pressure through the uveoscleral pathway and not the trabecular meshwork, hence the NO-donating effects of NCX-470 could be a potential differentiator in this regard.

Following the FY22 results, we have adjusted our FX assumptions to $1.07/€ versus parity previously, which has the effect of reducing our valuation (as discussed below) as well as longer-term revenue expectations in euros (although our local currency estimates for all products except Vyzulta are unchanged).

Given higher than expected FY22 royalties (which we attribute to stronger than anticipated Vyzulta net revenue), we have increased our medium-term growth expectations for Vyzulta sales and net royalties, although this is offset by our new FX expectations, resulting in a minor change to our peak (FY30e) net royalty forecast (€11.5m versus €11.1m previously).

While we had previously already modelled a y-o-y reduction in FY23e R&D costs (given the completion of Mont Blanc), we have raised our net R&D estimates slightly, although still forecasting a y-o-y decrease in FY22. We now forecast FY23 and FY24 net R&D expenses of €15.3m and €17.1m, respectively, versus our prior estimates of €13.3m and €16.1m, respectively. We now model operating cash burn rates of €17.5m and €25.8m in FY23 and FY24, respectively, versus our prior forecasts of €17.8m and €23.1m, respectively.

In addition to the changes above, we have rolled forward our forecasts, which has resulted in a change in our equity valuation. We now obtain an rNPV valuation for Nicox of €166.8m (versus €190.4m previously). After including Q422 net cash of €3.4m, we obtain an equity value of €170.2m, or €3.39 per basic share (down from €4.10 previously). After considering the potential dilutive effect of options and warrants and their effects on net cash, our fully diluted valuation would be €3.19 (versus €3.75 previously) per fully diluted share. The strengthening of the euro versus the US dollar is the largest driver of the change in valuation, followed by the increases in our R&D cost estimates.

Nicox continues to expect that funds on hand (€27.7m at end FY22) will be sufficient to maintain operations into Q224 based on the development of NCX-470 alone and our forecasts are similar. We expect the company will require €95m in added funding before the anticipated US launch of NCX-470 (which we forecast in 2027), after which we expect it to be profitable on a self-sustaining basis. Our projections do not include any potential proceeds from the exercise of options or warrants which, if exercised, would lower our funding forecasts accordingly. Our model assumes all financings will be raised through illustrative debt, as per our usual methodology. If our projected funding need of €95m is raised through equity issuances at the prevailing market price of c €0.68, our effective value per share would decrease to €2.24.

The amount of fund-raising which we estimate is necessary for Nicox to bring NCX-470 to commercialisation independently is larger than its current market capitalisation, although we note that funding intervals may be staggered over the next several years, which may alleviate the potential challenges associated with raising sums in excess of a company’s market capitalisation. Furthermore, NIcox is actively seeking potential partnership arrangements in the US and Japanese markets, which could provide non-dilutive funding and alleviate part of our expected funding requirements.