Sequana Medical — DSR 2.0 moving forward

Sequana Medical is a commercial-stage medical device company based in Belgium that first listed in 2019 on the Euronext exchange. Near-term commercial prospects are driven by its proprietary alfapump platform for the treatment of RRA related to liver disease and malignant ascites (ie ascites resulting from cancer). As discussed in our initiation report, ascites is a painful and potentially debilitating complication of such diseases and while diuretic drugs are the standard of care (SoC), resistance often develops and remaining alternative treatment options present risks and/or significant patient burden. The fully implanted, wirelessly charged alfapump automatically pumps fluid from the abdomen into the bladder and is positioned as a convenient and effective chronic treatment. The alfapump is undergoing a pivotal US registration study, POSEIDON, with primary endpoint data expected in Q422 (potential US launch in mid-2024). It is also CE marked and commercialised in parts of Europe for this indication. Sequana’s larger opportunity lies within its DSR programme for chronic HF patients with persistent congestion. Following encouraging data including sustained improvements in DR from its Phase IIa SAHARA DSR study in patients with persistent congestion despite maximal loop diuretic therapy, the company plans to start the MOJAVE US Phase Ib/IIa study in early 2023 in a similar patient population, using its second-generation product (DSR 2.0).

Our Sequana valuation applies a risk-adjusted NPV model primarily valuing the North American prospects for alfapump (55% probability of success) and the EU and North American prospects for DSR 2.0 (25% probability of success, given the earlier development stage), both using a 12.5% discount rate. Following adjustments to our DSR 2.0 assumptions, and after rolling forward our estimates and forex assumptions ($1.02/€ vs $1.09/€ previously), we now obtain a pipeline rNPV valuation of €276.4m versus €287.8m, previously. After adding H122e net cash of €17.6m (excluding lease liabilities), we obtain an equity valuation of €294.1m or €12.38 per share (€11.11 fully diluted), versus €13.12 previously (€12.19 fully diluted).

As the company is no longer advancing an alfapump DSR combination product, we have reduced our total R&D expense forecasts for the DSR programme, and this is offset by increased R&D cost projections for the alfapump RRA programme. We expect a net FY22e operating cash burn rate of €23.4m, and now expect a net operating burn rate of €23.4m in FY23e (vs €22.0m previously) and €24.8m in FY24e (vs €28.0m, previously). We estimate H122e net cash of €17.6m and now assume future total financing expectations of €110m (vs €100m previously), which we model that Sequana will raise over the next few years until it starts to generate sustained positive operating cash flows (which we now expect in H128 vs H127 previously given that we now expect DSR commercialisation in 2028 vs H226 previously). As per usual Edison policy, these fund-raising requirements are modelled as illustrative debt. The company in July entered into a €10m debt financing facility with Kreos Capital, which we assume will fulfil part of our expected funding requirements. The company expects that the facility, if fully utilised, would extend its cash runway into Q323 (vs its prior guidance of Q223).

In addition to the usual regulatory and development risks, Sequana will need to demonstrate clear benefits of the alfapump over alternate ascites treatments and effectively promote the product to the medical community and hepatologists to optimise penetration. The company must also develop its own US salesforce and it has no existing experience in this region. While alfapump uptake in Europe has been slow, North American prospects could be stronger given the rising prevalence of non-alcoholic steatohepatitis (NASH). For DSR, Sequana will depend on the commercialisation efforts and capabilities of a potential sales and distribution partner, as well as on securing a transaction at satisfactory terms and in a timely manner. Sequana will also need to have access to further capital to advance its programmes, and if its expenditures are higher than forecast and/or if revenue is below our expectations, its capital needs may be higher than we project. While our model accounts for the financing(s) as long-term debt, the company may need to issue equity instead, at pricing that may not be favourable for current shareholders and could lead to significant dilution. Finally, the success of Sequana’s products may depend on its ability to defend the IP assets surrounding them.

Following completion of enrolment from Part I of its Phase IIa SAHARA DSR study in patients with persistent congestion despite maximal loop diuretic therapy and positive sustained data discussed further below, Sequana has refined its DSR development strategy. The company will focus on applying DSR therapy using its second-generation product (DSR 2.0) as applied through a peritoneal catheter (‘short-term DSR’), rather than the alfapump DSR drug/device combination (see our initiation report for further details) therapy previously studied in the SAHARA and RED DESERT trials. Effectively, given indications of robust treatment persistence (a reduced need for diuretics medication) for up to 11 months shown in SAHARA, Sequana believes that a focused three- to four-week session of DSR therapy using a peritoneal catheter (‘short-term DSR’) could be sufficient to provide six to 12 months of therapeutic effect. As alfapump implantation may not be needed to reach a sustained treatment effect, Sequana believes the short-term DSR approach can reliably deliver the desired therapeutic effect (improving cardio-renal parameters and reducing reliance on loop diuretics over a prolonged duration).

Furthermore, the regulatory approval pathway for short-term DSR therapy with DSR 2.0 is likely to be more straightforward than the alfapump device/DSR therapy (‘alfapump DSR’) combination studied in SAHARA and RED DESERT, since DSR 2.0 would be regulated as a drug by the FDA, whereas the alfapump DSR combination would likely have needed to be regulated as a drug-device combination. Finally, this strategy should result in cost savings compared to the company’s prior parallel approach for advancing both short-term DSR and alfapump DSR in HF, as the company’s prior plan to start the SONORAN alfapump DSR study in H223 (which we estimate would have cost c €8m) has been discontinued.

As explained in our initiation report, HF can often lead to sodium retention and resulting fluid retention and accumulation (congestion). Congestion in HF patients is generally treated with diuretics in the first line, most commonly loop diuretics (eg furosemide, bumetanide and torsemide), but these drugs become less effective with disease progression. It has been estimated that more than one million US hospitalisations for HF1 occur each year, and that c 90%2 of these are due to fluid overload (or congestion), and about 25% of these cases due to congestion are re-admitted within 30 days (and that c 50% are re-admitted within six months).

Sequana’s DSR approach aims to resolve persistent congestion through the controlled introduction of a zero-sodium therapeutic solution, which is designed to remove excess sodium in patients and then restore DR and the kidney’s capacity to excrete excess fluids. While patients in the prior RED DESERT study were able to manage their fluid overload with high-dose loop diuretics, the SAHARA trial, which began enrolment in June 2021, assesses alfapump DSR in the more severely diseased HF population of patients with persistent congestion who were resistant to diuretic medication at study onset.

Our December 2021 note on interim SAHARA data described this trial’s protocol in greater detail, but in summary, at study onset, subjects are implanted with the alfapump device and discontinue all loop diuretics and then undergo DSR therapy (facilitated by the alfapump implant) in two phases: an intensive treatment phase (Phase I), followed by maintenance treatment and follow-up phase (Phase II) of 16 weeks. Phase I lasts between two and six weeks (depending on patient response) where patients receive up to once daily titrated DSR treatments delivered through an implanted port (port-a-cath) into the peritoneal cavity. During Phase II, subjects will receive DSR therapy in a monthly maintenance treatment session for four months in total.

All patients underwent a ‘diuretic challenge’ with an IV administration of 40mg furosemide, prior to commencing DSR dosing, and again after Phase I, to measure their diuretic responsiveness and six-hour sodium excretion (ie as measured in urine output) at both study time points.

In the updated data released in July 2022, results were reported on 10 evaluable patients after an intensive round of DSR therapy using the alfapump DSR system and the first-generation zero-sodium DSR infusate solution (DSR 1.0), which consists of a 10% dextrose sugar solution.

DR was markedly improved in all 10 evaluable patients compared to baseline, showing a more than doubling of sodium excretion levels (towards near-normal levels, although specific figures were not provided). All evaluable SAHARA I patients enrolled in the original cohort design met proof of concept, with a >30% mean reduction of NT-proBNP vs baseline (indicating improved cardio-renal status) and stable renal function (no significant change in eGFR vs baseline). Patients also showed a mean 6kg weight loss vs baseline (restoration of normal bodily fluid volume), and a significant reduction in their required loop diuretic dosing (nine out of 10 had a reduction of more than 90%), as shown in Exhibit 2 (bottom diagram shows the SAHARA I cohort data).

Altogether intensive DSR therapy was shown in SAHARA I to help eliminate persistent congestion and restore euvolemia (ie normal bodily fluid volume) and DR in previously diuretic-resistant HF patients. The most material takeaway from the trial, in our view, is that the need for loop diuretics medication was significantly lowered for an extended period (lasting up to 11 months following completion of the Phase I intensive DSR therapy round), as shown below.

This sustained reduction in diuretics dosing (for up to 11 months) underpins the company’s shift in strategy to focus the DSR programme on short-term DSR therapy, as the alfapump implantation (which would facilitate regular DSR dosing) does not appear to be required to ensure a prolonged treatment effect. Sequana believes that based on RED DESERT and SAHARA I data to date, an intensive treatment period of three to four weeks of DSR therapy in a controlled setting (ie a physician’s office) using a peritoneal catheter could be sufficient to provide for six to 12 months of important clinical benefits, and would not require permanent device implantation.

Patients treated with DSR therapy in both RED DESERT and SAHARA did not experience any congestion-related HF hospital re-admissions during their follow-up period (16 weeks in the case of SAHARA). This compares with a c 25% predicted 30-day re-admission rate (Costanzo MR et al. 2017, cited above) in HF patients admitted to hospital for persistent congestion. Although we note that these are not identical populations in terms of disease severity, as HF patients with persistent congestion admitted into the SAHARA study may differ in disease status from those HF patients admitted to hospital for their persistent congestion, we believe that the lack of congestion-related hospital admissions during the follow-up period is highly encouraging. Based on the Seattle Heart Failure Model, the company has conducted analysis using post-hoc data that predicts that, based on physician-collected data (including congestion status, cardio-renal parameters, etc) at six weeks past Phase I of SAHARA I and RED DESERT studies, subjects having completed the DSR therapy would have a c 75% lower predicted one-year mortality post-DSR therapy (c 5%) versus at screening (c 20%). This type of data, if expanded upon in future trials, can be very compelling in an eventual regulatory filing and/or for providing support for the commercial roll-out if the product is approved.

Effectively, the SAHARA results to date show that following DSR therapy, renal function (such as the ability to remove excess fluid) is restored for an extended period as patients can substantially reduce their dosage of diuretic medications (compared to pre-DSR intervention) for many months. The results suggest DSR can effectively and rapidly eliminate persistent congestion and restore euvolemia in diuretic-resistant HF patients, and show improvements in certain cardio-renal parameters.

The company’s next step to advance the short-term DSR programme is to assess its next-generation DSR product, DSR 2.0, in a new cohort within its SAHARA study (to be termed SAHARA II). This new cohort of up to five patients will use DSR 2.0 (instead of DSR 1.0) in combination with the alfapump system (retained to maintain consistency with other aspects of the SAHARA study), with results expected in Q422.

DSR 2.0, a proprietary formulation of icodextrin and dextrose, is expected to have an improved therapeutic and favourable safety profile compared to first-generation solution (DSR 1.0) studied in SAHARA and RED DESERT, as it is designed to provide a longer dwelling time (ie the length of time the drug product will remain in the peritoneal cavity) and slower diffusion of the excess sodium from the bloodstream to the DSR solution. The slower sodium diffusion rate (from the bloodstream to the DSR solution) is expected to reduce the risk of hyponatremia (low blood sodium), which should make the therapy easier to use. This improved profile could potentially reduce the amount of solution that needs to be administered to render an equivalent therapeutic response (ie as the longer dwelling time could enable a larger quantity of sodium to be removed, thereby reducing the quantity of drug product required per dose). The company has been granted intellectual property for DSR 2.0 and aims to market it as a drug to be delivered through a peritoneal catheter. We believe the GLP (preclinical) work required for the DSR 2.0 programme is largely complete.

SAHARA II data are expected to support Sequana’s US IND filing for MOJAVE, a Phase Ib/IIa US trial assessing DSR 2.0 as short-term DSR therapy in chronic HF patients with persistent congestion. The MOJAVE IND is expected to be filed in Q422, with recruitment planned to start in early 2023 leading to the potential release of top-line data in H124. We assume that short-term DSR patients will receive daily c 30-minute sessions of DSR 2.0 therapy (administered via a peritoneal catheter) for seven days, followed by two to three DSR 2.0 therapy sessions per week for the subsequent three weeks, and then be monitored afterwards. Interim data for MOJAVE could be released in H223 and if positive, could potentially support partnership or out-licensing opportunities.

The company may consider partnership/out-licensing opportunities for DSR 2.0 once interim MOJAVE data are available. We assume the company and/or its potential partner will start a confirmatory Phase IIb study in H224, following the conclusion of MOJAVE, which could then lead to the start of Phase III registration enabling trials in H225 (if two registration studies are required, we expect them to be run in parallel). This could potentially lead to launch in 2028 (versus our prior estimate of an H226 potential launch). We have pushed back our DSR 2.0 launch timing estimates to reflect the company’s updated guidance for the start and completion of MOJAVE, and we are also slightly extending our duration estimates for the Phase III registration studies and for the timing between regulatory New Drug Applications (NDAs) and potential market approvals.

Sequana’s more near-term commercial opportunity lies in its proprietary alfapump device being advanced for RRA. The alfapump received CE mark clearance in 2011 and is commercialised in Germany and France. A study to support reimbursement is also underway in France, and all current sales from France come from this study. Sequana receives revenues for the alfapump implants used in the study, which itself is sponsored by the French government. The company remains on track to report primary efficacy data from the POSEIDON alfapump North American pivotal study in Q422, and it expects to file a US premarket application for alfapump in RRA in H223, a slight delay to its prior estimate of mid-2023 given that the biocompatibility testing required to support the application has been extended by c three months. We continue to anticipate that the product could be launched in the US and Canada in mid-2024.

Ascites is the accumulation of protein-containing fluid within the abdomen, a complication of late-stage liver disease and associated with poor prognosis. The condition results in loss of appetite, shortness of breath, mobility and sleeping difficulties, and can predispose patients to develop bacterial peritonitis.3 Ascites is predominantly caused by high blood pressure in the hepatic portal veins (portal hypertension), often due to liver cirrhosis (scarring). Cirrhosis is often caused by alcohol, hepatitis and increasingly by NASH. There are over 240,000 cases of ascites due to cirrhosis in the seven major markets,4 and cirrhotic patients with ascites have mortality rates estimated at between 50% within two years5 and around 44% within five years.6

Often, a low-sodium diet and diuretic medications can help eliminate the excess ascetic fluid, but in c 5–20% of ascites cases,7, 8 DR develops where fluid accumulation persists despite medication use (or diuretic-induced complications occur), resulting in refractory ascites (RA). RA patients have a one-year survival rate of under 50%.9 Remaining treatments for RA are repeated therapeutic paracentesis (TP), which is burdensome, costly and time-consuming, and/or transjugular intrahepatic portosystemic shunt (TIPS), which is associated with hepatic encephalopathy (HE). Ascites can also be a common complication of certain cancers (termed malignant ascites), which accounts for c 10% of ascites cases.10

RA patients are often candidates for liver transplant, but, given the lack of available supply and other intervention risks, the common treatment at this stage is TP, which is also referred to as large volume paracentesis (LVP) when the volume drained exceeds five litres. The duration of TP varies from 30 minutes to 24 hours, and the company estimates that medical costs for TP are around $1,500–1,800 per treatment, which can occur 2–3x per month in patients with RA. TP requires patients to stay in hospital for up to 48 hours and only provides temporary relief, as often a cycle develops where patients undergo LVP, feel much improved for up to a week but then ascites accumulates with symptoms worsening before another LVP is needed.

The remaining FDA-approved therapeutic option for RA is TIPS, but as the procedure causes much of the patient’s subsequent blood circulation to evade the liver’s detoxification processes, it can often increase the risk of HE, particularly in older patients, as neurotoxins and ammonia can then accumulate in the general blood circulation. Altogether, TIPS is contraindicated in many RA patients, particularly in those over age 65, those with advanced liver disease (mostly Child-Pugh C classification), and those with HF and/or pulmonary hypertension.11 The only curative treatment for late-stage liver disease is a transplant but availability is minimal, and patients will require lifelong immunosuppression drugs post-implantation to prevent organ rejection. In 2019, 8,906 liver transplants were performed in the United States, up 0.1% y-o-y and more than in any previous year.12

The alfapump is designed to offer a convenient and unobstructive long-term therapy that aims to improve patient independence and quality of life (QoL), and reduce their need to frequent healthcare facilities for time-consuming and uncomfortable TP. The alfapump can pump up to four litres of ascites-containing fluid per day from the abdomen into the bladder, where it is eliminated via urination.

The US Centers for Disease Control estimates that in 2018 more than 4.5 million US adults were diagnosed with chronic liver disease.13 While alcohol abuse and hepatitis are the most common causes of liver ascites, the emergence of non-alcoholic fatty liver disease (NAFLD) (and consequently NASH) is a more recent contributor and is attributed to lifestyle-related disorders including obesity and type 2 diabetes. NAFLD is already one of the most common causes of chronic liver disease with an estimated global prevalence approaching one billion people.14 Between 21%15 and 26%16 of the US population have NAFLD. Between 20% to 30% of NAFLD patients are expected to progress to NASH within about 10 years17 and once NASH develops, c 10% should progress to cirrhosis within c 10 years.

In 2015, there were an estimated 1.16m compensated cirrhosis cases and 134,400 decompensated cirrhosis cases in the United States.18 Patients with decompensated cirrhosis have at least one complication, very often ascites, and have a median survival time of two years.19 Once ascites develops, between 5% and 20% of these patients will develop RA.20, 21

With NASH prevalence expected to grow ~60% by 2030,22 we expect the profile of the typical ascites patient to shift from mostly alcohol- and hepatitis-related cases towards an older, NASH-driven demographic with potentially greater access to the healthcare system and/or compliance to recommended treatments. Further, largely because of the increased risk of HE, TIPS is generally less suitable for the older population demographic that NASH ascites is more likely to affect.

Our initiation report discusses many of the earlier alfapump studies in RRA in greater detail, but the key trial to monitor in our view is the POSEIDON North American pivotal study in patients with RRA due to liver cirrhosis. The trial started in 2019 and is designed to support alfapump approval and reimbursement in the United States and Canada. The study is a single-arm and open-label, within- subject crossover study, whereby patients will serve as their own controls. Following enrolment, patients enter a three-month pre-implant observation period in which they receive SoC therapy, consisting of TP, before the alfapump is implanted. Eligible patients will be implanted with the alfapump and during the three-month stabilisation period, their alfapump settings will be adjusted as needed and patients will be fully trained. After the stabilisation period, a three-month post-implant observation period begins. The primary effectiveness outcomes include:

The primary safety endpoint is the rate of alfapump-related re-interventions as determined by the Clinical Events Committee, at six months post implantation. Albumin supplementation is also highly recommended (given that this may support renal health). Twenty-nine patients were enrolled in a training (or ‘roll-in’) cohort (which will be excluded from primary efficacy analysis but included in the safety analysis), to ensure centres were experienced with the alfapump before the actual pivotal (study) cohort was enrolled.

Enrolment of patients within the pivotal cohort was completed in December 2021, with the company affirming that its objective for POSEIDON was to enrol c 70 patients in the pivotal cohort, implant the alfapump in up to 50 of those patients and obtain up to 40 patients evaluable for the primary efficacy analysis. Sequana reported in April 2022 the completion of all POSEIDON alfapump implantations, with the total number of implanted patients within the pivotal cohort being 40 (out of 71 enrolled patients within that cohort). Given the severe disease status and lower life expectancy of the RRA population, we assume that a number of implanted patients may not be evaluable six months post-implantation, and hence we estimate that the number of patients evaluable for primary efficacy analysis is likely be c 30–35.

As described in a prior note, a second interim analysis of the study roll-in cohort from July 2021 showed that subjects had a greater than 90% reduction in mean frequency of TP versus baseline, and all patients experienced at least a 50% reduction in mean TP frequency per month versus baseline. As these trends substantially exceed the primary endpoints as defined in the pivotal cohort, we are confident that there is likely to 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 meet the primary endpoint targets despite there likely being a lower number of evaluable patients than originally planned. For instance, we estimate that a 90% reduction in the overall average frequency of TP (similar to that shown in the roll-in cohort) in a sample size of 30–35 would provide a stronger statistical signal than a 50% reduction in a sample size of 40. Further, as stated above, once enrolment in the pivotal cohort began, study centres had already accumulated more experience with the alfapump system (compared to when they were enrolling the roll-in cohort). We believe this provides the potential for the data resulting from this cohort to be more robust than that reported to date from the roll-in cohort.

Given that the overall intent of alfapump is to improve QoL (by reducing the need for TP) in RRA patients, Sequana has not attempted to assess whether the alfapump could have any effect on overall mortality. Nonetheless, Sequana reported a preliminary interim analysis (as of 25 March 2022) of patient survival in the roll-in cohort following alfapump implantation, which showed a mean survival probability of 70% at 12 months. This compares favourably with published reports (Biggins et al as cited in the American Association for the Study of Liver Diseases Practice Guidance; Moreau et al),23 which found a 12-month survival rate for RA patients of only c 50%.

Given the general poor state of health of patients with RRA, including weakened immunity and poor renal function, we believe it would be challenging for any treatment to show a significant change in mortality, taking account of the multitude of conditions or events that such patients could inevitably experience and the difficulty in controlling a trial for such aspects. Hence, while we apply caution in comparing the roll-in cohort result with historical outcomes in the RRA population (given differing study and inclusion criteria), the company’s reporting of lower 12-month mortality may potentially bode well for the overall safety dossier of the device (when the PMA is to be filed in H223).

As stated above, the company continues to expect to report primary efficacy data from the POSEIDON study in Q422. We maintain our forecast that the alfapump will be launched in the United States in mid-2024. We continue to expect the opportunity for alfapump in North America to be much more robust than in Europe given the rising prevalence of NASH in this region. NASH-related cirrhosis is expected to account for a larger proportion of RRA cases in the United States and Canada, and these patients are generally older (and thus more likely to be contraindicated for TIPS), insured (those aged over 65 have government-run Medicare insurance in the United States) and well-integrated into the healthcare system.

BioVie is developing BIV201, a continuous infusion formulation of terlipressin, a vasopressin-analogue drug approved in Europe and Australia often used to treat related complications of cirrhosis such as hepatorenal syndrome. BIV201 acts as a vasoconstrictor and is intended to reduce portal hypertension by restoring blood flow through the kidney and liver, and thereby impede the cycle of accelerating fluid generation in ascites patients. In 2019, BioVie completed a Phase IIa (n=6) trial of BIV201 in patients with RA due to advanced liver cirrhosis, where patients received the study drug via continuous infusion for up to 28 days. It reported that four of the six treated patients experienced an increase in the number of days between paracenteses between 71% and 414% compared to before initiating therapy. The company started a subsequent 30-patient Phase IIb study in 2021, where patients receive the drug via continuous infusion for two 28-day cycles. BioVie expects to report study data in early 2023, but we believe the need for prolonged continuous infusion cycles may limit the attractiveness of this treatment modality.

Noorik Biopharmaceuticals is developing a ‘micro-dose’ formulation of ambrisentan, an endothelin receptor antagonist approved (in the United States and Europe) for forms of pulmonary arterial hypertension. Noorik is advancing the candidate for portal hypertension and believes the lower dose of its formulation would selectively exert inhibitory action on one endothelin receptor (ETA) rather than both (ETA and ETB), and thereby provide a better therapeutic profile for this ascites-predisposing condition. Noorik had terminated a Phase II study on this portal pressure indication due to poor enrolment as a result of COVID-19 and is currently studying its ambrisentan formulation for respiratory insufficiency due to COVID-19.

Our local-currency forecasts for alfapump in RA are generally unchanged (as reiterated in our April update note), but given the refinement in the company’s DSR strategy, we have updated our assumptions for DSR 2.0.

Previously we had assumed that the company would advance both alfapump DSR and short-term DSR, with short-term DSR being positioned as a ‘bridge’ therapy towards alfapump DSR. With data suggesting that intensive DSR therapy (which we believe can be delivered through the peritoneal catheter, ie short-term DSR) can provide sustained effects, we now see the total HF congestion market as being treatable with the short-term DSR 2.0 platform (ie there is no more need for a separate alfapump DSR segment). Now that the alfapump device may no longer be required to deliver the desired therapeutic effects, we now assume the target potential peak market share is larger than previously, as we believe that the prior more invasive requirement for alfapump implantation served as a potential barrier for implementation. We believe physicians and patients alike will generally be more amenable to periodic treatment rounds of DSR (administered through a peritoneal catheter for around seven consecutive days at c 30-minutes per session, followed by three weeks with less frequent dosing) once or twice yearly than the implantation of an alfapump device previously envisioned.

As a result, we assume peak US market share of 7.5% vs 4.0% previously (of an addressable market representing approximately 50% of the c 0.9m US HF patients hospitalised for fluid overload who are readmitted within six months, or reflecting c 0.45m patients per year). While the addressable market has increased, we have also lowered our net average revenue per patient estimates to reflect that the alfapump device is no longer necessary and that the DSR treatment is now being positioned as a drug rather than a drug/device combination. We now assume net US average annual revenue per patient at launch of $20,000, vs $27,500 previously. Our pricing assumption is supported by a recent meta-analysis suggesting that the median annual US hospitalisation costs for HF are $15,879 and that the DSR programme is expected to significantly reduce such costs (and potentially lead to quality-of-life benefits).

In addition, we have refined our commercial partnership assumptions. As described in our initiation report, we previously had anticipated a more complex partnership transaction whereby, with the DSR product proposed as a drug/device combination, Sequana would become responsible for all DSR-related manufacturing costs (device and drug product) and consequently we had modelled that Sequana would be entitled to a 30% transfer price on net sales. With DSR 2.0 being positioned as a drug, we believe a more conventional pharmaceutical licensing arrangement is more likely, with the licensee being responsible for all commercial (and manufacturing costs), and we now assume that Sequana would receive a royalty of 25% of net sales. We assume a license agreement will occur before mid-2025, and that the licensee/partner will fund a portion (modelled at 33%) of the pivotal US studies in the H225 to H127 time frame, which we model at €30m total cost (thus Sequana to fund c €20m). Our revised forecasts are stated below.

As the alfapump DSR combination is no longer being advanced, we have removed the need for the previously planned SONORAN study, which we estimate would have cost €8m, thus reducing our total R&D expense forecasts for the DSR programme until its commercialisation. This effect is somewhat offset by the raising of our alfapump R&D costs in RRA by €3m (expected to be borne in FY23) to reflect the added biocompatibility studies required. The combination of both changes leads to an increase in our FY23e R&D cost and operating cash burn assumptions and a decrease in our FY24e cost expectations. Our new FY23e and FY24e R&D expense assumptions are €14.9m and €9.3m, respectively, versus €13.5m and €13.0m, previously. We expect FY24 R&D costs to decrease y-o-y following the conclusion of the POSEIDON study in FY22 (and we model that a portion of the Phase III DSR studies will be paid by a future partner/licensee).

We continue to expect a net operating cash burn rate of €23.4m in FY22e, and now expect a net operating burn rate of €23.4m in FY23e (vs €22.0m previously) and €24.8m in FY24e (vs €28.0m, previously). In March, Sequana raised €28.4m (gross) though the issue of 5.167m shares at €5.50 per share. Given FY21 net debt of €2.28m (excluding lease liabilities), we estimate H122e net cash of €17.6m.

We have raised our future total financing expectations to €110m (from €100m previously), which we model that Sequana will raise over the next few years until it starts to generate sustained positive operating cash flows (which we now expect in H128 vs H127, previously). The increase in total funding need and revised positive operating cash flow timeline assumption is due to the pushing back of our DSR commercialisation timeline to 2028 (from H226, previously). As per usual Edison policy, we model future fund-raising requirements as illustrative debt. The company in July 2022 entered into a €10m debt financing facility with Kreos Capital, which we assume will fulfil part of our expected funding requirements. The Kreos loan facility agreement allows Sequana to request loans of up to €10m (accruing at 9.75% pa interest) in €1.5m increments on an uncommitted basis, until 30 September 2022, and the facility matures on 30 September 2025. The company expects that the facility, if fully utilised, would extend its cash runway into Q323 (vs its prior guidance of Q223). The loans do not contain covenants but are secured on the company’s bank accounts, receivables and certain assets, including IP rights. Kreos also receives a €0.125m up-front transaction fee, and share purchase subscription rights for c 0.122m shares exercisable at €5.31 per right.

We value Sequana Medical using a risk-adjusted NPV model with a 12.5% cost of capital for alfapump in North America and the DSR 2.0 programme, and a 10% rate for alfapump in ex-North American markets (where it is commercialised).

Following the adjustments described above, particularly with respect to the DSR 2.0 programme, and after rolling forward our estimates and our forex assumptions ($1.02/€ vs $1.09/€ previously), we now obtain a pipeline rNPV valuation of €276.4m versus €287.8m, previously. After adding H122e net cash of €17.6m (excluding lease liabilities), we obtain an equity valuation of €294.1m or €12.38 per share (€11.11 fully diluted), versus €13.12 previously (€12.19 fully diluted).

Development and regulatory risk: for alfapump in RRA, if the rate of safety events in the POSEIDON study, particularly the incidence of acute kidney injury or blockage, is higher than in the MOSAIC US feasibility study, and/or if TP rates post-implantation are not sufficiently reduced, it could dampen the likelihood of approval in North America. These risks are somewhat alleviated by data reported to date from the ‘roll-in cohort’ component of this study, which has shown a more than 90% reduction in the mean frequency of TP versus baseline, and an acceptable safety profile, in our view. The DSR 2.0 programme has further studies and development before reaching the approvability stage, so as such it carries higher risks, but the RED DESERT and SAHARA results show proof-of-concept in terms of demonstrating a sustained lower need for diuretics and improvements in cardio-renal parameters.

Commercial and competition risk: if approved in RRA, alfapump would show a clear advantage over TP in an area of unmet medical need, but the company will need to effectively promote the product to hepatologists, interventional radiologists and the medical community at large to optimise penetration. The relatively limited traction to date in Europe could highlight possible challenges for North American adoption, but the rising prevalence of NASH as a cause of RRA and the potential for improved healthcare access compared to ‘traditional’ RRA causes could portend a much stronger penetration rate in this region. The company must also develop its own US salesforce and it has no existing commercial experience in this territory, although its intended strategy to target dedicated liver transplant centres appears sound. Further, while alfapump is the most advanced-stage RRA treatment candidate to our knowledge and the only one in US registration enabling trials, in the event that BIV201, ambrisentan or another future competing product obtains approval, alfapump would need to compete with these alternatives and product positioning and its relative strengths in safety and efficacy versus emerging competitors will be key in sustaining a strong market position.

Partnership risk: Sequana will be dependent on the commercialisation efforts and capabilities of its potential partner for its DSR 2.0 programme. If Sequana is unable to secure a favourable licensing deal in a timely manner, it could weaken the eventual economics Sequana could be entitled to for these programmes and/or result in additional delays before the attainment of commercial revenues.

Financing risk: we expect Sequana will need to raise additional capital before commercialising alfapump in North America and further capital to build the required salesforce needed to reach profitability in H128. We forecast €110m in financings between H222 and 2027. Difficulties or challenges in obtaining funds could affect the timing or progression of Sequana’s programmes. If Sequana’s expenditures are higher than forecast and/or if revenue is below our expectations, it may need to raise further capital. While our model accounts for the financing(s) as long-term debt, the company may need to issue equity instead, at pricing that may not be favourable for current shareholders and could lead to significant dilution.

Intellectual property risk: the success of Sequana’s programmes will depend on its ability to defend the IP assets surrounding them.

Reimbursement risk: to obtain optimal revenue and product penetration, Sequana and/or its partner will need to negotiate with the Centers for Medicare & Medicaid Services (CMS; likely the dominant insurer involved with payment for alfapump and DSR 2.0) and obtain favourable reimbursement terms, which we believe would also have a trickle-down effect on the terms offered by other private insurers. The FDA Breakthrough Therapy status accorded to alfapump provides some assurance of provisional CMS reimbursement for up to four years post-approval, but securing longer-term reimbursement may depend on the accumulation of post-approval efficacy data in the US Medicare population.