Intec Pharma — Update 29 September 2016

Intec Pharma is a drug delivery company that went public via an IPO on TASE in 2010 and NASDAQ in 2015. The company’s core technology is the accordion pill (AP), a controlled release drug delivery device in the form of layered membranes that are delivered in a normal capsule pill. The device expands in the stomach, leading to retention for up to 12 hours. This process is ideal for drugs that must be delivered to the upper digestive tract and drugs that dissolve poorly. Intec Pharma has developed AP-CDLD for Parkinson’s in Phase III and AP-ZP for insomnia is Phase II ready. There is also an undisclosed product in Phase I for the prevention of NSAID induced ulcers of the stomach, duodenum, and bowel. It will be launching a Phase I trial of cannabinoids for pain (and potentially other indications) in Q117. It has a development agreement with Biogen to develop an AP formulation of one of Biogen’s approved drugs.

We have derived an initial valuation of Intec of NIS540-582m or NIS47-51 per basic share based on a risk-adjusted NPV analysis. The highest value programme is AP-CDLD at NIS405m because of the well-established mechanism, best-in-class efficacy, and advanced development stage. We forecast 2% market share and $196m in peak sales. We expect to update our valuation to reflect data from the open label extension of the AP-CDLD trial, AP-ZP business development, progression of the cannabinoid programme, and with more information on the two undisclosed programmes.

Intec raised NIS130m during the August 2015 IPO on NASDAQ, and ended H116 with NIS81m in cash. The company has stated that it intends to out-license AP-ZP for further development and commercialisation, which we believe will significantly offset the NIS70m in additional capital needed before profitability in 2020. The remaining cost to develop AP-CDLD is low (NIS87m) because the company is pursuing a 505(b)2 pathway, with a single Phase III needed for approval.

The development risks of Intec are largely centred on whether the AP technology can provide a definitive benefit over other controlled release (CR) formulations. The company has MRI evidence that APs are effectively retained in the stomach, but the question remains how this translates into a benefit for any given compound. The advantages of the formulation are most well-established for AP-CDLD, which demonstrated superior results to existing CR carbidopa/levodopa in Phase II. The benefit is less clear for AP-ZP, and it will likely be significantly more difficult to demonstrate a lack of next-day effects for the drug considering that these have generally not been observed during pivotal trials for other drugs of the class. We therefore see AP-ZP as the higher risk programme. Both drugs face significant commercial risks, because Parkinson’s and insomnia are two markets dominated by generics, with very large numbers of treatment options. In the case of Parkinson’s, there are multiple programmes aimed at the same treatment axis as AP-CDLD. In the case of insomnia, prescription hypnotics are half the total number of prescriptions for the disease, but are dwarfed by OTC treatments. The recent approval of Belsomra and other orexin inhibitors in development are a potentially disruptive force. Intec intends to out-license AP-ZP before further development, and there is a risk that these market effects will limit its options and eventual profitability. Financial risks for the company are limited, especially compared to other companies at this stage. Our predicted funding shortfall is small (NIS70m), and the out-licensing of AP-ZP would likely provide a significant offset to this amount. Development costs are limited due to the 505(b)2 pathway to approval, and this pathway has been confirmed by the FDA in the case of AP-CDLD.

Intec is an Israeli specialty pharmaceutical company developing new formulations of existing drugs using its proprietary accordion pill (AP) technology. Intec has five development programmes based on the AP technology. The most advanced programme is AP-CDLD, an AP formulation of the well-established Parkinson’s drugs carbidopa and levodopa, which have proven difficult to formulate effectively in an extended release pill for an array of reasons. The programme in is Phase III. The company has also completed a Phase II trial of AP-ZP, an AP with zaleplon for the treatment of insomnia. This programme hopes to leverage the short half-life of zaleplon with controlled release to provide effective sleep maintenance without next-day residual effects. A third clinical programme is investigating a product to reduce the risk of NSAID induced ulcers in the stomach, duodenum, and small bowel. Intestinal ulcers, unlike peptic ulcers, are poorly controlled with proton pump inhibitors. The details of this programme are undisclosed. Also undisclosed are the details of a preclinical partnership with Biogen to develop an AP formulation of one of Biogen’s approved medications. The company is entitled to $8m upfront, $39m in milestones, and a low single digit royalty on sales up to $100m, should Biogen exercise the option. And finally, the company recently announced in August 2016 the intention to develop formulations of cannabidiol and tetrahydrocannabinol for the treatment of pain.

Intec’s key innovation is the development of the accordion pill drug delivery platform. The AP technology uses a typical gel-cap pill, which dissolves in the stomach to release a folded two-dimensional composite film impregnated with the drug of interest. The AP expands upon exposure to the gastric medium to 3.5cm in length, and is retained in the stomach while drug is released.

The AP platform is versatile and can be adapted to an array of drugs and release profiles. Each accordion pill is comprised of a series of layers, which can be formulated independently to control the drug release profile:

Intec is currently investigating the formulation for a series of controlled release (CR) applications because of a set of distinct advantages the AP has over other existing CR formulations. One of the central characteristics of the AP is that its expansion in the stomach leads to unprecedented gastric retention times (eight to 12 hours), as measured through MRI imaging. The gastric retention is driven by three factors that discourage passage through the pylorus: the device’s physical size, its two-dimensional profile, and its rigidity. Unlike other CR formulations that release drug continuously though their passage of the digestive tract, the AP isolates this dissolution to the stomach, and the drug is absorbed primarily in the duodenum and proximal small intestine, which can be important for drugs that have local activity or specific absorption in these regions. This provides a uniform absorption profile and can potentially improve plasma levels by prolonging the absorption phase. Moreover, the solubilisation of the drug is aided by the high concentration of bile acids. This consideration is important as an increasing number of new drugs are of low solubility, up to 60% by some measures.1

The AP technology is covered by three patent families. First, the underlying technology is covered by a patent licensed from Hebrew University of Jerusalem, and broadly covers gastroretentive devices for drug delivery. This patent is associated with a 3% royalty on sales and 15% on sublicences and the patent expires in 2020. The second patent family covers manufacturing of accordion pills, which, based on the nature of the device, we consider a significant hurdle. These patents provide additional protection for the formulation of poorly soluble drugs like AP-ZP. These patents expire in 2028 in the US and in 2027 in other locations. The individual AP drug formulations are protected by independent patents, which at this time protect AP-CDLD until 2029.

Intec’s lead product is an AP co-formulation of carbidopa and levodopa (AP-CDLD) for the treatment of Parkinson’s disease. Parkinson’s disease is a neurodegenerative disease in which the dopamine secreting (dopaminergic) neurons in the brain are lost, leading to severe motor defects and cognitive impairment. Approximately one million people in the US have Parkinson’s and it affects 1.75% of people over 60.2,3

Carbidopa and levodopa is the most widely used treatment for Parkinson’s worldwide. Levodopa, aka L-DOPA, is a precursor to dopamine but is able to cross the blood brain barrier, unlike the neurotransmitter. High doses of this molecule can increase dopamine concentrations in the brain and alleviate some of the symptoms associated with the loss of dopaminergic neurons. However, the molecule is also quickly converted into dopamine outside the brain, which is associated with gastrointestinal and other side effects and significantly reduces the concentration of drug available to the brain. This is avoided by the co-administration of carbidopa, which inhibits this conversion in peripheral tissue. Despite this, however, there are significant limitations to the administration of levodopa that limit its utility. Even with carbidopa, levodopa is still metabolised quickly with a half-life of 1.5 hours, leading to a pharmacokinetic profile with high peaks and deep valleys throughout the day. The valleys are associated with the motor defects typical of the disease, also known as being “off”, and the peaks can cause dyskinesia that interferes with normal function, leaving a fraction of a patient’s day where he is well treated. As the disease progresses, the therapeutic window for the drug gets smaller, leaving limited time in which the patient is in an “on” state without troublesome dyskinesia.

The treatment of Parkinson’s disease is multifaceted and normally requires multiple concurrent pharmacological interventions on top of levodopa treatment to obtain optimal control of the disease. These treatments include dopamine agonists, glutamate antagonists, monoamine oxidase inhibitors, and other classes of drugs in addition to levodopa and drugs used in conjunction with it. Because of this, there are an exceptionally large number of drugs that are marketed or in development in for the indication, measured in the hundreds. However, there are substantially fewer programmes directly addressing the levodopa treatment axis that might affect the potential market for AP-CDLD.

There are approximately 300k total prescriptions for carbidopa/levodopa per month in the US.4 The market is dominated by generics, which constitute 97% of these prescriptions.

Similar to AP-CDLD, many companies are seeking drug delivery solutions to address the limitations of immediate release levodopa. There are two branded controlled release formulations of carbidopa and levodopa that are commercially available: Sinemet CR and Rytary (Numient in Europe). Sinemet CR did not compete well against generic immediate release carbidopa/levodopa because the pill is both slow to relieve off states and had low systemic bioavailability, requiring increased dosing over immediate release products. Generic equivalents to Sinemet currently have 17% market share. Rytary was approved in 2015 to address some of the shortcomings of Sinemet CR, and incorporates an immediate release component, to provide immediate relief from off states. Sales of Rytary are not explicitly stated by sponsor Impax Laboratories, but Symphony Health reports US sales of $16.2m for Q116 with approximately 2.7% market share.

Other programmes have addressed the levodopa delivery problem through the development of devices that continuously infuse the drug. The most prominent of these programmes is Duopa (AbbVie, Duodopa ex-US), which is a gel formulation of carbidopa and levodopa that is delivered directly to the duodenum via an implanted pump. This solution is effective at reducing off states (63% reduction, twice the effect of immediate release pills) and dyskinesia (86% more on time without dyskinesia compared to immediate release pills), but requires major surgery, and therefore we expect it to be limited to only the most poorly controlled patients. The product was approved in the US in early 2015, but has been approved in Europe since 2004. The product sold $231m in 2015, with 95% of sales in Europe.

Additionally there are a number of drugs designed to inhibit catechol-O-methyltransferase (COMT). COMT is an enzyme that breaks down dopamine and levodopa, and similar to carbidopa, inhibition of this enzyme can increase the half-life of levodopa in the body and increase dopamine concentrations in the brain. Therefore we consider these programmes to be direct competitors with drugs like AP-CDLD and other attempts to achieve sustained levodopa serum levels. The first drug of this class to be approved was Comtan. Novartis and Orion reported sales of this drug, along with the co-formulation with carbidopa and levodopa, Stalevo, of $446m worldwide in 2015 and it had peak sales of $737m in 2011 before US patent expiry in 2012.

Intec has developed an AP formulation of carbidopa and levodopa to address the issues of existing formulations: AP-CDLD. The properties of the AP lend themselves well to the delivery of these drugs, and the drug is formulated with levodopa in the controlled release inner layer and carbidopa in an immediate release layer. Levodopa is only absorbed in the upper GI tract because it requires an active transporter to ferry it across the intestinal wall that is only present in this location. Moreover, the controlled release properties of AP-CDLD could potentially improve the pharmacokinetic profile of the drug, reducing peaks and valleys and therefore reducing off time and dyskinesia. This is enhanced by a reduced food effect seen for this formulation, which was demonstrated in a clinical trial. Other formulations of carbidopa and levodopa have a pronounced food effect,5 which can affect the absorption of the drugs and contribute to under- and overdosing. The absorption of these drugs is strongly affected by gastric emptying rates which vary significantly on the basis of amount of food eaten and its caloric content. In the AP-CDLD study, no difference in absorption was seen between a 550 Kcal meal and a 1,000 Kcal meal. A final benefit of this formulation is that release over an extended period could help reduce the pill burden on these patients.

AP-CDLD has been investigated for the treatment of moderate to severe Parkinson’s in a Phase II study. The trial consisted of multiple sub studies designed to investigate the dosing, pharmacokinetics and efficacy of the formulation.

In the pharmacokinetic portion of the trial, patients were stabilised on either AP-CDLD with 50mg carbidopa and 375mg levodopa twice a day, or an equivalent amount of both drugs in an immediate release formulation four times a day. A total of eight patients completed this portion of the trial and the daily time course of levodopa blood concentration was measured (Exhibit 5).

What was found was that the AP formulation of these chemicals substantially reduces the “peak and valley” profile typical of levodopa administration. Patients were able to maintain a relatively constant blood concentration of levodopa, with only a threefold change in the ratio of maximum and minimum exposure. Also interesting was finding that patients on AP-CDLD woke up with 500ng/mL of levodopa in their system, meaning that the kinetic profile of the drug was so long that it was able to maintain some exposure throughout the night and into the morning following the day’s last dose (12 hours before waking). Although it is unlikely that this low concentration supressed symptoms, this result poses the possibility that AP-CDLD could be effective as an overnight drug. Morning off states tend to be the most severe of the day for Parkinson’s sufferers and there are currently no options for oral carbidopa and levodopa that last through the night.

In the efficacy portion of the trial, two arms had a crossover design structured to investigate AP-CDLD at two different doses compared to the same patients on their optimised current carbidopa/levodopa based treatment. The endpoints were the difference in off time, on time with troublesome dyskinesia, and the number of additional levodopa doses needed. Of the patients that were comparable after three weeks in the study, 16 received AP-CDLD with 50mg carbidopa and 375mg levodopa (50/375) twice a day and 18 received AP-CDLD with 50mg carbidopa and 500mg levodopa twice a day (Exhibit 6).

The study found that AP-CDLD was more effective at reducing off time at both dosing regimens, and the result was statistically significant by a wide margin (p<0.0001). The total mean reduction in off time of 1.9 hours per day was larger for AP-CDLD than has been previously observed for either Rytary or Comtan (1.0 hours and 1.1 hours, respectively). Moreover, the mean amount of on time with troublesome dyskinesia was reduced at the higher dose by 0.5 hours per day. It is understandable that this effect was only seen at the higher dose because patients with more severe Parkinson’s disease on higher doses of levodopa tend to experience this side effect with higher frequency. This result was not seen in the Phase III studies of Rytary, although it should be noted that baseline troublesome dyskinesia was substantially lower (0.35-0.37 hours per day) than seen in patients in the AP-CDLD trial. Studies of Comtan have shown that it increases the rate of dyskinesia (53% of patients compared to 32% for placebo, p=0.002).6 It should be noted that in the Rytary and Comtan trials, patients were optimized to different dosing regimens, and the data reflects an average of these optimized treatments.

The final measure of efficacy tracked in the study was the number of daily support doses of levodopa needed as part of the patient’s current treatment or on top of AP-CDLD. The number of additional pills was reduced by 2.8 per day on the lower AP-CDLD dose, and 1.3 on the higher dose. The reduction is not particularly surprising considering that AP-CDLD is providing a significant amount of levodopa and therefore reducing the total needed by a patient via other means throughout the day. However, this does give a measure of the pill burden for patients on this treatment. Pill burden can be significant for Parkinson’s patients, considering the number of overlapping treatment regimens these patients require. This finding indicates that the lower dose AP-CDLD may reduce the overall pill burden (2 pills of AP-CDLD but 2.8 fewer other pills), and although patients requiring the higher dose may have an increased pill burden, it is small (approximately one extra pill) considering the benefit to off time and dyskinesia.

Intec will be seeking a 505(b)2 approval pathway for AP-CDLD in the US and a hybrid application pathway in Europe, which should enable a marketing application after a single Phase III trial, which enrolled its first patient in April 2016. These routes to market are available to reformulations of existing approved medications, like carbidopa and levodopa. Eligibility for the 505(b)2 pathway was confirmed by the FDA. The study consists of a head-to-head comparison between AP-CDLD and the immediate release carbidopa/levodopa drug Sinemet. The trial is randomised and double blind and will examine two dosage strengths of AP-CDLD (50mg carbidopa with either 400mg or 500mg levodopa) at two to three times daily. Prior to randomisation, patients will be stabilised on both Sinemet and AP-CDLD to determine the correct dosing regimen, and then patients will receive one of the drugs concurrently with a dummy version of the other (to prevent unblinding due to different dosing frequencies). Patients will be able to take two to three pills per day of AP-CDLD at two different doses (50/400mg or 50/500mg of carbidopa/levodopa). An important difference from the Phase II is that patients on the AP-CDLD arm will not be supplementing with IR levodopa if needed, which may increase off time, although this will be mitigated by the ability to take up to three APs per day if needed. The primary endpoint of the trial will be the reduction in number of off hours, as reported by a patient diary, but other efficacy measures such as the change in troublesome dyskinesia and global assessments such as the Unified Parkinson’s Disease Rating scale (UPDRS) will be made. The study will enrol approximately 460 patients and proceed for 25 weeks total. This trial design is substantially similar to previous levodopa/carbidopa trials, including the recent Rytary trial. Following completion of the trial protocol, patients will be entered into an open label extension, data from which may provide early insights into efficacy. Top-line data are expected in Q417.

Intec is also developing an AP-based formulation of zaleplon for the treatment of insomnia, which it has termed AP-ZP. Estimates of the prevalence of insomnia vary significantly, based on the diagnostic criteria. Up to 30% of adults have difficulty initiating or maintaining sleep or have a poor quality of sleep.7 According to an NIH State-of-the-Science group on the disorder, 10% of adults have a daytime impairment or distress as the result of loss of sleep, and with the criteria that the insomnia is persistent for over a month this rate drops to 6% of adults, corresponding to 14.8 million people in the US.7 Despite the large number of patients with the disorder, rates of intervention with hypnotic drugs is low. The best data available on insomnia treatment trends are from a survey of managed care patients in the Detroit area, in which 1.38% of patients had received a prescription for hypnotics.8 This is about half of all prescriptions for insomnia treatment. In Europe these rates are lower, with 0.78% of people receiving hypnotics in the UK.9 However, the vast majority of patients self-medicate for insomnia, using OTC medications or alcohol, each at approximately twice the rate that prescriptions are used.10

The sleep market generally is highly fragmented, with numerous over-the-counter and prescription medications prescribed for the disorder. The prescription is further split into hypnotics, whose primary indication is insomnia, and other drug classes such as anxiolytics and anti-depressants (notably tricyclics), which are also prescribed for the disorder.

The most commonly prescribed hypnotic by a large margin is zolpidem, including Ambien (zolpidem, Sanofi), Ambien CR, and generics. According to Symphony Health, there were 35m prescriptions written for zolpidem, in 2015 with 90% market share of Z-drugs. Broadly, this class of drug are GABA agonists, but unlike other GABA agonists (barbiturates, benzodiazepines), they have fewer off-target interactions and better sleep quality improvement. The second bestselling Z-drug eszopiclone (Lunesta, Dainippon Sumitomo, and generics), by comparison, had 2.8m prescriptions for the year.

A notable recent development in the insomnia market is the approval of Belsomra (suvorexant, Merck), which launched in early 2015. This drug has a different mechanism of action (orexin antagonist) than other insomnia drugs, and a different profile compared to Z-drugs: better improvements in waking during the night but with higher rates of morning somnolescence, nightmares and suicidal ideation. The drug sold $33m in Q116, according to Symphony Health. There are multiple development programmes at other companies into drugs with a similar mechanism of action.

Intec is developing AP-ZP as a new sleep aid with the goal of providing consistent sleep without any next-day after effects. Zaleplon is an insomnia treatment that was previously marketed under the name of Sonata, and is part Z-drug class. Zaleplon has a half-life of approximately one hour (compared to 2.6 for Ambien and 6 for Lunesta).11 Because of this, the drug can be taken before even relatively short periods of rest (less than two hours) without leading to any residual “hangover” effects.12 The hangover experienced by patients taking prescription hypnotics is an issue of significant public health interest, and the FDA has ordered a reduction in the dosing recommendations for both Ambien and Lunesta on the basis of post-marketing reports of impaired function the day after taking the medications. However, when compared to Ambien, patients taking zaleplon saw less improvement in overall sleep quality,13 which might be tied to the short half-life. The company believes that it can achieve a best of both worlds solution by providing the controlled release of zaleplon with an AP throughout the night to maintain sleep quality and still avoid morning hangover effects. Moreover, the AP is the ideal platform because poor solubility limits the bioavailability of the drug in traditional formulations.14

AP-ZP’s most recent and most comprehensive clinical trial was a Phase II study that assessed its efficacy in a set of sleep parameters and measured the residual next-day effects in 83 individuals. The trial was of a crossover design, with patients receiving either placebo or active drug over six nights. The study was randomised and double blind and occurred at five US medical centres and one in Israel. It enrolled patients who had been diagnosed with insomnia and used electrical polysomnographic instruments to measure sleep parameters. The specific formulation of AP-ZP used in the trial contained 10mg of immediate release zaleplon and 15mg of extended release drug.

The trial demonstrated a statistically significant improvement in both total sleep time and the latency to persistent sleep (Exhibit 9). This improvement in both metrics was more pronounced than what was seen in previous studies of Sonata (10mg).15 Notably, AP-ZP significantly increased the total sleep time in patients, which was largely unaffected in the Sonata study, presumably due to the short half-life of the molecule. Sonata is approved for insomnia on the basis of reducing the time to persistent sleep and consistently did not improve total sleep time in clinical studies. It should be noted that the total amount of zaleplon in the AP-ZP formulation is 2.5x that of the standard 10mg dose of drug used in this study and indicated for the majority of patients. Additionally, patients in the Sonata registration study appeared to have less severe insomnia, as evidenced by lower latency to persistent sleep and longer sleep times on placebo.

It is useful to also compare AP-ZP to Ambien (10mg), due to its dominant market share (including generics, 90%). With respect to sleep parameters, Ambien clearly provides a greater improvement compared to AP-ZP, with a greater reduction in the time to persistent sleep and total sleep time. Additionally, Ambien decreased the amount of time that patients spent awake after sleep onset, which AP-ZP did not affect. We expect that any further trials of AP-ZP will use formulations with increased amounts of drug in an attempt to improve upon these results compared to Ambien. In Phase I, formulations containing 30mg and 35mg of total drug were also tested without safety issues.

AP-ZP may provide advantages over Ambien in terms of residual next-day effects (Exhibit 10). In the AP-ZP clinical trial, the drug did not show any significant worsening in the digit symbol substitution test (a measurement of cognition) or on a memory test, compared to placebo. There was a statistically significant increase in the patient assessment of symptoms on a visual analogue scale, but the magnitude of the increase was small (3%). Clinical trials of Ambien generally showed low levels or residual effects.16 However, these results were questioned following numerous post-marketing reports of impairment, which prompted the FDA to issue a warning letter in 2013. This warning letter stated that up to 15% or women and 3% of men had blood levels significant enough to cause impairment the morning after taking immediate release Ambien. For Ambien CR, the rates were even higher, with 33% of women and 25% of men.

The company has stated that it intends to seek a partner to commercialise AP-ZP prior to proceeding with a Phase III clinical trial.

Many of the development risks typically associated with pre-commercial pharmaceutical companies are mitigated in the case of Intec, because the company is developing reformulations of approved pharmaceuticals for their original indications, and the efficacy of these compounds is not under question. However, the data supporting the clinical benefit of the AP technology over other formulations is limited. The potential benefit appears most pronounced in the case of AP-CDLD, in which the pharmacokinetics of levodopa support a gastroretentive formulation. This translated into better improvements in off time than the recently approved controlled release formulation Rytary. However, this effect required supplementation with additional immediate release levodopa pills, meaning that AP-CDLD alone may perform worse, although the Phase III permits an increased dosing frequency (three times a day) which may mitigate this risk.

In the case of AP-ZP, the exact benefit of the AP technology over other controlled release formulations is much less clear. We do not know of a definitive benefit from gastroretention or drug absorption in the upper digestive tract. The drug improved total sleep time more than immediate release zaleplon, but underperformed on all sleep metrics compared to Ambien. The proposed benefits of AP-ZP are predicated on improvement in next-day residual effects, but these residual effects were not observed during the Ambien clinical trials under similar conditions to the AP-ZP clinical trial. This being said, some of the shortcomings of AP-ZP compared to Ambien may be addressed by moving to a higher dose in future trials.

The company will be facing significant commercial risks, as AP-CDLD and AP-ZP are both entering especially competitive markets where potentially disruptive technology is being developed. AP-CDLD is a viable solution to the difficulties in levodopa-based therapy, but there are the two products already available and others in various development stages. Additionally, there are marketed and development products that aim to achieve better disease control by using an alternative route of administration (ie the Duopa duodenal pump). And finally, the advancement of COMT inhibitors may further improve the pharmacokinetic profile of levodopa and limit the benefits of AP-CDLD over other formulations.

The insomnia market is difficult because although highly fractured in a broad sense, the class of prescription hypnotics is dominated by a single molecule: Ambien, and its generics. However, the recent approval of Belsomra and the development of multiple other orexin inhibitors is a potentially disruptive force in the space. The adverse effects of Belsomra, above and beyond those of Ambien, do not appear to be limiting its initial adoption, which may indicate that the insomnia market is not adverse to the factors that AP-ZP has been designed to solve.

There exists a financing risk for the company, as we expect it to require an additional NIS70m before profitability in 2020. This value is small in comparison to other development stage pharmaceutical companies, and limited primarily by the efficient 505(b)2 pathway in the US and the hybrid pathway in Europe. This financing requirement may also be offset through an upfront licensing fee for AP-ZP, which we currently include in our valuation as NIS45m.

We arrive at an initial valuation range of NIS540-582m, based on a risk-adjusted NPV analysis of Intec’s clinical programmes and costs and the 52-week NIS exchange rate range to the dollar (3.70-3.99). This corresponds to a value per basic share of NIS47-51. These values include a H116 cash level of NIS81m (down from NIS120m at the end of 2015).

We attribute 64% of the company’s value to the AP-CDLD programme at NIS247m. This value assumes the internal commercialisation of the drug in the US and Europe. Although we acknowledge that the drug might be better served via a marketing agreement with a company with an established footprint in the Parkinson’s space, we believe that any future deals will be made advantageously over the internal commercialisation case we present here in lieu of such an agreement. We believe that this programme has a probability of success (60%), based on the well-established efficacy of carbidopa and levodopa and the Phase II results demonstrating a clear improvement over standard of care. We also see this formulation as potentially competitive with other carbidopa/levodopa solutions such as Rytary and Duopa, and predict peak penetration of 2% of moderate to severe Parkinson’s patients, with peak sales of $196m in 2029. Our pricing assumptions are based on a $20 daily cost in the US ($7,300 per year), which is approximately a 20% premium to Rytary (WAC $2.30 per pill, 7.2 pills per day)17 based on better efficacy, and an assumed 40% lower price in Europe. We currently do not include any other markets in our valuation, but consider these potential out-licensing opportunities. We estimate a manufacturing cost of approximately $1 per day, which equates to approximately 5% in the US and 8% in Europe, based on our current pricing. This is a premium to normal capsule formulations. Other COGS include the 3% royalty payment to the Hebrew University of Jerusalem repayments to the Office of the Chief Scientist of the Israeli Ministry of the Economy (OCS). For the years of 2019 through 2022, the company will be repaying a grant received from OCS in the form of a 3-4.5% royalty on sales (4.5% in our models).

We assume a discount to payers of 30% for the product, which we see as a balance between efficacy and generic price pressures. Our selling fees of 15% are larger than average, but take into account the large number of prescribing doctors (over 16,000 neurologists in the US, and a mix of other prescribers). The R&D spending assumption is made on the basis of an expected 460 patients (company guidance, in line with previous studies) at $50k each, distributed over three years to account for the Phase III trial and the open label extension. This corresponds to a negative NPV of NIS70m.

We value the AP-ZP programme at NIS91m (including NIS36m from licensing), corresponding to $155m in combined peak sales in the US and Europe. Our probability of success for this programme is 40%, which is lower than average, based on the difficulty we see in demonstrating an advantage over the market leader, Ambien and its generics. The Phase II trial showed insignificant day after residual effects by functional metrics, but after effects were significant by patient assessment. Additionally, market leader Ambien did not show significant after effects during its registration trials, and the reports of these effects were all derived post-marking approval. This is coupled with what we see as weaker efficacy in the AP-ZP programme compared to Ambien.

We assume that Intec will out-license the programme, consistent with guidance, and use a royalty of 15% on sales in our calculations. The company will owe 15% of its revenue from any licensing agreements to the Hebrew University of Jerusalem. Our sales estimates predict a peak 6% market share of hypnotic drug users (estimated at 4.4 million in the US and 3.9 million in Europe). Our pricing assumptions are based on a WAC of $7.20 per pill, in line with Sonata, and an average of 86 pills per diagnosis, based on historical data.8 European pricing assumes a 20% discount to US prices, which is low, considering this is a lower-margin product. Our gross-to-net discount is high at 50%, because we believe the highly fractured nature of the market and the high number of effective generics will translate to payer resistance in the absence of definitive efficacy improvements.

As part of the out-licensing of AP-ZP we have included an upfront payment of $12m followed by $15m upon approval in 2020 and a $15m sales milestone (out of a potentially larger pool) in 2025. These amounts are a 50% discount to the deal between Purdue Pharmaceuticals and Transcept Pharmaceuticals in 2009 for the sublingual formulation of zolpidem Intermezzo ($25m upfront, $30m on approval and $90m in milestones). The GSK licensing of Lunesta from Sepracor also had a $20m upfront, followed $155 in licence and milestone fees. The discount reflects the earlier stage of development (Intermezzo was licensed post Phase III). We attach relative risks of 60%, 40% and 30% for the upfront, approval milestone and sales milestone, respectively.

We currently do not include the Biogen collaboration, the undisclosed NSAID, or the cannabinoid AP in our valuation due to lack of insight into these programmes.

Intec’s most recent financing was the IPO on NASDAQ on 7 August 2015, with gross proceeds of $34m (NIS130m). The company currently trades basic shares on both NASDAQ and TASE. Prior to this offering the company had received approximately NIS209m in other offerings. The company ended H116 with NIS81m in cash and investments.

We currently forecast NIS53m in spending for 2016. This corresponds to NIS41m in R&D spending, primarily associated with the Phase III clinical trial of AP-CDLD. We expect costs to remain in this range prior to commercial launch of AP-CDLD in 2019, after which we expect a substantial increase in SG&A expense associated with the hiring of a salesforce to market the drug (in the range of NIS70m during the launch year). This assumes an initial hire of 100 reps, but we expect this number to scale with increasing sales to over 300.

The company currently has a favourable tax status in Israel, allowing it to claim a tax exempt status until 2023. The company has the option to manufacture the product in underserved regions of Israel to receive a reduced tax rate at that time, although we currently forecast taxes post 2023 at the standard 25% rate until more details of the company’s development plan become available. We estimate that the tax exemption will save the company NIS98m assuming approval of both AP-CDLD and AP-ZP.

The company has received NIS37.8m in grants from OCS with approximately NIS20m more approved. These grants are repaid in the form of a royalty on sales (3-4.5%) and are forgiven in the event of a default, and as such are not recorded as liabilities. However, the company could face penalties or face repayment for the transfer of manufacturing or know-how from Israel, which could affect the company’s funding requirement.

We forecast that that the company will have a small funding requirement of NIS70m before 2018 to reach profitability in 2020. We expect this requirement to be offset via the out-licensing of AP-ZP. However, in lieu of such a deal in hand, we currently record this financing requirement as illustrative debt.