NuEvolution — Update 16 February 2017

Nuevolution is a Scandinavia-based leader in small molecule drug discovery, co-founded in 2001 by CEO Alex Haahr Gouliaev. The company’s internally innovated DNA-encoded drug discovery platform, Chemetics, has been designed to rapidly select drugs for an array of tough-to-drug disease targets; the technology has been validated by multiple collaborative deals, notably the deals in 2016 with Amgen and Almirall. In addition to out-licensing deals, Nuevolution is developing an early-stage portfolio of drugs that it intends to develop to proof of concept (targeting inflammation and oncology); we anticipate progress of at least one internally generated asset into the clinic in the near future. Nuevolution’s headquarters are in Copenhagen, Denmark, and it employs about 40 people. To date the company has generated SEK525m ($59.3m) in revenues through collaborations (including the SEK109m Almirall upfront) with global pharmaceutical companies and raised net proceeds of SEK230.1m ($25.5m) from its IPO on Nasdaq First North Premier in Stockholm, Sweden in December 2015 (at SEK17.5/share).

Assigning a fundamental valuation to Nuevolution requires consideration of the inherent value of the Chemetics technology platform, potential clinical pipeline candidates and future partnership deals. However, our valuation of SEK901m including net cash of SEK229m is exclusively based on a risk-adjusted model of the future milestones we expect from the Almirall (SEK8.8 per share) and Amgen (SEK6.9 per share) deals alone (ie excluding any value of the technology itself, other pipeline assets and excluding future deal opportunities), using a 12.5% discount rate. We have not ascribed value at this point to the unique platform and multiple candidates at an early stage in preclinical development; consequently, we see uplift potential as further deals are made and/or assets move into clinical development.

Nuevolution is subject to drug development risks, including clinical development delays or failures; however, Nuevolution’s large number (15+) of compounds in parallel development helps to reduce the risk typically associated with pure-play biotech. Additional sensitivities exist around IP protection, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. While Nuevolution’s strategy minimises the business risk associated with drug development by partnering early on in development, general risk still remains in the partner’s willingness to progress these partnerships. One of the key sensitivities for Nuevolution relates to the successful transition of molecules discovered by its Chemetics programme into clinical-stage development; this will enable further validation of its technological capabilities. Financing needs depend on milestone revenues from existing partners and potential new partnering activities; delay or failure to receive future milestones would generate a funding gap during FY19.

Net cash as of 31 December 2016 was SEK142.9m ($16.1m); excluding the net (of withholding tax) SEK86.5m ($9.1m) upfront payment from Almirall in January 2017. Net cash including the Almirall upfront is c SEK229m, which suggests a cash runway into FY19. Revenues should benefit from milestone payments from the Amgen and Almirall deals as targets progress in the upcoming years and we forecast total revenues of SEK139.4m in FY17 (SEK21.3m FY16), and SEK186m in FY18. The Almirall upfront milestone translates to just above break-even in FY17 (SEK1.5m net income FY17e). We forecast a net profit of SEK36.7m in FY18 due to forecast income from the Almirall and Amgen deals. While it is inherently difficult to predict revenues from further deals, we note that any additional deals could significantly add to the current forecast revenue stream.

Nuevolution’s Chemetics technology platform enables the rapid development of small molecule drugs for ‘tough-to-drug’ targets. Key to this is the company’s ability to generate small molecule drug libraries that are magnitudes larger than previously possible. Management believes that its proprietary DNA encoded libraries of close to 2bn small molecules enables 1,000-fold more compounds to be screened vs traditional high-throughput screening (HTS). The fact that Nuevolution has demonstrated via deals that its Chemetics technology is able to significantly accelerate the drug discovery phase, at a substantial cost saving, has been of considerable appeal to the global pharmaceutical industry as it battles to improve R&D productivity. Nuevolution’s 17 collaborative partnerships include mid- and large-cap industry peers (including Amgen, Almirall, Novartis, Janssen Biotech, GSK, Boehringer-Ingelheim [BI], Merck and Co) in addition to world-class oncology research institutions Cancer Research Technology (CRT) and the Institute of Cancer Research (ICT). As evidenced by the list of Nuevolution’s partners, DNA-encoded drug discovery continues to gain traction globally as multiple major pharmaceutical and biotechnology companies advance the technology.

Costly but effective injectable biologic agents have revolutionised the treatment of chronic inflammatory conditions in particular. Nuevolution is focusing its development effort on small molecules for ‘tough-to-drug’ targets. Small molecules generally have four key advantages over biologics: the ability to target intracellular components (potential to reach novel targets), cheaper cost of production (lower pricing), oral dosing (improved compliance to injectable) and shorter half-life (important if side effects need to be controlled). While offering important practical advantages, novel drug candidates have high efficacy hurdles to meet, while ensuring low toxicity profiles.

Nuevolution’s business model embodies continuous revenue generation and risk mitigation, executed through a ‘multiple shots on goal’ approach to drug development. This translates to: 1) revenue generation through early partnership agreements, 2) an associated reduction in R&D costs and 3) financial and physical capability to continuously identify drug development candidates; management’s focus is to develop several assets each year from its proprietary pipeline for partnering and revenue generating business opportunities while maintaining an internal development pipeline. We anticipate Nuevolution to progress at least one internally generated asset into clinical development in the near future; its aim is to have an abundant pipeline of partnered assets plus a focused clinical-stage pipeline.

The business model has evolved over time; it has moved away from its early deals that were more fee for service technology transfer deals (eg BI, Merck, Janssen and Novartis) or sublicensing an access to patents (eg Lexicon, GSK, Novartis deal) to a multi-pronged approach to value creation:

All told, Nuevolution has delivered on two key IPO promises, signing at least one licensing agreement (Almirall) after 12 months and one risk-sharing collaboration (Amgen) after 10 months of IPO.

In October 2016, Nuevolution announced a risk-sharing collaboration with Amgen focused on oncology and neuroscience. The company could receive up to $410m per target; specific targets and diseases were undisclosed. Under the terms of the deal, Nuevolution will carry out the initial research work before working collaboratively with Amgen in the later-stage research. Amgen is responsible for all preclinical and clinical development, in addition to worldwide commercialisation.

The Almirall deal focuses on the development and commercialisation of RORγt inverse agonist for dermatological diseases and psoriatic arthritis (Nuevolution retains ownership of other indications). An upfront of €11.2m (SEK109.2m) gross, net (of Spanish withholding tax) €9.1m contributes to a total potential deal value of €442.0m (SEK4.3bn) from development, regulatory and sales milestones in addition to tiered royalties on future sales, which could generate significant revenue for Nuevolution. Almirall is responsible for both funding and undertaking all research and commercial activities.

While the development of Nuevolution’s lead candidate, the RORγt inverse agonist for dermatology and Psoriatic Arthritis (PsA) will transfer completely to Almirall (with potential IND filing in H217), we expect Nuevolution to continue to progress the rest of its pipeline (particularly BRD BD1, Cytokine X, and RORyt inverse agonist outside dermatology). Nuevolution’s second most advanced programme is an inhibitor of BET bromodomain 1 (BRD BD1); it recently demonstrated positive preliminary toxicology and efficacy data in an animal mouse model for systemic lupus erythematosus.

Additionally, we expect the collaboration with Amgen to be of focus in the short to medium term as Nuevolution generates drug candidates which, if successful in preclinical development, will be taken to the clinic by Amgen. One of the longer-term strategic aims of the company is to innovate and develop a pipeline of clinical assets in addition to a broader preclinical pipeline in the immunology, immune-oncology and oncology therapeutic areas. Management will consider, for one or two programmes, advancing development up to Phase I/II clinical studies. Exhibit 1 highlights Nuevolution’s development pipeline.

In addition to industry partnerships, Nuevolution has a range of ongoing academic collaborations. In December 2016, Nuevolution, in partnership with Professor Kristian Helin at the Biotech Research and Innovation Center (BRIC) (University of Copenhagen) received a three-year grant from Innovation Fund Denmark. The total budget is DKK24.4m (SEK32.3m), of which Innovation Fund Denmark will contribute DKK16.4m (SEK21.6m). Nuevolution will contribute with in-kind investments and is due to receive up to DKK5.2m (SEK6.8m) in funding over the project period. If the project is successful, Nuevolution will have the lead in commercialising any compounds. Together, Nuevolution and the Helin Group will aim to identify therapeutic small molecules for histone methyltransferase enzymes, an epigenetic target involved in a range of cancers.

Additional partnerships include the recently published paper by Nobel Laureate Dr Robert J Lefkowitz from Duke University, who isolated a beta-blocker, and a drug discovery collaboration with the Institute of Cancer Research (ICR), Cancer Research Technology (CRT) (signed in January 2014), which is focused on a key target within the stress response pathway.

Nuevolution’s Chemetics technology platform enables the rapid development of small molecule drugs to ‘tough-to-drug’ targets. Key to this is the company’s ability to generate small molecule drug libraries that are magnitudes larger than previously possible (Nuevolution recently announced the production of a 40 trillion compound library, potentially the largest ever produced). This is enabled by the tagging of chemical compounds with DNA that encodes for its chemical structure and composition. Entire libraries can be generated in one vial, assayed together and easily sequenced for hits (Exhibit 2).

Classical high-throughput screening typically enables the screening of between 10,000 and 100,000 compounds at any one time, with a typical library of 1-3 million taking anywhere from a few weeks to a few months to screen. Molecules are screened individually in micro well plates, typically in 96-, 384- and 1,536-well formats. Due to advancements in robotics, solution handling and data readouts, the screening process has become one of the fastest components of the entire drug discovery process. Hit validation and progression in particular, along with assay development and data analysis, can often be the most time consuming. With traditional techniques the time and cost required for the supporting work is proportionally linked to the number of compounds tested; a careful balance needs to be maintained between covering the whole target space and the time required to develop these molecules. Nuevolution believes it has overcome these bottlenecks with its Chemetics platform.

The creation of Chemetics libraries involves a range of technical steps that have been refined by Nuevolution since its inception. Every small molecule within a library is tagged with a double-stranded DNA that, much like a barcode, can be read to determine the structure and chemical makeup of the small molecule it is attached to. Library construction involves the repeated sequential addition of chemical building blocks by the split-and-mix method to enable the production of diverse chemical libraries. This involves splitting mixtures into individual wells where they are incubated with chemical fragments before remixing all solutions together and splitting them back out again for addition of new chemical fragments. This enables the creation of significantly larger libraries (trillions) than is possible with HTS (millions); however, of note is recent research that indicates productivity of a library may not correlate with library size; as such, Nuevolution’s ability to design a library for diversity as well as size is key to generating hit compounds.

In detail, this involves a few keys steps:

This process of adding a new chemical component with an accompanying barcode (DNA fragment) before remixing all the wells together and splitting the mixture back out again enables the creation of highly diverse libraries consisting of trillions of compounds. If this process is done over 96, 384 or 1,536 wells, a large and diverse library can be produced quickly. Libraries are designed to contain not just a wide variety of compounds but also many copies of each compound; this ensures that any singular binders accidently lost in affinity selection do not dramatically affect the identification of a hit compound. Library generation is estimated to take three to four weeks from a known design, while design of a library from scratch often requires nine to 12 months. Each library can be utilised typically more than 100 times.

Once the library is generated it is assayed against a target. This can take a range of formats and will be tailored to the target; generally it involves the incubation of the library with a target where non-binders are removed. The process is often repeated multiple times with increasing stringency until a fraction of the original library remains (still millions of compounds). This library is then analysed. In classical HTS this can be a slow and laborious process; however, as each Chemetics molecule is tagged with a strand of DNA that contains the chemical and structural information of the compound, the information can be quickly obtained. The strands of DNA are amplified in the presence of a DNA polymerase (enzyme) through cyclical temperature increases and decreases, a process known as polymerase chain reaction (PCR). One of the key problems with PCR is the preferential amplification of certain sequences; this could distort the sequenced library as certain strands may appear more abundant than they actually are. As such, the unique barcoding of the strands when the library is created is key to tracking specific amplification. The entire DNA library is sequenced utilising an outsourced next-generation sequencing platform like Illumina’s ‘Sequence by Synthesis’ technology. This technology provides the sequence of every single DNA strand left in the library, often numbering into the millions. The analytical techniques involved in this whole process require careful tuning and development to be able to generate actionable leads, a process that has a high barrier of entry to new entrants.

DNA-encoded drug libraries until recently were viewed with scepticism by large pharma companies. However, an explosion of deal making in the sector has pushed many companies into the limelight. GSK, one of the first pharmaceutical companies to see the potential of the technology, acquired Praecis Pharmaceuticals (a developer of DNA-encoded drug libraries) in 2007 for $55m before subsequently entering into a licensing agreement with Nuevolution granting GSK further freedom to operate. Two main technological tranches have emerged since then: DNA barcoding and DNA templating. DNA barcoding, as carried out by Nuevolution, is the process where the chemical structure is encoded for with an attached DNA. DNA templating is the utilisation of DNA to physically bring together chemical fragments in an appropriate conformation. Generally, DNA templating enables more control over quality, while DNA barcoding allows the production of much larger libraries.

The competitive landscape is outlined in Exhibit 4. While this highlights the pure-play drug discovery companies, major strides are being taken by large pharmaceutical companies. GSK currently has one of the most advanced clinical candidates in the form of an epoxide hydrolase inhibitor for COPD (GSK2256294, Phase I completed, no current details on further development) and possesses some of the largest DNA encoded libraries in the sector, with over a trillion uniquely tagged molecules. Novartis meanwhile is also believed to be refining its DNA-encoded libraries after securing a technology transfer deal (in 2014) with Nuevolution. One needs to look no further than the partners listed in Exhibit 4 to see the interest the industry has in these new discovery engines. As pharmaceutical companies often closely guard early stage assets, visibility of drugs generated from DNA encoded libraries remains limited; however, as pipelines advance we expect this to change.

While deal details and values in the sector often remain private, disclosed details highlight the value of the technology. In May 2016, DiCE Molecules (founded in 2013) entered the spotlight with its directed evolution DNA templating technology when it agreed a research collaboration with Sanofi to discover new therapeutics for up to 12 targets. Sanofi agreed to pay DiCE over $50m in an upfront and a further $184m in milestones per target. DiCE’s technology focuses on tough-to-drug protein-protein interactions. In addition to DNA templating, it utilises directed evolution. Typically once a library has been screened, any binders are seen as hit and taken forward for optimisation. Directed evolution involves taking these binders, creating a new library with them and screening them against the target again. This process can be repeated again and again until only a select pool of target binding compounds remain; however, the speed and practicalities of this method are still being addressed.

In October 2016, Nuevolution and Amgen announced an extensive strategic collaboration deal with a focus on small molecule drug discovery targets in the field of oncology and neuroscience. This represents a multi-target research alliance whereby Nuevolution utilises its proprietary Chemetics drug discovery platform to potentially identify drug candidates that Amgen may wish to develop beyond the drug discovery stage; thereby leveraging the strengths of the Chemetics drug discovery platform with Amgen’s drug development capabilities. Nuevolution can receive up to $410m per target in licence fee payments upon option exercise and milestones alone (specified research, development, and commercial milestones); specific targets and diseases were undisclosed.

Under the terms of the deal, Nuevolution will carry out the initial discovery research work before working collaboratively with Amgen in the later-stage research. Amgen is responsible for all preclinical and clinical development, in addition to worldwide commercialisation. Nuevolution’s collaborative process has started with Amgen in Q2 and management believes the early hit identification looks promising with target one; and expects further programme targets to start in Q3.

As a comparison, we highlight the Amgen and Inmatics strategic collaboration (announced 9 January 2017) to develop novel T-cell engaging bispecific immunotherapies; under the terms of the agreement, Inmatics will receive a $30m upfront payment plus over $500m in development milestones for each programme and additional tiered royalty rates up to a double-digit percentage of net sales.

In December 2016 Nuevolution announced a global, strategic collaboration deal with Almirall for its internally generated RORyt inverse agonist (inhibitor) programme. Almirall is a Spain-based speciality pharmaceutical company with a focus on dermatology (~50% of sales in 2016). The company has been trading for over 70 years and maintains a strong international presence with ~2,000 employees worldwide. Almirall is increasing its focus in psoriasis with two late-stage products in development; LAS41008 and tildrakizumab (IL-23 antibody in-licensed from Sun Pharmaceuticals – originally from Merck & Co – in July 2016) are both at registration stage.

Almirall has obtained rights to the RORyt inverse agonist (inhibitor) programme to enable it to identify and develop novel small molecule drugs for inflammatory-based dermatological conditions in addition to psoriatic arthritis. Under the terms of the deal, Almirall will fund all further research and regulatory and commercial activities; Nuevolution has in exchange received an upfront payment of SEK86.5m (€9.1m), net of Spanish withholding tax, plus is eligible to receive up to SEK1.7bn (€172m) in development and regulatory milestones contingent on successful development. If approved Nuevolution would be entitled to a tiered royalty on net sales generated in addition to tiered commercial milestones of up to SEK2.6bn (€270m).

The deal with Almirall, in our view, is significant as it demonstrates:

We anticipate a potential IND filing for the product by Almirall in H217, and it would be the first internally generated asset to move into the clinic with one of its strategic partners. Nuevolution commenced production of the active pharmaceutical ingredient (API) in September 2016 for the first RORyt inverse agonist candidate. As part of the initial agreement, both companies will also establish a research collaboration to identify additional RORyt inhibitors; Almirall will retain the option to use it in dermatology and psoriatic arthritis.

The discovery of retinoid-acid receptor-related orphan receptor gamma t (RORyt) as an important master control switch of immune system activation translates to a potential novel class of drugs for the treatment of auto-immune diseases (by immune suppression) and for cancer immunotherapy (by immune activation). For auto-immune conditions such as psoriasis/psoriatic arthritis and rheumatoid arthritis, this represents a step towards finding novel treatment options (notably novel orally administered drugs) for these incurable, chronic debilitating conditions.

RORyt is a critical target in the regulation and development of Th17 immune cells. These cells are CD4 T helper effector cells that are involved in the expression of naturally occurring pro-inflammatory cytokines such as interleukin-17A (IL-17); abnormalities in IL-17 expression (elevated levels) can be found in auto-immune conditions such as psoriasis. IL-17 as a target has been validated by the approval of Novartis’s human IgG1 monoclonal antibody Cosentyx (secukinumab); the only approved IL 17A antagonist for severe plaque psoriasis, active psoriatic arthritis and ankylosing spondylitis. Targeting RORγt could theoretically reduce the IL-17 over expression in these disease states with a potential practical translation of disease modification. Novel disease modifying drugs that are efficacious without side effects or an increased risk of comorbidities have the potential to revolutionise treatment of these therapeutic areas.

While opportunities will always exist for novel drugs with differential features, we highlight that the psoriasis biologics market will become more competitive over the next decade as novel biologic agents and biosimilars vie for position in the moderate to severe psoriasis space. The RORyt programme represents a novel mechanism of action.

In placebo-controlled trials, Novartis’s Cosentyx has posted the highest improvement in PASI 75 scores (see Exhibit 6) Cosentyx was approved for use in psoriasis in January 2015 by the US FDA and in March 2015 by the EMEA. Its label was widened to include ankylosing spondylitis and psoriatic arthritis in January 2016; Novartis reported sales of $1.1bn in 2016 across all indications. Celgene’s Otezla (apremilast) small molecule, PDE4 inhibitor is an oral drug treatment for PsA and psoriasis that was approved in 2015. It has a wholesale price in the US of $22,500 a year, around a 30% discount to the injectable treatments Humira (AbbVie) and Enbrel (Amgen). Celgene reported that Otezla sales had exceeded $1bn in 2016, in its second full year on the market; uptake of the drug has been driven by price and its oral mode of administration despite its lower efficacy compared to biologic agents.

The three most advanced RORγt inverse agonist programmes in development have all been either out licensed or acquired; Nuevolution has out licensed its programme to Almirall, Vitae Pharmaceuticals was acquired by Allergan (for $639m in cash) and Phenex Pharma has out licensed its inverse agonist to Janssen. In May 2016, Vitae Pharmaceuticals reported top-line results from its Phase IIa clinical trial testing its small molecule RORγt inverse agonist (VTP-43742) in psoriatic patients. In the low dose cohort (350mg), VTP-43742 reported a 23% improvement in PASI score at day 28 from baseline (0.015); this compared favourably to a 1% deterioration for patients on placebo. Patients on the higher dose cohort demonstrated a 29% improvement from baseline at day 28 (p=0.003). There were no reported serious adverse events. This data is the first Phase II data to confirm the validity of RORγt as a drug target for the treatment of psoriasis. Allergan confirmed upon acquisition the plan to initiate a 16-week Phase II trial to determine the effect of VTP-43742 over a longer time period. No further details have been released since the acquisition in September 2016.

In 2012, Phenex Pharma entered into a research collaboration with Janssen Biotech to jointly discover compounds that target RORyt. Phenex Pharma is eligible to receive milestone payments of up to $135m and tiered royalties; most recently Phenex received $6m in December 2012 for reaching an undisclosed milestone. Janssen and Phenex are jointly responsible for the discovery of compounds, after which Janssen will take full control of development from the preclinical stage. Janssen has to-date not disclosed the progress of the programme.

Our valuation of the Almirall deal largely focuses on the potential milestone payments in the near term, with a smaller contribution in value from royalties on sales (see valuation). For comprehensiveness we discuss the potential US and EU opportunity for RORyt, and estimate a $1.9bn peak sales opportunity in psoriasis and PsA. Although in early stages, the RORyt programme mode of action is closer scientifically to Cosentyx, with the oral dosing benefit conferred by Otezla. The US market potential alone is significant, with over 7.5 million psoriasis patients, of whom 35% require drug treatment. Given that 20% of patients fail first and second-line treatment, we believe 0.5m patients in the US and 1.0m patients in the EU represent the target population of RORyt. We assume RORyt could be used in 10% of eligible US patients at its peak and pricing of $20,000 a year (a small discount to the $22,500 a year Otezla pricing). In Europe we assume a 5% peak penetration rate and pricing of $15,000 per annum.

While the development of Nuevolution’s lead candidate, the RORγt inverse agonist, will transfer completely to Almirall (potential IND filing in H217), we expect Nuevolution to continue to progress the rest of its pipeline (particularly BRD BD1, Cytokine X and the RORyt agonist).

Nuevolution’s second most advanced programme is an inhibitor of BET bromodomain 1 (BRD BD1); it recently demonstrated positive preliminary toxicology and efficacy data in an animal mouse model for systemic lupus erythematosus (SLE), such that a second preclinical mouse model in human lupus has been initiated and data is expected mid-2017. Nuevolution has identified protein targets in the treatment of inflammation, and is aiming to create best in class drugs in these blockbuster indications, where efficacy, safety and ease of use will be critical to obtaining significant market share.

BET bromodomain is an extremely novel target for oncology and immunology; no drugs of this class have been approved in this setting to date. These inhibitors exert their effect by displacing BET bromodomain proteins (eg BRD4) from chromatin by competing with their acetyl-lysine recognition modules, resulting in the inhibition of oncogenic transcriptional programmes. Nuevolution’s most advanced candidate is currently in the lead optimisation stage; the company is currently exploring the use of such compounds in multiple disease settings, including SLE and idiopathic pulmonary fibrosis; data from the latter is expected in Q417.

Drugs that avert inflammation by targeting the cytokine environment in the auto-immune family of diseases are well documented; approved drug classes include anti-TNF (tumour necrosis factor) alpha and interleukin receptor pathways. Given that multiple TNF alpha specific antibodies (J&J’s Infliximab, AbbVie’s Adalimumab, J&J’s Golimumab, Amgen’s Etanercept) are competing in the rheumatoid arthritis (RA), psoriatic arthritis, psoriasis and inflammatory bowel disease space, we postulate that ‘Cytokine X’ is likely a small molecule interleukin antagonist. The exact nature of the programme has not yet been declared for competitive reasons.

Nuevolution is subject to drug development risks, including clinical development delays or failures; however, its large number (15+) of compounds in parallel development helps to reduce the risk typically associated with pure play biotech. Additional sensitivities exist around IP protection, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. While Nuevolution’s strategy minimises the business risk associated with drug development by partnering early on in development, general risk still remains in the partner’s willingness to progress these partnerships. One of the key sensitivities for Nuevolution relates to the successful transition of molecules discovered by its Chemetics programme into clinical-stage development; this will enable further validation of its technological capabilities. While DNA-encoded library technologies such as Chemetics are gaining traction and are postulated to provide targets that can move swiftly in to the clinic, this is yet to be proven (industry wide) by an approved product reaching the market. Furthermore, the company’s current drug development pipeline is focused on novel targets that have not yet been clinically validated, translating to additional risk.

Almirall will be solely responsible for further development of the RORγt inverse agonist for dermatology and PsA indications, such that Nuevolution will not be able to influence future development decisions in these indications. Additionally there is risk that the strategic drug delivery collaboration with Amgen fails to materialise into asset progression and thus the milestone payments that have been included in our near-term financial forecasts would be at risk. For the earlier-stage pipeline, both pre-clinical development and partnering risks remain. We expect Nuevolution to develop its pipeline of assets in the discovery stage to the preclinical stage before partnering. However, we have limited visibility beyond that on the terms and timing of any potential deals.

Financing needs depend on milestone revenues from existing partners, potential new partnering activities, the scale of preclinical research and the potential start of clinical trials for one or two compounds. Critically, our model assumes that under the Amgen deal three assets move into preclinical development, precipitating an estimated ~SEK109.0m ($12.3m) in milestones per annum in 2018, 2019 and 2021; delay or failure to do so implies a funding gap during FY19.The shares trade on NASDAQ North, and are tightly held; as such liquidity can be an issue.

Our valuation of SEK901m ($102m) including net cash of SEK229m ($26m) is based on a risk- adjusted model of the Almirall (SEK8.8/share) and Amgen (SEK6.9/share) deals alone, using a 12.5% discount rate (Exhibit 7) and excludes the valuation of the technology, other pipeline assets, and future deal opportunities. While we recognise the value in other deals including the Janssen collaboration, we do not currently ascribe value to these due to the lack of visibility on milestone payment and structure. Specifically for the Amgen deal, our valuation is based purely on potential development milestones, with no value included from product launches. For Almirall, the majority of the value lies in milestone payments (62%), given the long time frame to potential launch of the product, with a smaller contribution from royalties on sales (38%). We have not ascribed value at this point to the unique platform and multiple candidates at an early stage in preclinical development; consequently, we see uplift potential as further deals are made and/or assets move into clinical development.

Exhibit 8 displays our milestone expectations (on a risk-adjusted and non-risk adjusted basis) for both deals through to 2020.

We include $1.9bn indicative peak sales (2031), launch in 2027, an 8% royalty rate on sales and a 10% probability of achieving NDA and approval milestones. Our deal milestone estimates are $8m on start of Phase I in 2017; $15m on start of Phase II in 2019; $37m on start Phase III in 2022; $55m on NDA filing; and $70m on approval in 2027.

Given the unknowns in the Amgen deal, in terms of timing, number of targets and specific therapeutic indications, we have made some general assumptions in our valuation, contributing SEK6.9 a share. We assume three assets move into preclinical development per annum in 2018, 2019 and 2021, precipitating an estimated ~SEK109.0m ($12.3m) in milestones each year as a result of Amgen exercising its option to take forward the individual assets. We assume that no products make it to the market; we believe this is realistic considering industry drug approval rates. However, we note that the majority of current value rests in near-term clinical achievements than would arise from any distant potential sales milestones. We assume that one product candidate makes it to a Phase III trial (20% probability), while the other two reach Phase II (30% probability) and Phase I (40% probability) trials. Revenue is inherently difficult to predict but we assume that milestones are activated upon classical development and business achievements (eg initiation of Phase I, II, III trials, NDA submission, launch, sales).

We highlight this is simply a theoretical scenario and the risk remains that zero programmes are progressed or even launched. Equally, as the Amgen deal is per target, additional candidates (above the three we have assumed) that progress into preclinical development could be a major value driver. Note that we only include milestone payments on our Amgen deal assumptions; we do not ascribe value to royalties on sales at this point as we do not know the potential indications.

Net cash at the half year results as of 31 December 2016 (accounting year end 30 June) was SEK142.9m ($16.1m); this includes the net proceeds of SEK230.1m ($25.5m) from the IPO financing round in December 2015 but excludes the upfront milestone payment (net of withholding tax) of SEK86.5m ($9.1m) from Almirall in January 2017. Net cash including the Almirall upfront is c SEK229m. Our model suggests this is sufficient to fund operations into FY19, assuming current burn rates. After that, financing needs will depend on the exact status of the internal pipeline; progressing one or more candidates into the clinical stage could require additional funding. The cash runway to FY2019 is not dependent on our expected milestone payments in the period.

We forecast that through the ongoing collaborations with Amgen and Almirall, revenues should benefit from milestone payments and we forecast total revenues of SEK139.4m in FY17 (versus SEK21.3m reported in FY16) and SEK186.0m in FY18. We forecast R&D expenditure of SEK101.8m in FY17 (SEK115.7m FY16) and SEK106.9m in FY18. We expect costs to increase modestly from FY17 to FY18 as we expect one programme to enter the preclinical stage and discovery work to ramp up.

G&A spend increased in FY15, reflecting costs incurred following the IPO; we assume a gradual increase in the coming years from the 2014 base. The Almirall upfront milestone will contribute to profitability in 2017 (SEK1.5m net income FY17e); we forecast net income of SEK36.7m in FY18, which is entirely dependent on milestones from Amgen, which may not come to fruition.