Pixium Vision — Update 19 October 2016

Pixium entered an agreement to issue up to €11m in bonds bearing 11.5% interest to Kreos Capital, with attached warrants for up to 207,817 new shares at a per share subscription price of €5.2931. The funding should support the ongoing 10-patient European clinical trial of the Iris II epi-retinal implant in patients with retinitis pigmentosa (RP) and the firm’s planned human study on its Prima sub-retinal implant in patients with age-related macular degeneration (ARMD). The financing is composed of two €4m tranches and an optional €3m tranche. Each tranche is to be repaid in 33 monthly payments. Given that Pixium had H116 net cash of €16.1m and our projected operating 2016 and 2017 cash burn rates of €15.1m and €15.2m (down from €25.2m previously), respectively, we expect the facility, if fully drawn, should support operations into H118.

The firm recently received approval from the Spanish Ministry of Health to enrol patients as part of the company’s ongoing 10-patient clinical trial with the Iris II implant in patients with retinitis pigmentosa (RP). Barcelona’s Institute of Ocular Microsurgery has joined other European Iris II study sites, including centres in France, Austria, Germany, and the UK (including Moorfields Eye Hospital). The company has implanted four patients thus far and is confident that it will complete recruitment before YE16. The study started in January 2016 and will assess the effectiveness of the device for at least 18 months. Interim data from the trial should further assist reimbursement applications in EU territories.

In parallel, the company is working with public reimbursement authorities, initially in France and Germany, to have preliminary or “conditional” Iris II reimbursement prior to the completion of the ongoing study. Under such a scenario, Pixium envisions that it can potentially obtain funding for a predetermined number of Iris II implantations, under the assumption that efficacy data will be collected from these treated patients, to support a more permanent form of state funding for the Iris II. Management believes it may receive decisions on potential conditional Iris II reimbursement from these territories in H117. We assume that such preliminary reimbursement will be achieved, as this drives our (unchanged) 2017 Iris II sales forecast of €2.5m.

Animal model thermal1 and electrical safety studies were recently completed and, according to management, successfully showed that the system meets the safety thresholds for thermal and electrical safety requirements for the eye. After completing these and other studies, the firm believes it has successfully completed all the required steps needed before first in-human testing for ARMD patients in Europe. It is also seeking to have the study investigators publish the Prima animal thermal and electrical safety data in a research paper or scientific seminar.

Pixium has submitted a proposed study protocol for a five-patient feasibility study in ARMD patients with French regulatory authorities. It hopes to have the first implantation competed by YE16 and potentially complete the feasibility trial by mid-2017. The firm could potentially start a registration-enabling, multi-centre pivotal EU Prima study for ARMD in H217.

As it relates to the US Prima opportunity, the company is scheduling discussions with the FDA for possible clinical trial design and parameters. Under an ideal scenario, it could potentially bridge or combine US recruitment sites with EU sites participating in the pivotal EU study, and subsequently, the US premarket approval (PMA) registration file could include data from both EU and US participating patients. The firm expects to have further clarity on the US regulator’s view on the potential design for the registration pathway for Prima in the US in or around H117.

In terms of study size, we note that the Second Sight’s Argus II device intended for RP or severely-vision impaired patients required 30 implantations and follow-up to obtain US Humanitarian Device Exemption (HDE) level approval. The Prima device would be targeting the much larger late-stage ARMD market (the prevalence of late-stage ARMD is up to 10x higher than RP), and we estimate that US regulators would likely require a study to provide detailed follow-up and monitoring for up to 18-24 months on approximately 60-80 patients for approval.

As Pixium has increased confidence (based on successful preclinical development) of Prima’s potential, and as this device has several advantages compared to Iris II (potentially improved vision resolution or clarity, while using a simpler and less invasive surgical technique better suited to the typically older ARMD patient), the firm is re-examining its strategy for the timing of Iris II development in the US. The company reserved the right to proceed with a US PMA study for Iris II in RP, but given the resource requirements and the fact that Prima appears to be progressing well in the ARMD indication, the firm appears to be dedicating its US development strategy and resources first to Prima, for the ARMD indication. Hence, the company may delay running a US PMA study for Iris II in RP, which differs from our previous forecasts (which had assumed that such a study would start in 2017). Instead, the company could potentially start US recruitment for a PMA-enabling Prima study in H217 or H118.

With the company no longer planning a US Iris II study in 2017, our R&D expenditure forecasts for 2017 and 2018 have decreased. Whereas we previously budgeted €20m in 2017 and €22m in 2018 R&D spending, which assumed pivotal clinical trials for both Iris II (in the US only) and Prima, we now assume R&D spending of only €12m in 2017 and €15m in 2018. The large majority of projected 2017 and 2018 R&D costs are expected to be allocated to the Prima programme, with a much smaller proportion to the ongoing European post-CE Mark Iris II study.

In terms of timelines, even in the event that the US and EU Prima clinical sites can be combined towards a “global” registration study, we continue to expect that CE Mark clearance (and EU approval and launch) would still occur 18-24 months earlier than US PMA approval and launch, given we expect that European regulators could allow approval of the device following interim (six- to 12-month) safety and performance data on a smaller number of implanted patients, than would be required for the US counterparts (ie full 18-24 month follow-up data, including efficacy, on the full study cohort). Hence, we continue to model potential EU Prima launch in 2019 and US Prima launch in 2021.

Our model now excludes US Iris II sales, but our European Iris II and our global (US and EU) Prima sales forecasts are unchanged.

We have made certain adjustments to our valuation approach for Pixium. We have removed the US contribution to Iris II sales and in doing so, we have increased our Iris II probability of success estimate from 55% to 70%, given that the Iris II regulatory risk embedded in our discount was attributed to US regulatory risk. This factor has now been removed (no longer applicable), given that Iris II already has CE Mark clearance and is approved for sale in Europe. Remaining Iris II risk-adjustment factors include commercialisation risks (market acceptance, reimbursement).

For Prima, as the company indicates that it has successfully completed preclinical thermal and electrical safety studies and expects clearance to commence human feasibility studies shortly, we have increased our probability of success estimate to 12.5% (from 10%, previously). We anticipate that a formal announcement from regulators permitting the commencement of Prima human studies could trigger another upward adjustment to our Prima probability of success estimate.

Given the above changes and after rolling forward our forecasts we now obtain a pipeline rNPV (enterprise value) of €125.5m, down from €132.3m previously. After including €12.2m estimated Q316 net cash, we obtain an equity valuation of €137.7m, or €10.78 per share (down from €11.62, previously).

Pixium’s H116 net cash position was €16.1m (€16.2m gross cash minus €0.2m in short-term advances), and given its H116 operating cash burn rate of €8.1m, we estimate Q316 net cash of approximately €12.2m. We have increased our interest expense forecasts given the higher than anticipated cost of debt associated with the announced financing. Given the reduction in our R&D cost forecasts, we now assume a lower cash burn rate in 2017 and 2018 than previously. We now assume a 2017 and 2018 operating cash burn rate (excluding net interest) of €15.2m and €13.3m, respectively, compared to our prior estimates of €25.2m and €22.3m, respectively.

Beyond the announced €11m financing (which we estimate will be fully drawn by mid-2017), we assume Pixium will raise an additional €25m in 2017 and €20m in 2018. For illustrative purposes only, we have added these requirements to long-term debt. Note that our financial and valuation models do not include the potential dilutive impacts of future equity offerings. We do not expect Pixium to start generating sustainable positive recurring operating cash flows until H219, at which point we forecast Prima will start generating meaningful sales for the company (in addition to Iris II).