ReNeuron — Update 24 March 2016

Healthcare

ReNeuron

First patient treated in first US clinical study

RP Phase I/II trial initiated

Pharma & biotech

24 March 2016

Price	3.38p
Market cap	£107m

Net cash (£m) at 30 September 2015		72.3

Shares in issue	3,164.6m
Free float	60.5%
Code	RENE

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	22.7	17.4	0.0
Rel (local)	18.0	18.7	11.5

52-week high/low

6.38p

2.50p

Business description

ReNeuron is a UK biotech company developing allogeneic cell therapies. CTX neural stem cells are in development for ischaemic stroke disability (Phase II) and critical limb ischaemia (Phase I) and hRPC (human retinal progenitor cells) are being studied for retinitis pigmentosa (Phase I/II).

Next events

FY16 results	July 2016
CTX: Phase II stroke data	Mid-2016
CTX: start Phase II CLI study	H216

Analysts

Dr Linda Pomeroy	+44 (0)20 3077 5738
Christian Glennie	+44 (0)20 3077 5727

healthcare@edisongroup.com

Edison profile page

ReNeuron is a research client of Edison Investment Research Limited

ReNeuron has treated the first patient in its US Phase I/II clinical trial with its cell therapy candidate for the blindness-causing disease retinitis pigmentosa (RP). This is a significant step given we estimate peak sales of $445m for the programme, which could move straight into a pivotal Phase II/III study in H217, pending positive data in the Phase I/II by end-2016/early 2017. The next major valuation inflection point is now the Phase II stroke disability study data (with its CTX neural stem cells), due in mid-2016.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
03/14	0.0	(7.8)	(0.50)	0.0	N/A	N/A
03/15	0.0	(10.3)	(0.50)	0.0	N/A	N/A
03/16e	0.0	(15.2)	(0.50)	0.0	N/A	N/A
03/17e	0.0	(27.3)	(0.76)	0.0	N/A	N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

First RP patient treated

ReNeuron has announced the first patient treated in its US Phase I/II clinical trial with its stem cell product line human retinal progenitor cells (hRPC) for the treatment of RP. The study will be conducted at the Massachusetts Eye and Ear Infirmary (Boston). The trial design is an open-label, dose-escalation study to evaluate the safety, tolerability and preliminary efficacy of the hRPC stem cell therapy (administered as a single, subretinal injection) in up to 15 patients with advanced RP. The primary endpoint of the study is safety, with patients being followed up for 12 months post treatment, while changes in visual acuity will also be measured. Initial safety readouts are expected by end-2016, with efficacy data in early 2017, which if positive could lead to a pivotal Phase II/III trial starting in H217. With the potential for data readout in 2018/19, we project a launch in 2020.

A year of potential across its portfolio

ReNeuron also has a number of potential newsflow items in 2016 across its pipeline portfolio, in particular, results from the Phase II stroke study in mid-2016, with ≥2 responders in a 21-patient cohort required to pass the futility hurdle. Positive data could enable a Phase II/III trial to commence by end-2016, with potential data in H218. We also expect updates from the exosome programme, which recently received a UK grant of £2.1m and could enter the clinic in H117.

Valuation: Slight increase to £233m or 7.38p/share

Our valuation has increased, following formal initiation of the Phase I/II trial in the US in RP (probability of success increased from 15% to 20%), to £233m (from £230m) or 7.38p per share (vs 7.30p/share). ReNeuron is well-positioned, with an estimated cash balance of £63m at FY16 (31 March 2016), to execute its clinical strategy over the next 24-36 months. This could offer a number of inflection points such as data readouts from the Phase II stroke study and the Phase I/II hRPC study, and further trial initiations for CTX neural stem cells in stroke and critical limb ischaemia (CLI).

Phase I/II hRPC study underway

This is a first-in-human, open-label, dose-escalation study to evaluate the safety, tolerability and preliminary efficacy of the hRPC stem cell therapy. It will include 15 patients with advance retinitis pigmentosa (RP). Each patient, in one study eye, will undergo vitrectomy surgery and will receive a single subretinal implantation of one of three doses of hRPCs (three patients at 250,000 cells, three at 500,000 cells and nine at 1,000,000 cells). Once treated, the patients will be monitored through ophthalmic examinations and imaging for any ocular or systemic adverse events for 12 months post treatment. The primary outcome measure of safety and tolerability will be reported after six months, with the secondary outcome measure of efficacy at the end of 12 months.

This study is similar in design to an Advanced Cell Technology (Ocata Therapeutics) trial1 of subretinal injection of stem cells for retinal degeneration disorders. This study included a dose range (50,000, 100,000 and 150,000 cells) and was combined with vitrectomy surgery. Vitrectomy is not a standard procedure to restore or slow decline in vision in RP patients (it is usually indicated for patients that have media opacities or macular pathology) and therefore should not provide a significant benefit alone. Furthermore, patients with media opacities or macular pathology are excluded from the study, along with those that have already previously received vitrectomies. As such, any observation of a treatment benefit (eg improvement in visual acuity) should be directly attributable to administration of the hRPCs.

Prof Steven D Schwartz, et al (2015). Human embryonic stem cell-derived retinal pigment epithelium in patients with age-related macular degeneration and Stargardt's macular dystrophy: follow-up of two open-label phase 1/2 studies. The Lancet, Volume 385, No. 9967, p509–516, 7 February 2015.

Valuation

Our rNPV valuation has increased slightly, following the initiation of the Phase I/II trial in the US in RP, to £233m (vs £230m) or 7.38p per share (vs 7.30p/share), primarily after increasing the probability of success for the hRPC programme to 20% (vs 15% previously) and updating the $/£ exchange rate to 1.50 (vs 1.55 previously). Offsetting this is our lower estimated net cash of £63m as of 31 March 2016 (vs £71m estimated at H116 or 30 September 2015). ReNeuron’s strong cash position should allow the company to execute on an expanding clinical trial programme, resulting in a number of potential key inflection points over the next 24-36 months, including:

■

Phase II stroke data (mid-2016);

■

initiation of a pivotal Phase II/III study for CTX in stroke (H216);

■

initiation of Phase II clinical trial for CTX in CLI (H216);

■

Phase I/II hRPC data (end-2016/2017); and

■

preclinical data from the exosome nanomedicine programme, such as efficacy and toxicity.

We note our peak sales estimate for the hRPC programme of $445m, based on 20% penetration of patients with advanced to severe vision loss and a per-eye treatment cost of $50k is conservative. A transformational disease modifying treatment could be priced significantly higher.

Exhibit 1: ReNeuron valuation model and key assumptions

Product	Setting	Status	Launch	NPV (£m)	Peak sales ($m)	Probability of success	Royalty rate	rNPV (£m)	rNPV/ (p)	Key assumptions
CTX	Stroke disability	Phase II	2019	699	1,600	20%	30%	125	3.95	1.76m strokes/yr (US 800k + EU 800k + Japan 155k); 85% ischaemic; 85% survival; 50% disability; 10% peak penetration; treatment cost $50,000 (US/Japan) or $40,000 (EU).
CTX	CLI	Phase I	2022	127	670	20%	20%	20	0.64	CLI prevalence 0.25%-0.30% in 40+ yrs; 35% ineligible for revascularisation surgery; 85% survival; peak penetration 10% (US) or 5% (EU/Japan); treatment cost $20,000 (US/Japan) or $15,000 (EU).
hRPC	RP	Phase I/II-ready	2020	173	445	20%	30%	25	0.80	RP prevalence 1 in 4,000; 10% advance to severe vision loss per year; peak penetration 20% (US/Japan) or 15% (EU); per-eye treatment cost $50,000 (US/Japan) or $40,000 (EU).
Portfolio total				999				171	5.39
Cash (FY 2016e)								63	1.99	Cash estimated at 31 March 2016
Overall valuation								233	7.38	3,164m shares outstanding

Source: Edison Investment Research

Financials

ReNeuron has a strong cash position following its net £65.1m fund-raise in July 2015. As outlined in our previous note, we expect R&D expenditure to ramp up due to an increase in clinical trial activity for the stroke, CLI and hRPC programmes. We estimate an increase in R&D costs in FY16 to £11.6m and another ramp-up in FY17 to £23.2m, with two Phase II/III studies potentially underway for the CTX and hRPC programmes. Alongside the increase in R&D expenditure, there is also an increase in G&A expenses due to the recent relocation and establishment of a new research and manufacturing facility in South Wales. We estimate G&A expenses of £4.4m in FY16 and £5.1m in FY17. We expect current cash to be sufficient to last until FY19, enabling ReNeuron to deliver on a range of clinical milestones which, as outlined above, would offer multiple catalysts for the company’s value.

Exhibit 2: Financial summary

	£'000s	2013	2014	2015	2016e	2017e	2018e
Year end 31 March		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		17	22	30	26	26	26
Cost of Sales		0	0	0	0	0	0
Gross Profit		17	22	30	26	26	26
R&D expenses		(4,786)	(5,829)	(7,250)	(11,591)	(23,182)	(20,864)
G&A expenses		(2,319)	(2,824)	(3,693)	(4,433)	(5,098)	(5,608)
EBITDA		(6,966)	(7,857)	(10,269)	(15,484)	(27,627)	(25,658)
Operating Profit (before GW and except)		(7,088)	(7,969)	(10,394)	(15,554)	(27,810)	(26,002)
Intangible Amortisation		0	0	0	0	0	0
Exceptionals		0	0	0	0	0	0
Operating Profit		(7,088)	(7,969)	(10,394)	(15,554)	(27,810)	(26,002)
Other		0	0	0	0	0	0
Net Interest		29	149	91	330	472	278
Profit Before Tax (norm)		(7,059)	(7,820)	(10,303)	(15,224)	(27,338)	(25,723)
Profit Before Tax (FRS 3)		(7,059)	(7,820)	(10,303)	(15,224)	(27,338)	(25,723)
Tax		714	754	1,397	1,955	3,281	3,087
Profit After Tax (norm)		(6,345)	(7,066)	(8,906)	(13,269)	(24,058)	(22,637)
Profit After Tax (FRS 3)		(6,345)	(7,066)	(8,906)	(13,269)	(24,058)	(22,637)

Average Number of Shares Outstanding (m)		748.7	1,425.0	1,788.8	2,676.2	3,164.6	3,164.6
EPS - normalised (p)		(0.85)	(0.50)	(0.50)	(0.50)	(0.76)	(0.72)
EPS - FRS 3 (p)		(0.85)	(0.50)	(0.50)	(0.50)	(0.76)	(0.72)
Dividend per share (p)		0.0	0.0	0.0	0.0	0.0	0.0

BALANCE SHEET
Fixed Assets		1,620	1,772	2,033	2,786	3,592	4,434
Intangible Assets		1,272	1,272	1,591	1,591	1,591	1,591
Tangible Assets		213	225	161	914	1,720	2,562
Other		135	275	281	281	281	281
Current Assets		4,602	22,347	14,054	65,687	41,200	18,104
Stocks		0	0	0	0	0	0
Debtors		341	676	400	832	832	832
Cash		3,547	20,917	12,382	62,901	37,087	14,186
Other		714	754	1,272	1,955	3,281	3,087
Current Liabilities		(1,164)	(2,036)	(2,345)	(2,517)	(2,517)	(2,517)
Creditors		(539)	(1,234)	(1,150)	(1,322)	(1,322)	(1,322)
Short term borrowings		0	0	0	0	0	0
Short term leases		(1)	(1)	(1)	(1)	(1)	(1)
Other		(624)	(801)	(1,194)	(1,194)	(1,194)	(1,194)
Long Term Liabilities		(150)	(366)	(606)	(606)	(606)	(606)
Long term borrowings		0	0	0	0	0	0
Long term leases		0	(2)	(1)	(1)	(1)	(1)
Other long term liabilities		(150)	(364)	(605)	(605)	(605)	(605)
Net Assets		4,908	21,717	13,136	65,351	41,669	19,415

CASH FLOW
Operating Cash Flow		(6,637)	(6,718)	(9,124)	(15,501)	(27,252)	(25,275)
Net Interest		(1)	0	0	0	0	0
Tax		616	714	879	1,397	1,955	3,281
Capex		(37)	(121)	(380)	(824)	(988)	(1,186)
Acquisitions/disposals		0	0	0	0	0	0
Financing		5,601	23,435	0	65,116	0	0
Dividends		0	0	0	0	0	0
Other		30	61	91	330	472	278
Net Cash Flow		(428)	17,371	(8,534)	50,519	(25,813)	(22,902)
Opening net debt/(cash)		(3,974)	(3,546)	(20,914)	(12,380)	(62,899)	(37,085)
HP finance leases initiated		0	(3)	0	0	0	0
Other		0	0	0	0	(0)	(0)
Closing net debt/(cash)		(3,546)	(20,914)	(12,380)	(62,899)	(37,085)	(14,184)

ESource: ReNeuron accounts, Edison Investment Research

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