Nicox — Revising NCX-470 timelines given Denali delay

Nicox reported H122 financial results, with net revenues in line with trends reported at the company’s Q222 business update in July 2022, when it had reported Q222 net royalty revenue1 of €0.7m. Gross H122 revenue, which is predominantly derived from Vyzulta sales royalties received from Bausch + Lomb (B+L)2 and is before the consideration of royalties paid to Pfizer, was €2.3m (+13.7% y-o-y). After offsetting payments to Pfizer (€0.89m, up 23.7% y-o-y), Nicox reported H122 net revenue of €1.43m (+8% y-o-y). As mentioned previously, Vyzulta US prescriptions continue to increase robustly, up 35% y-o-y in Q222 (vs a 21% y-o-y increase in Q221). We believe that pricing issues in reimbursement are continuing to drive a discrepancy between Nicox’s reported royalties and the Vyzulta prescriptions growth rate, but these should likely flatten out in coming quarters.

Gross H122 R&D costs were €7.8m (vs €10m in H121 and our €7.5m estimate), with the decrease due to the completion in H221 of the Mississippi Phase IIb study for NCX-4251, resulting in lower clinical trial spending versus the prior-year period (the Mont Blanc and Denali NCX-470 trials were ongoing in both years). G&A costs (inclusive of stock-based compensation) were €3.7m in H122 (vs €3.3m in H121 and our €3.4m estimate). Altogether, operating costs (including R&D tax credits and excluding depreciation and amortisation) were €11.2m in H122 (vs €12.9m in H121 and our €10.5m estimate).

Nicox incurred a one-time €10.5m impairment charge in H122 relating to its decision to seek a partner to pursue the development of NCX-4251 in the United States and no longer pursue clinical trials internally on the product (discussed further below). The company also reported a non-recurring €1.2m severance payment relating to the change in CEO. Altogether, Nicox reported an H122 operating cash burn rate of €10.3m (vs €10.3m in H121 and our estimate of €9.8m).

One of the key announcements from the H122 results, in our view, is Nicox pushing back its expected timeline for the release of primary efficacy data from the Denali study (the company’s second Phase III trial for lead candidate NCX-470 for the treatment of glaucoma). Nicox now expects to report top-line results for Denali after 2024, based on current recruitment rates, whereas in April 2022 it had communicated that Denali study results would not be available by the end of 2023 as it had previously communicated as recently as January 2022. The company cites lockdowns in China and the COVID-19 pandemic as primary reasons for the study’s delays, as well as ‘longer-term effects on the wider glaucoma clinical trial environment.’ As a reminder, approximately 20% of the c 370 planned patients for the Denali study are to be recruited from sites in China (with the remainder coming from the United States). The Denali trial is being equally funded by Nicox and Ocumension (Nicox’s commercial partner for the Chinese market) and, like the Mont Blanc study, is evaluating NCX-470 ophthalmic solution (0.1%) versus latanoprost (0.005%). The Denali and Mont Blanc trials are designed collectively to fulfil the regulatory requirements to support New Drug Application (NDA) filings in the United States and China.

The contrast between recruitment patterns in Denali and Mont Blanc trials is noteworthy, given that in June 2022 Nicox pushed forward its expected timeline for the reporting of primary efficacy data for Mont Blanc to November 2022 (from Q123 previously). The two study designs are very similar (and both have a planned enrolment of c 670 patients) with the primary difference that Denali has a more substantial contingent of clinical trial sites in China, which we believe was designed to satisfy Chinese regulators. The Denali study also includes a long-term (12-month) safety extension. In our view, the Denali study is the limiting factor affecting the timing of the potential filing of an NDA for NCX-470 (assuming positive clinical study data from Mont Blanc). However, with the delays (>12 months) to the projected reporting of Denali data compared to guidance from earlier in 2022, and with further delays beyond 2025 not ruled out, one may speculate that the company may wish to consider pursuing a new US-focused confirmatory Phase III study to accelerate the generation of data to satisfy US NDA requirements. Given the company’s updated Denali guidance, we are pushing back our timing estimate for the potential NCX-470 launch in the United States to 2027 (from H226 previously). As a reminder, before the first reported Denali delay in April 2022, we had anticipated that NCX-470 could have been launched in H225 in the United States, and had calculated an rNPV for NCX-470 across all geographies of €217m (compared to our revised NCX-470 rNPV, as discussed below, of €183m). Hence, the Denali delays are affecting the discounted (present-value) of the commercial revenue opportunity for NCX-470, in our view.

We continue to have a very constructive stance on NCX-470 given the positive Dolomites Phase II study data as discussed in our Outlook report, and are encouraged that Mont Blanc top-line data is expected imminently. In the 433-patient US multicentre 28-day Dolomites trial, the highest tested NCX-470 concentration (0.065%) demonstrated statistical superiority in IOP lowering to the latanoprost arm at day 28, delivering up to 1.4mmHg of additional lowering of IOP at this time point (p<0.025). The Phase III NCX-470 trials are testing a higher 0.1% drug concentration, which may provide further IOP reduction. Nicox recently announced that 691 patients have been enrolled in Mont Blanc, the last patients in the trial completed their final study visits, and it expects to report top-line data in early November. We anticipate that positive Mont Blanc top-line study data, demonstrating superior IOP lowering efficacy to latanoprost, would materially de-risk future NCX-470 development and likely drive a re-rating of the stock. Further, positive Mont Blanc data could provide optionality as it may open the door for NCX-470 out-licensing transactions (eg for North America, Japan or Europe) or other strategic deals or initiatives. We highlight that in August 2022, Alcon announced it was purchasing Aerie Pharmaceuticals for $770m in equity value, a 37% premium to Aerie’s last closing price. Aerie’s leading commercial-stage products, and in our view, likely the primary drivers for the transaction, are its two FDA-approved glaucoma drugs based on its Rho-kinase inhibitor molecule, netarsudil. These are Rocklatan (a combination of netarsudil and latanoprost) and Rhopressa (netarsudil standalone) and are described in more detail in our outlook report. Aerie had guided for its total glaucoma franchise net product revenue to be $130–140m for FY22.

As stated above, Nicox has decided to cease further internal clinical development for NCX-4251 and will seek to partner the product for the US and other ex-China markets (Ocumension holds rights to the product in China, Macau, Hong Kong and Taiwan). As discussed in our Outlook report, NCX-4251, a proprietary ophthalmic suspension of fluticasone propionate nanocrystals, was previously investigated for acute blepharitis, and repositioned for development in DED after a post-hoc analysis of the Mississippi Phase IIb trial showed an improvement in dry eye symptoms and subsequent positive discussions with the FDA in Q122. This decision should reduce the company’s future capital needs, as we had previously modelled that Nicox would spend c €28m in NCX-4251 related R&D costs between 2023 and year-end 2026. Nonetheless, seeking a US partner at this stage (Phase II) likely limits the potential upside of commercial NCX-4251 revenue and explains the company’s asset impairment charge, and leads to a reduction in our NCX-4251 rNPV (as discussed below). We have now removed future NCX-4251 R&D costs from our model, and assume that Nicox will obtain a drug development partner for advancing NCX-4251 in DED for the United States, Europe and other ex-China markets by the end of 2023. We expect the next Phase II study in DED to begin in 2024, funded by the partner, with a Phase III programme to follow in 2025, and for commercial approval and launch to occur in 2028 (from H227 previously). We assume that Nicox will be entitled to 20% net royalties on commercial sales. Our underlying assumptions for the DED market are unchanged (please see our Outlook report for further details). Over 30 million people in the United States have DED and over 75% experience short-term exacerbations (which we model at an average of four events per year). While we consider a sizeable portion of DED patients will not seek medical care for every acute DED episode, we estimate the addressable market to be c 24m potential acute DED episodes per year in the United States. Assuming a gross price at launch of $320 per bottle or treatment course (a c 10% discount to Eysuvis), we model peak US sales of c $420m in the US market in 2032, resulting in c $84m in net NCX-4251 US royalties to Nicox in that year.

Nicox reported cash and equivalents of €31.6m and non-current financial assets of €0.16m at 30 June, offset by outstanding debt of €20.2m, excluding €1.3m in lease liabilities. We calculate H122 net cash of €11.6m and, as stated above, the H122 operating cash burn was €10.3m. The company continues to expect that its funds on hand should be sufficient to maintain operations into Q423, based on the development of NCX-470 alone.

Following the company’s results and the change in the NCX-4251 development strategy, we have reduced our R&D forecasts for FY23 and beyond, to reflect the removal of NCX-4251 R&D spending from our forecasts. We have also reduced our FY24 G&A cost estimate by €6.6m as we no longer expect significant NCX-470 related marketing expenditures by Nicox in that year (since we have pushed out our NCX-470 launch timing to 2027). We have also updated our forex assumptions to €/$ parity, and have not revised our local-currency assumptions for Vyzulta and Zerviate royalties, resulting in a mild increase in our euro-denominated revenue forecasts.

We now assume an FY22 operating cash burn rate of €20.0m, up from €18.8m previously, largely reflecting the higher than expected operating expenditure rate in H122 versus our prior estimates. The changes described above lead to reductions in our operating cash burn estimates for subsequent years. We now expect net operating cash burn rates for FY23e and FY24e, of €16.7m and €21.7m, respectively, versus our prior estimates of €19.7m and €33.7m, respectively.

Given our new forecasts, we now expect the company will require €85m in added funding before the anticipated launch of NCX-470 (which we now expect in 2027), down from €104m previously. Our projections do not include any potential proceeds from the exercise of options or warrants, which if exercised would lower our funding forecasts accordingly.

Our Nicox valuation applies a risk-adjusted NPV model with a 12.5% cost of capital. We have rolled forward our estimates and adjusted our forex assumptions to €/$ parity (vs $1.05/€ previously). Compared to our prior valuation, our rNPV for NCX-470 in the US market has decreased (from €146.0m to €132.0m) due to pushing back our expectation for launch into 2027 (from H226 previously) given the added delay in the Denali trial. We have also reduced the rNPV of the NCX-4251 programme to €37.5m (from €95.1m previously), to consider a NCX-4251 partnership/out-licensing arrangement compared to our prior assumption that the company would have commercialised the product internally and would have retained a higher share of the product’s commercial sales and operating income.

We now obtain an rNPV valuation for Nicox of €224.0m (versus €297.8m previously). After updating for H122e net cash of €11.6m, we obtain an equity value of €235.6m, or €5.45 per basic share (down from €7.23 previously). After considering the potential dilutive effect of options and warrants and their effects on net cash, our fully diluted valuation would be €5.17 (down from €6.75 previously) per fully diluted share.