Genkyotex — Targeting obNOXious fibrosis

Genticel’s shareholders have approved the strategic combination with Genkyotex, a Swiss private company with extensive expertise in NOX science. The combined company has taken the name Genkyotex and is focused on the development of NOX inhibitors. Lead product GKT831 will start a Phase II clinical trial in PBC in Q217, with first interim data in H118. Its second product is GKT771, which is in preclinical stage and will be Phase I ready in late 2017, with a focus on inflammatory pain and angiogenesis. Furthermore, Genkyotex has a portfolio of early stage NOX inhibitors for other indications such as neurology, hearing loss and oncology. Finally, the new company is inheriting Genticel’s agreement with SIIL for the use of GTL003 in the development of vaccine candidates and is eligible for up to $57m in upfront, development and sales milestone payments ($1.7m paid so far), as well as single-digit royalties on net sales. Genkyotex retains rights for the most profitable markets of Europe and the US among other developed regions.

We have updated our rNPV valuation to include the main assets of the combined entity, including GKT831 and GTL003 in addition to estimated net cash. No value for GKT771 is assumed prior to the start of its clinical development. Our valuation is €268m or €3.5/share (based on c 78m shares in the combined entity). For GKT831, we currently only include the potential in PBC, projecting peak sales of $1.1bn and launches in 2023. We do not typically include any contribution for indications until clinical development commences, hence our GKT831 estimates do not include any potential in NASH. However, a sensitivity analysis suggests NASH could add between c €30m and €90m, excluding milestones or upfronts, depending on the commercial strategy.

We estimate Genkyotex had c €20.8m net cash at the end of Q117, which should be sufficient to fund clinical development of both lead assets over the next two years, according to our forecasts. The company expects to receive an additional €3m in tax credits. Our updated forecasts for 2017 and 2018 include our assumed underlying R&D and G&A spend for the combined entity. We forecast R&D of €7m in 2017 and €10m in 2018, and G&A of $5.5m in 2017 and $5m in 2018. We also provide a simple estimated 2016 pro forma statement based on available information to date.

We believe the main share price driver in the near term will be GKT831 interim data in PBC in H118. Positive results would justify further development in PBC and potentially support development in NASH. Conducting a full clinical programme in NASH would require significant funding. Therefore, positive data in the PBC indication is important to raise the interest of potential partners or capital markets to fund the NASH programme. In addition to that, liver fibrosis is a competitive environment, with one product on the market for PBC and several competitors in both PBC and NASH ahead of Genkyotex. Progression of GKT771 and other early stage candidates to further clinical trials could also become value drivers.

As a result of the transaction, GKT831 and GKT771, developed by Genkyotex, will enter the pipeline of the new company. The leading product is GKT831, a NOX1 and NOX4 inhibitor due to start a Phase II clinical trial in PBC in Q217. The company recently announced the US FDA had accepted the IND application for the clinical trial. Interim data could be available in H118 and full data in H218. We estimate the number of PBC patients that could be eligible for treatment with GKT831 at c 46,000 and project peak sales of $1.1bn in this indication, with launch in 2023. The PBC trial, if successful, could also support development of GKT831 in the larger liver fibrosis opportunity, which could target c 60 million people in the EU and US. GKT831 is patent protected in the US, Europe and Japan until 2029.

The study will enrol 102 patients with PBC. Patients will be administered placebo and two doses of GKT831, 400mg once a day or 400mg twice daily, during 24 weeks. The primary endpoint will be change in serum gamma-glutamyl transferase (GGT), a marker of liver injury. Secondary endpoints will explore other markers of cholestasis and liver injury,1 inflammation2 and liver fibrosis.3

Genkyotex has conducted four Phase I studies that have established the safety of GKT831. These trials investigated GKT831 in 117 healthy subjects in a single ascending dose, in multiple ascending doses as well as the food effect and drug interaction. In these studies GKT831 showed no safety issues and there were no dose-limiting toxicities.

A Phase II study in diabetic nephropathy did not meet the primary efficacy endpoint of reduction of proteinuria at 12 weeks, but results were statistically significant (p<0.05) in the pre-defined secondary endpoints of changes in liver enzymes such as GGT and markers of inflammation like high sensitivity C-reactive protein (hsCRP). Moreover, adverse events were significantly lower in the GKT831 arm vs placebo. The company concluded that the data supported further development in inflammatory and fibrotic indications.

Genkyotex plans to start a Phase I study of second candidate GKT771, a NOX 1 inhibitor, if preclinical studies are positive. The product is expected to be ready for clinical studies by the end of 2017. The company has pointed to angiogenesis, inflammation and pain as potential applications. We are not including GKT771 in our valuation, as assessing its potential in the absence of clinical data is challenging.

NADPH oxidase (nicotinamide adenine dinucleotide phosphate-oxidase, NOX) is an enzyme complex that generates reactive oxygen species (ROS) by transporting electrons through lipid membranes. It is involved in eliminating bacteria and other infectious agents. NOX comprises seven different isoforms and has a role in a number of biological pathways, as shown in Exhibit 2.

Increased NOX activity has been linked to various diseases, in particular to metabolic and cardiovascular diseases and neurodegeneration. Some isoforms are more present in certain tissues, which may lead to a particular phenotype in case of disease. Increased ROS in tissues contribute to fibrosis, hence targeting NOX has been proposed as a potential treatment for fibrosis in various organs such as the liver, lung or heart.

Fibrosis is a pathological condition in which scarring and thickening in an organ or tissue occurs in response to trauma and injury. The process is initiated when immune cells like macrophages release pro-fibrotic cytokines such as transforming growth factor-beta (TGFb) that stimulate fibroblasts. Activated fibroblasts are responsible for the deposition of collagen and extracellular matrix proteins. Although the process may be necessary for healing, in excess it may compromise the normal functioning of the organ. Fibrosis may affect various organs such as the lungs (idiopathic pulmonary fibrosis, cystic fibrosis), the liver (cirrhosis), heart (cardiac fibrosis) or the kidneys (renal fibrosis), among others.

Liver fibrosis is characterised by the accumulation of fibroblasts in response to injury. Accumulating evidence suggests a critical role of NOX in the activation process of hepatic myofibroblasts. NOX isoforms have been implicated to regulate hepatic stellate cells (HSC) activation and hepatocyte apoptosis, both of which are essential steps for initiating liver fibrosis.

Only a handful of companies that we are aware of are developing NOX inhibitors for various indications; all are in the early stages of development (see Exhibit 4). In our view, Genkyotex is the most advanced among its peers as it is the only one that has a clinical stage compound.

GKT831 has been shown to have dual NOX1 and NOX4 inhibiting effects. The half maximal inhibitory concentration (IC50) is in the three-digit nanomolar range for NOX1 and NOX4, showing it is a potent inhibitor specific to these isoforms.

To date, Genkyotex has generated 35 scientific publications showing the mechanism of action of its compounds in vitro and in vivo. Brenner D et al. (2015) reported that deletion of either NOX1 or NOX4 genes in mice attenuates induced liver fibrosis and showed that GKT831 suppressed signalling by a number of pro-fibrinogenic ligands in HSCs.

Furthermore, Genkyotex and collaborators have studied the role of NOX1 and NOX4 in liver tissue samples from patients with NASH and cirrhosis, and in and in mouse models of diet-induced NASH. They showed that NOX4 levels are increased in the NASH and cirrhosis liver samples compared with controls. Additionally, treatment with GKT831 reduced liver inflammation and fibrosis and increased insulin sensitivity in mice with diet-induced steatohepatitis.

The company has also studied the role of NOX4 and the effect of GKT831 in the bile duct ligation (BDL) model of PBC. Experiments concluded that BDL mice treated with GKT831 displayed less ROS production, decreased hepatocyte apoptosis and significantly attenuated fibrosis.

Animal data published in Science Translational Medicine showed that targeting NOX4 with GKT831 in an aging model of lung fibrosis led to a reversal of persistent fibrosis associated with aging and prolonged survival.

Unlike most competitors, which focus on metabolic and cholestatic pathways, Genkyotex’s GKT831 focuses on fibrosis and inflammation, as shown in Exhibit 5.

Hence, the positioning of GKT831 in the NASH and PBC competitive landscape is unique as it is the only product that targets the NOX pathway with anti-fibrotic and anti-inflammatory effects.

Genkyotex plans to initiate a Phase II trial in PBC, formerly known as primary biliary cirrhosis. PBC is a rare autoimmune liver disease in which antibodies target and destroy biliary ducts causing leakage of bile fluids to the liver parenchyma, which eventually leads to fibrosis, cirrhosis and liver failure, which may cause death if left untreated. Most patients are middle-aged women and prevalence has been estimated at up to 40 cases per 100,000 people.

We estimate that GKT831 could achieve peak sales of $1.1bn. Based on epidemiology data, we calculate that there could be up to 46,000 patients in the US and EU diagnosed with PBC and not responding to UDCA in the US and EU-5, which would represent a c $3bn opportunity, based on Intercept’s Ocaliva US list price of $70,000. Allowing time to complete Phase III trials and regulatory reviews, we forecast initial launches for GKT831 in the US and EU from 2023. Our peak sales estimate of $1.1bn, which is based on a two-year duration of treatment and a 20% market penetration, assumes that GKT831 is able to demonstrate safety and/or efficacy benefits over Ocaliva. The company says this could be possible owing to its different mechanistic profile, which targets fibrosis/inflammation vs Intercept and Genfit’s metabolic approach. However, if this benefit is not proved, we would assume duration of treatment (and hence sales revenues) more in line with Ocaliva. The consensus sales estimate for Ocaliva is $505m in 2022 (EvaluatePharma), when the patent expires.

Non-alcoholic fatty liver disease (NAFLD) is the most common form of liver disease in the Western world. NAFLD represents a spectrum ranging from bland steatosis to NASH and is closely associated with obesity and metabolic syndrome. Research has recently been increasing in this area due to the growing prevalence of NAFLD and the potential for NASH to progress to cirrhosis and liver-related mortality. NASH is becoming more prevalent with the increasing occurrence of obesity, diabetes mellitus and other components of metabolic syndrome. NASH is characterised as the hepatic manifestation of metabolic syndrome because as many as 90% of NAFLD cases have at least one component of metabolic syndrome and as many as 33% have three or more components; see Exhibit 8 for details. The development of NAFLD/NASH is associated with the diabetic pathophysiological process. NAFLD is believed to affect 80-100% of diabetic patients and progresses to NASH in 20-50% of cases. Mortality due to liver disease is thus two to three times higher in the diabetic population than in the overall population.

We estimate that around 60 million people could be affected by NASH in the EU and US based on epidemiology data; hence, this represents a significant opportunity and we believe a product that is successfully developed could achieve blockbuster sales. Moreover, recent deals have reached overall values of up to $1.7bn (see Exhibit 9), which is indicative of the interest of pharmaceutical companies in this field. We typically do not include prospective indications within our valuation estimates until formal clinical plans are outlined and started. Hence, at this stage we are not including NASH in our valuation until the company outlines more definitive plans for this indication.

As increased NOX activity is involved in a number of pathways in different tissues, Genkyotex is pursuing research programmes to develop additional NOX inhibitors with applications in neurology, hearing loss and oncology. We are not including these projects in our model until clinical data are generated.

The new company is inheriting the collaboration agreement between Genticel and SIIL. SIIL sells more than 1.3 billion doses annually and is the largest vaccine producer in the world. SIIL manufactures the single shot DTaP vaccine, which protects against diphtheria, tetanus and pertussis (whooping cough). According to Genkyotex, around two-thirds of children immunised globally are vaccinated with a product manufactured by the Serum Institute.

Around 86% of children aged 12-23 months receive the DTP vaccine worldwide. Moreover, Bordetella pertussis antigens are included in multiple complex vaccination schedules such as hepatitis B (HB), polio (IPV) and influenza B (Hib).

The partnership involves the licence of Genkyotex’s Vaxiclase used as an antigen (GTL003) to SIIL for its use in the development of acellular multivalent combination vaccines that include pertussis antigens. The licence covers all countries of the world except the US, Europe, Canada, New Zealand, Australia, Japan, Israel and Turkey. Genticel/Genkyotex is eligible for up to $57m in upfront, development and sales milestone payments, as well as single-digit royalties on net sales. To date, Genkyotex has received nearly $1.7m from SIIL. At present, SIIL is in the process of finishing formal preclinical testing before starting clinical trials. If they are able to strike a deal on similar terms for the more profitable western markets, the potential milestones could provide significant upside.

The transaction between Genticel and Genkyotex was approved by Genticel’s shareholders at their general meeting on 28 February 2017. As described in regulatory filings (Traite d’Apport and Document E), it is an all-share transaction in which Genticel will issue 62.3m shares to Genkyotex shareholders. They will receive 11.8355 new shares of Genticel for each contributed share of Genkyotex and hold 80% of the share capital and voting rights of Genticel, non-diluted.

Genkyotex reported €21.8m gross cash at end March 2017, which we forecast should be enough to fund clinical development over the next two years.

Genkyotex is subject to the usual drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, financing and commercial risks. The main sensitivity in the near term relates to GKT831, in particular the successful completion and results from the PBC Phase II study. As PBC is considered the proof of concept in liver fibrosis that could open the NASH opportunity, the investment case in the long term would be affected by a clinical setback in PBC.

Regulatory approval and competitive dynamics will be key for the commercial success of GKT831. Several competitors in PBC exist and while some of them will fail due to the inherent attrition rates associated with clinical development, GKT831 will not have a first to market advantage. A differentiated safety and efficacy profile will be key to garner market share.

Genkyotex is exploring the potential of GKT771 other NOX inhibitors in additional indications. At this stage, data from these studies are unlikely to be a major share price driver. However, as progress is made with these assets, they could gain more visibility and become more critical to the investment case.

Our valuation of Genticel was previously placed under review pending the in-licensing of assets as part of the strategic review that was initiated in Q316. This review has led to the strategic combination of Genticel and Genkyotex, with the combined entity called Genkyotex.

Edison’s updated valuation for the new entity is based on GKT831 in the PBC indication and the SIIL deal, leaving all other product development opportunities and additional indications as upside. Taking conservative market share and pricing assumptions and using our standard 12.5% discount rate produces a risk-adjusted NPV of €268m or €3.5 per share, with 77.85m shares post-transaction. For the SIIL deal, we include the present value of the milestones according to our own assumptions on the likelihood and timing of receipt. At this stage we are not including royalties on sales of the product/s, which are undisclosed and it is therefore challenging to estimate future potential sales. A potential deal in western countries remains upside.

Our assumptions for this programme are:

Although at this stage we do not include the NASH opportunity within our valuation (as we generally do not include programmes until more formal development plans are in place), we have also examined the valuation potential if this indication is pursued in the future. We provide two scenarios: (1) the company conducts the programme itself; or (2) the company partners it with another company post Phase II data. For both scenarios we project launch in 2024 and a 10% probability of success. Given the size of the patient population, we believe that $2bn peak sales are achievable even if there are other competitors in this field. We consider two potential scenarios for NASH:

We will update our assumptions and valuation when there is guidance from the company on the path forward in NASH. We note that deals in the liver fibrosis area are indicative of the interest of large pharmaceutical companies in the anti-fibrotic approach. In particular, Tobira was acquired by Allergan for a c $595m upfront payment and an additional $1.1bn in potential milestone payments in September 2016, after Tobira announced its drug candidate had met the secondary endpoint of improving liver fibrosis without worsening NASH.

We have updated our financial forecasts (which were previously under review) following the strategic combination to form Genkyotex. To date, pro forma statements are available to end June 2016 (see Document E and Exhibits 12 and 13). We have provided a simple pro forma 2016 estimate (shown in Exhibit 14) based on available information; we expect the full pro forma 2016 accounts to become available around mid-2017 (and we will update our numbers accordingly). Our 2016 pro forma estimate includes: (i) reported Genticel FY16 financial results; (ii) H116 Genkyotex financial results, which we have extrapolated to arrive at estimated FY16 Genkyotex (pre-combination) financial results; and (iii) H116 transaction-related adjustments, which we have kept constant.

The main elements to consider for our 2017 and 2018 forecasts were operating expenses, as these will likely be the most significant financial components. Pro forma G&A spend for H116, excluding transaction-related adjustments, was €2.5m. Hence, we anticipate underlying G&A spend in 2017 and 2018, of around €5-6m per year (excluding any transaction-related costs).

In 2017 and 2018, we expect Genkyotex to fund the Phase II GKT831 PBC trial, which is expected to yield top-line data in 2018. We believe this trial, in around 90 patients, could cost around €10-12m over this timeframe. We also include R&D spend on the Phase I GKT771 trial, and R&D spend on earlier-stage programmes. We forecast R&D of €7m in 2017 and €10m in 2018.

Genkyotex reported gross cash of €21.8m at end of Q117. We estimate this should be sufficient to fund operations for around two years, including near-term milestones, namely clinical trials initiation and readout as well as R&D activities. Our estimated net cash of €20.8m at the end of Q117 includes c €0.9m Genticel debt from OSEO grants (French public funding) related to HPV research projects and a global industrial collaboration (Magenta). These grants are interest-free and repayable according to a schedule that goes into 2023. Additionally, Genkyotex expects to receive an additional €3m in tax credits.