Redx Pharma: delivering on our expectations

Redx Pharma’s H122 results confirm progress is being achieved as we expect. The company is increasingly recognised as a creator of innovative and highly differentiated small molecule drug candidates, with the recent IND clearance of Jazz Pharmaceuticals’ JZP815 being the latest example. The business model is underpinned by the strength of its medicinal chemistry, where Redx has proven its ability to solve complex targeting issues with five compounds now set to be in the clinic. The experienced management is executing a clear strategy. Risks are actively managed through selective partnering, with attractive deals that retain material financial upside if successful. May’s impressive £34.3m equity raise has removed financial uncertainty and allows the completion of Phase II clinical studies for RXC004 and RXC007. It is these programmes that we expect to deliver value-inflection catalysts over the coming 12-18 months. Updating our rNPV model sees our valuation increased to £458m ($595m) or 138p/share.

We explored Redx Pharma’s investment case in our extensive February 2022 Outlook, where we covered the key in-house programmes and the progress with partnered projects. This included the relevance of the Wnt pathways in selected oncology indications and the format of the RXC004 Phase II proof-of-concept clinical trials, as well as the role of ROCK2 inhibition in various fibrosis indications and how the forthcoming RXC007 Phase II trials should provide valuable insights into its eventual clinical positioning. The Outlook note also explains how Redx is differentiated from its peers, the rationale underpinning the strategy pursued, and the importance of managing development risks (hence the partnered programmes). In this Update note we cover the progress made, near-term news flow and expected development and financial milestones, and, importantly, the financial flexibility and runway resulting from the impressive recent fund raise.

Exhibit 1: Redx Pharma pipeline

Source: Redx Pharma   Note: DDR = discoidin domain receptor; GI = gastrointestinal; IND = investigational new drug application; IPF = idiopathic pulmonary fibrosis; MAPK = mitogen-activated protein kinase; MSS mCRC = microsatellite stable metastatic colorectal cancer; RAF = rapidly accelerated fibrosarcoma; ROCK = Rho associated protein kinase

As context, the recent IND clearance of Jazz Pharmaceuticals’ partnered pan-RAF programme, JZP815, means this will be the fifth clinical stage asset discovered by Redx. This impressive track record is tangible evidence of the quality of the discovery platform, which is underpinned by strong medicinal chemistry expertise. The aim is to create either best-in-class or first-in-class small molecules addressing clear, and commercially significant, medical needs. The pipeline is well-balanced, with two clinical in-house programmes and three partnered late preclinical/early clinical assets (outlicenced to AstraZeneca and Jazz Pharmaceuticals). In-house development is focussed on highly selective small molecules, directed at known and scientifically validated pathways, for the treatment of genetically defined tumours and poorly treated fibrotic diseases.

Continued delivery across Redx’s three investment pillars (RXC004, RXC007, and the discovery engine) mean that there are significant catalysts over 2022 and 2023 (Exhibit 2). While COVID-19 restrictions remain a sensitivity with respect to timings (impacts on patient recruitment into clinical trials is a known industry-wide consequence), we anticipate Redx Pharma will make significant strategic progress.

Exhibit 2: Multiple – fully funded – potential milestones over the next 18 months

Source: Redx Pharma

RXC004: Phase II proof-of-concept trials underway

RXC004, a highly selective and potent small molecule targeting the porcupine (Porcn) enzyme on the Wnt (Wingless type) signalling pathways, is under evaluation as a monotherapy and in combination with checkpoint inhibitors (CPIs) in various solid tumours. Preclinical studies have shown RXC004 has a promising direct anti-tumour activity in cancer lines with upstream mutations in this pathway, eg RNF43. Additionally, RXC004 enhances the immune response in the tumour micro-environment and hence has a possible dual mechanism of action.

RXC004 has completed a Phase I programme, which consisted of three modules in an all-comers population each evaluating a different setting. First Phase I results presented at ESMO 2021, detailed in our September 2021 Update, confirmed that RXC004 has a useful therapeutic window and is safe and well tolerated at the selected Phase II dose. Treatment associated adverse events were dose-related and in line with the expected profile for Porcupine inhibition. Additionally, there were early efficacy indications in genetically selected Wnt ligand driven tumours.

The Phase II programme similarly explores both monotherapy and a CPI combination with two multi-arm trials: PORCUPINE for genetically selected MSS mCRC (microsatellite stable metastatic colorectal cancer) includes a RXC004 monotherapy arm and a combination arm with anti-PD1 agent nivolumab (Opdivo, Bristol Myers Squibb); and PORCUPINE2 which also explores monotherapy and combination with two indications, one in genetically selected metastatic pancreatic cancer and the second in unselected biliary cancer.

The design of PORCUPINE was presented at ASCO 2022 (American Society of Clinical Oncology). Patient enrolment in the PORCUPINE monotherapy arm initiated in November 2021, with the combination arm expected to start in H222 (once the relevant Phase I dose escalation results are available). PORCUPINE2 initiated patient enrolment in the monotherapy arm in January 2022, with the combination arm similarly awaiting the identification of the optimal dose. The first topline data readouts from both of these programmes are expected in H123.

RXC007: Completing Phase I studies in H122

RXC007 is a novel and highly specific small molecule that selectively targets the ROCK2 (Rho Associated Coiled-Coil Containing Protein Kinase 2) receptor. ROCK is a biologically validated target that sits at a nodal point in a cell signalling pathway, where it modulates inflammatory response and fibrotic processes. The two kinase forms, ROCK1 and ROCK2, have similar functions (especially in fibrosis), but the simultaneous targeting of both appears to be associated with cardiovascular effects (notably hypotension).

We view RXC007 as a particularly promising asset. Preclinical data have shown good ADME profiles and robust anti-fibrotic effects, with strong data in fibrosis disease models such as idiopathic pulmonary fibrosis (IPF), non-alcoholic steatohepatitis (NASH), and diabetic nephropathy (DN). The preclinical profile suggests RXC007 has the prospect of being disease modifying.

A Phase I study in healthy volunteers started in June 2021, with results showing excellent safety and pharmacokinetic profiles presented at the Interstitial Lung Disease (ILD) Summit in March 2022. These encouraging data clear the path for a staged Phase II trial programme to begin during 2022.

Exhibit 3: Phase IIa study design

Source: Redx Pharma  Note: DLCO =  carbon monoxide diffusion coefficient; FVC = forced vital capacity; HRCT = high resolution computerized tomography; Pbo = placebo

The first Phase IIa study will be of 12 weeks duration and will assess early efficacy signals, safety, and tolerability in IPF, a progressive lung condition with a poor prognosis despite two approved drugs. The insights, especially around the suitability of biomarkers and target engagement, will guide design of the larger 12-month Phase IIb trial. If successful here, we would expect RXC007 to be explored in other fibrotic indications.

Partnered programmes progressing equally well

Redx has two partnerships, with AstraZeneca (AZD5055 for fibrosis) and Jazz Pharmaceuticals (for pan-RAF inhibitor JZP815 and a separate collaboration targeting the MAPK pathway). These partners contributed $19m ($10m and $9m respectively) in milestones during financial H122, with a further $5m triggered post-period, when JZP815 received IND clearance from the FDA in June 2022. JZP815 is a precision pan-RAF inhibitor being developed for RAS and RAF mutant tumours that was designed to overcome resistance mechanisms to currently approved B-RAF selective drugs.

The first milestone of $10m (£7.4m) milestone was triggered in December 2021 when Jazz progressed the collaboration focussed on the MAPK pathway into its second year. Post-period, Jazz confirmed plans to progress one candidate towards an IND application, but the second target has been discontinued due to pipeline prioritisation at Jazz.

A $9m (£6.6m) milestone was also triggered in December 2021 on the entry of AstraZeneca’s AZN5055 into Phase I clinical trials. AZN5055, previously known as RXC006, is a potent small molecule inhibitor of the Porcupine receptor in development for fibrosis indications. AZN5055 was outlicenced as a preclinical asset, on attractive terms, as a strategic move to lessen Redx’s exposure to the Porcupine class.

Discovery efforts still moving at pace

Management aims to have three further wholly owned IND-stage assets for progression into clinical development by 2025. The research focus remains on the attractive pathways that impact selected oncology and fibrosis indications. In March 2022 RXC008 was nominated as the development candidate in its novel GI-targeted ROCK programme. RXC008 is a pan-ROCK inhibitor designed to only work locally in the gut wall and, as it is quickly degraded by metabolic enzymes, to have a short half-life once absorbed. The aim is to avoid the systemic side-effects, notably cardiovascular, that are associated with simultaneous inhibition of ROCK1 and ROCK2 yet still retain the impressive efficacy seen in preclinical models. RXC008’s profile is highly differentiated, and it has the potential to be a first-in-class therapy for a debilitating condition: fibrostenotic Crohn’s disease.

In January 2022 management announced it is working on a novel DDR (discoidin domain receptor) inhibitor programme which has entered lead optimisation. The role of DDRs, notably in oncology and fibrosis, and the reasons for industry interest in their selective inhibition was also discussed in our February 2022 Outlook. Redx has developed a number of potent and selective DDR inhibitors with preclinical studies ongoing. These are initially being explored in models of fibrotic disease and offer the potential of disease modifying activities.

Valuation

We update our rNPV-based valuation following H122 results, reflecting also the progress achieved across the in-house and partnered pipeline (including milestone receipts) and, more materially, the impact of May’s equity raise. Our valuation is now £458m ($596m), equivalent to 138p per share vs £434m ($565m) or 157.5p per share previously. Exhibit 4 summarises the outputs and underlying assumptions of our valuation model. A detailed overview of our methodology is provided in our September 2020 Initiation.

Exhibit 4: rNPV-based valuation of Redx Pharma

Source: Trinity Delta   Note: The rNPV of RXC004 and RXC007 includes a deal success factor of 80%, and of 75% for GI-targeted ROCK; other valuation assumptions include a 12.5% discount factor, £/$ FX rate of 1.30, and 10% taxation from 2028 (UK patent box).

Our Redx valuation comprises a sum of the parts that includes a pipeline rNPV and a discovery platform valuation, with the latter based on Redx’s output/track record and benchmarked against similarly successful discovery peers. As always, we employ conservative assumptions throughout our modelling, particularly regarding market sizes and growth rates, net pricing, adoption curves, and peak market penetration.

The clinical progress of the various pipeline assets should unlock upside, as further data would prompt us to adjust the respective success probabilities that reflect the inherent clinical, commercial, and execution risks that each programme carries. Additionally, as these programmes progress, there should be more insight into the specific oncology or fibrosis patient populations that will be addressed, and this in turn would mean that peak sales (pricing, penetration) and timeline assumptions could be revisited.

Financials

H122 was marked by continuing pipeline delivery. End-March 2022 cash of £31.6m (end-September 2021: £29.6m) was boosted by $19m in milestone receipts. This was further augmented post-period by a $5m milestone and more significantly by Redx’s key event of 2022, the successful equity raise of £34.3m (gross) in May through placing of 58.1m new shares at 59p/share. This over-subscribed placing raised more than the planned c £30m despite the challenging macro-economic backdrop and was executed at no discount to the prevailing market price (incidentally at a premium to the last December 2020 equity raise of £25.5m gross at 56p/share). Existing major holders (Redmile, Sofinnova, Polar Capital, and Platinum Healthcare) supported the raise, with participation from a new healthcare specialist investor Invus. This capital injection removes a financial overhang, extending the cash runway by an extra year through to key data points. Management have confirmed that the current cash, plus modest risk-adjusted milestones, now provides a cash runway through to end-2023, comfortably supporting the comprehensive development plans for RXC004 and RXC007.

The increased H122 revenue of £8.4m (H121: £2.1m) was largely on account of milestone receipts of £6.68m (H121: nil), with a contribution from collaboration revenues of £701k (H121: £1.32m) and £968k in payments for research and preclinical development services (H121: £780k). AstraZeneca milestones (eg the $9 in December 2021) are recognised on receipt as they relate to contingent consideration on the license previously granted, whereas payments from the Jazz collaborations (predominantly related to the underlying development services) have a deferred recognition element and are recognised as each stage is completed. We note that the target discontinued by Jazz post-period end will trigger the recognition of £5.52m in revenue, representing all remaining contract liabilities relating to this target, in H222.

R&D investment increased to £12.9m (H121: £10.5m) due to set up and initiation of the Phase II programmes for RXC004 and RXC007. We anticipate a material rise in R&D spend if data supports continuing clinical development, as each successive stage is larger and therefore costlier. Positive data may also support broader evaluation of assets in other, related, indications. G&A costs were £4.9m (H121: £3.8m) due to headcount growth and ongoing investment in support infrastructure. H122 net loss was £9.8m (H121: loss of £12.7m) with a loss per share of 3.5p (H121: loss of 5.3p). Despite the increase in staff numbers and investment in support infrastructure, G&A expenses increased more modestly to £6.5m in FY21 (FY20: £4.2m). Finance costs were £1.7m (FY20; £1.0m). This translated into an FY21 net loss of £21.6m (FY20: loss of £9.2m), with loss per share of 8.4p (FY20: 5.4p).

We expect FY22 revenue of £19.2m, comprised of the $9m (£6.7m) AstraZeneca milestone and recognition of c £12.5m in revenues from Jazz (payments recognised under the Ras/Raf/MAPK collaboration and in relation to the $5m JZP815 IND clearance milestone). Our £4.0m revenue expectation in FY23 relates to revenue recognition from Jazz as the remaining Ras/Raf/MAPK target progresses towards IND enabling studies. While future potential milestone receipts are significant (c $800m in aggregate) there is limited visibility on timings as they are linked to the clinical development progress of AZD5055 and JZP815 which is under the control of their respective licensors.

Exhibit 5: Summary of financials

Source: Company, Trinity Delta     Note: Short-term debt in FY23E is indicative of our view of Redx’s funding requirement. Redmile/Sofinnova Convertible Loan Note has August 2023 conversion date, with a 15.5p conversion price, equating to a potential 110.3m of new shares. Revenue forecasts do not include any contribution from milestone payments yet to be received.

Arecor: well-positioned for diabetes innovations

Arecor’s investment case centres on its proven Arestat formulation platform and the ability to create a portfolio of proprietary and partnered clinical assets. Whilst the specialty hospital programmes (both through collaboration and in-house development) should provide an attractive blend of near- and longer-term revenue streams, it is the diabetes programmes, AT247 (ultra-rapid insulin) and AT278 (ultra-rapid ultra-concentrated insulin), that have the near-term potential to add further significant value. Results from the first of a series of Phase I studies suggest they offer competitive and differentiated profiles that may be ideally suited for use in integrated insulin delivery systems (“artificial pancreas”) and address the emerging needs of high dose insulin users. The recent KOL event, coupled with AT278 data publication, underpin our view that the clinical benefits and commercial potential of these assets are yet to be fully appreciated. Updating our Arecor rNPV model to reflect increased AT278 potential sees our valuation raised to £159.8m (574p per share) from £140.9m (506p per share).

Arecor’s diabetes assets were developed using its proprietary Arestat platform. Arestat is a suite of technologies which can be employed to develop novel formulations of existing products. These are specifically created to offer improved attributes, ranging from better shelf life and stability, easier patient administration, and superior therapeutic profiles through tailored absorption characteristics.

Exhibit 1: A broad portfolio of de-risked and innovative assets

Source: Arecor Therapeutics

Arecor’s strategy aims to diversify risk through combining partnered projects with selected in-house development (Exhibit 1). Technology partnerships bring in near-term revenues, and licensing deals involve better success-based economics, including clinical and commercial milestones and net sales royalties or equivalent. The in-house portfolio is focussed on diabetes and specialty hospital products, with this note detailing the results of the AT278 Phase I study and the diabetes KOL (Key Opinion Leader) event.

Key takeaways from the Key Opinion Leader event

Arecor hosted a Key Opinion Leader (KOL) event where a panel of diabetes experts discussed the limitations of current treatment options and the need for new ultra-concentrated, rapid-acting insulins. The discussion focussed on the treatment challenges and covered various aspects of the clinical and patient need for improved glucose control, particularly for high insulin users, as well as providing a detailed overview of the recent Phase I AT278 clinical data.

The session was moderated by Jay Skyler, Professor of Medicine, Pediatrics and Psychology, Division of Endocrinology, Diabetes and Metabolism, University of Miami, USA. Professor Skyler was joined by three experts in diabetes care:

• Wendy Lane, Clinical Endocrinologist, Director of Clinical Research, Mountain Diabetes and Endocrine Center, Asheville, USA: discussed the rising need for rapid-acting concentrated insulin products in treatment of Type 2 diabetes from a clinical perspective;
• Davida Kruger, Certified Diabetes Nurse Practitioner, Henry Ford Health System, Division of Endocrinology, Detroit, USA: provided a patient and caregiver viewpoint, reviewing several case studies demonstrating real world challenges and the benefits of concentrated insulin; and
• Thomas Pieber, Head of the Division of Endocrinology and Metabolism at the Medical University of Graz, Austria: presented results from Arecor’s Phase I trial of AT278, its ultra-rapid, ultra-concentrated insulin.

Several important themes emerged from the discussion. Firstly, that an increase in the numbers of both Type 1 and Type 2 diabetic patients is being driven by the obesity crisis, which is also leading to increasing insulin requirements and the amount of insulin use on average per patient. Secondly, currently available insulins do not meet the needs of patients with high daily insulin requirements. The only available concentrated insulin (Eli Lilly’s Humulin R U-500) does not act rapidly enough, and the next most concentrated insulins (Humalog U200 and Lyumjev) are often used off-label in pumps as clinicians seek “creative” approaches to help control glucose levels in their high insulin using patients. All session participants emphasised a desire to be able to provide better care for patients and the demand for a rapidly acting highly concentrated insulin, which could provide more optimal glucose control and would allow small volumes of high dose insulin to be used, ideally in a specifically designed prefilled pump.

Availability of an ultra-rapid ultra-concentrated insulin would bring several advantages, extending from clinical (improved blood glucose control and clinical outcomes), to comfort and convenience (reduction in pen or pump injection volumes and development of miniaturised pumps), to cost (via fewer cartridge changes, more insulin per co-pay). Importantly, AT278 was seen as potentially fulfilling both basal and bolus insulin needs in the same device, which could also simplify co-pay issues; these were described as “huge” given patients are often on multiple medications to treat their diabetes and comorbidities. The panel discussion concluded that patients and caregivers have been waiting for decades for the sort of formulations Arecor is developing, which offer the prospect of absorption profiles that closely match emerging clinical needs.

Clinically relevant and commercially attractive

Diabetes care is evolving rapidly, reflecting changing patient demographics and technological advances. The causes and drivers, as well as the opportunities and prospects, for Arecor’s diabetes franchise were covered in our September 2021 Initiation report, with greater detail given in our January 2022 Update note. It is clear that diabetes is a growing problem, with rising patient numbers, while advances in delivery devices create a need for specifically formulated insulins. Such trends underpin the commercial attractiveness of the two ultra-rapid insulins in clinical development: AT247 and AT278 (an ultra-concentrated formulation).

The latest International Diabetes Federation (IDF) Diabetes Atlas fact sheets show there are currently 537m people with diabetes globally, and this is expected to grow by 19.7% to 643m in 2030 and 46.0% to 784m in 2045. Type 2 diabetes accounts for around 90% of diagnosed diabetes globally, although the accuracy of incidence (the rate of new cases, usually annually) and prevalence (the number of cases per defined population) statistics are limited due to the difficulty in, and hence differing rates of, accurate diagnoses across geographies. Type 1 diabetes affects c 9.5% of the global population, with 15 such diabetics per 100,000 people and growing by 2% to 5% per annum.

Type 1 diabetes is an autoimmune process that results in the body’s immune system attacking the insulin producing beta-cells of the pancreas so that very little or no insulin is produced. This means Type 1 diabetics need daily insulin injections to keep their blood glucose level within an appropriate range and a lack of insulin would result in death. Although it was originally known as juvenile diabetes, over half of patients are between 19 and 40 years at diagnosis and will need daily insulin for the remainder of their lives.

Type 2 diabetes is associated with older populations, with a strong link to obesity. Here the pancreas continues to produce insulin, but the body’s cells begin to respond less well (insulin resistance) and, over time, fail to maintain blood glucose levels in the normal range. Most Type 2 diabetics can control their disease adequately through a combination of improved diet, more exercise, and the appropriate use of oral hypoglycaemics.

However, as beta cell production wanes, an increasing number of patients (currently 7% to 8%) need to add in injected insulin. It is estimated that better diagnosis and greater access would see this rise to over 15% of Type 2 diabetics. The size of this population means there are three to four times as many Type 2 diabetics using insulin than there are Type 1 insulin dependent diabetics and, importantly, they tend to require larger doses of insulin than the equivalent Type 1 diabetic.

Striving to achieve the physiological insulin profile

We have covered the clinical landmarks in diabetes care in previous notes, with arguably the single greatest advance being the appreciation of the need to tailor individual insulin therapy to maintain tight glycaemic control (see the DCCT study). Keeping blood sugar levels as close to normal throughout the day (known as time in range) helps prevent common, debilitating, and expensive, complications such as retinopathy, neuropathy, nephropathy, and cardiovascular diseases.

In his presentation, Thomas Pieber of the Medical University of Graz, Austria, highlighted the importance of striving to mimic the physiological profile of endogenous insulin. The use of regular human insulin, whilst a clear advance over prior animal-sourced products, is associated with a significant mismatch in postprandial activity with high glycaemia after a meal and hypoglycaemia later. The fast-acting insulin analogs (such as lispro, aspart, glulisine) have a better profile, with tighter postprandial control and less nocturnal hypoglycaemia. However, there is still a sizeable gap (Exhibit 2) to the endogenous insulin profile and that is the driver for the development of ultra-rapid insulin formulations.

Exhibit 2: Striving to achieve a closer to physiological insulin profile

Source: Adapted from Diabetes Obes Metab 2015;17:1011–20  *Schematic representation

Arecor is progressing two ultra-rapid insulins through a series of Phase I trials. AT247 is a novel formulation of an existing insulin (100U aspart) that aims to materially accelerate absorption after injection, achieving a profile that very closely approximates healthy (non-diabetic) physiological insulin secretion, giving the desired tighter and more effective management of blood glucose levels. AT278 is a novel formulation of insulin aspart with the focus on creating a highly concentrated, 500 units/ml, ultra-fast insulin. AT278 recently reported Phase I data that exceeded our expectations (see later), this prompts us to raise its contribution within our valuation model. Discussions with KOLs has strengthened our belief in the potential of the franchise, most notably the prospects for AT278.

AT247: the leading ultra-rapid insulin programme

AT247 is a second-generation ultra-rapid prandial insulin analogue that was examined in a Phase I clinical trial that compared it against Novo Nordisk’s NovoRapid (IAsp) and Fiasp (faster IAsp). The double-blind study tested 19 Type 1 diabetics using a standard glucose clamp setting to determine the pharmacokinetic (PK), pharmacodynamic (PD), and safety characteristics of AT247. The full results were published in Diabetes Care February 2021, with AT247 having successfully met all study endpoints and suggesting a best-in-class profile. The relevant profiles and data were discussed at the KOL event and are shown in the graphics and table (Exhibits 3 and 4).

Exhibit 3: AT247 Phase I clinical study PK/PD results

Source: Svehlikova et al. Diabetes Care 2021: 44: 448-455

These data (Exhibit 4) show that AT247 has a superior onset of action and activity throughout the important 120 minutes after dosing vs both NovoRapid and Fiasp. For instance, AT247 was nine minutes faster than Fiasp for onset of action, achieved a three-fold increase in glucose lowering in the first 30 minutes and a two-fold increase in the first 60 minutes, yet was comparable over 480 minutes. As expected, AT247 was well tolerated with no safety concerns seen.

Exhibit 4: Phase I data on onset, offset and overall exposure and glucose-lowering effect

Source: Svehlikova et al. Diabetes Care 2021: 44: 448-455

The importance of such a profile is not simply in improving outcomes in diabetics who are using pen devices (also known as MDI – multiple daily injections) but in enabling the use of fully automated continuous pump devices. Advances in miniaturisation and computing power have seen the introduction of viable continuous glucose monitors (CGM). These allow patients, and clinicians, to assess trends, patterns, and time spent in range in real time. The sensor tests glucose every few minutes and sends an alarm if hypo- or hyper-glycaemia is threatened. Such devices have been transformative for some patients. In parallel, similar technological advances saw sophisticated, and reliable, wearable pumps developed. These pumps, known as continuous subcutaneous insulin infusion (CSII) therapy, have evolved rapidly and offer near-normal glucose control in previously uncontrolled diabetics.

Exhibit 5: Key milestones towards a truly artificial pancreas

Source: New closed loop insulin systems Boughton & Hovorka Diabetologia 1007-1015 (2021)

As these devices approach reality, the remaining obstacles to be addressed are shifting from the physical and software aspects to the characteristics of the insulins that are now required. For instance, the inherent delays in absorption of subcutaneous injected insulin compared with endogenous insulin production means postprandial hyperglycaemia is still a challenge for these closed-loop systems. As the clinicians at the KOL event noted, the pharmacokinetics and pharmacodynamics of current rapid-acting insulins are known to be suboptimal. The new ultra-rapid acting insulins, which have faster onset and offset of action, have the potential to address this issue. Small studies with Fiasp (faster aspart) and Lyumjev (ultra-rapid lispro) have not shown the hoped-for conclusive results. It is for this clear clinical need that AT247 (ultra-rapid insulin) and, increasingly, AT278 (ultra-rapid and ultra-concentrated) appear particularly well suited.

AT278: ultra-rapid and ultra-concentrated insulin

AT278 is a novel formulation of insulin aspart with the focus on creating a highly concentrated, 500 units/ml (U500), ultra-rapid insulin. There has always been a need for concentrated insulins (eg for insulin control post operatively or post-infection) but the use is now much more mainstream. Such high concentration insulins are expected to become increasingly in demand, reflecting the rising number of Type 2 and refractory Type 1 diabetics requiring higher daily dosing.

A key element driving this is the growing rate of obesity across most geographies, with a BMI of 30 or greater said to contribute 80-85% of the risk of developing Type 2 diabetes. Although the reasons remain unclear, excess abdominal fat is thought to release pro-inflammatory signals that create insulin resistance (and relative insulin insufficiency). In the UK 28.1% of adults are classified as obese, rising to 63.4% when the overweight are included ; forecasts suggest 26m people will be classified as obese by 2040. In the US the figures are even more dramatic, with obesity prevalence rising from 30.5% in 2000 to 41.9% in 2022. The expectation is that half of all US adults will be obese by 2030.

Dr Wendy Lane, a diabetes specialist from North Carolina, highlighted how obesity-related insulin resistance is driving increases in daily insulin requirements, pointing out how in 2012 some 35% of Type 2 diabetics needed a daily maintenance of 60U (units), whilst in 2022 the average daily dose has risen to 97U. Similar trends were also seen in Type 1 diabetes, despite the younger demographics and stricter attention to dietary intakes, with 25% having a BMI greater than 30 and 64% with a BMI greater than 25. Yet, even with this growing population, there are only three concentrated bolus insulins available: U500 regular insulin (which has a profile similar to a basal insulin), U200 Humalog, and U200 Lyumjev (all manufactured by Eli Lilly).

The results from the AT278 Phase I study in Type 1 diabetics were first presented at the Advanced Technologies and Treatments for Diabetes (ATTD) meeting on Thursday 28 April. Dr Thomas Pieber described the results at the KOL seminar (Exhibits 6 and 7). The trial met all primary and secondary endpoints, demonstrating a superior pharmacokinetic (PK) and pharmacodynamic (PD) profile to a comparable dose of lower concentration of NovoRapid (NovoNordisk’s gold standard rapid acting insulin). The trial evaluated 38 adults with Type 1 diabetes in an euglycemic clamp setting aiming to establish PK/PD equivalence between a subcutaneous dose of AT278 0.3 U/Kg (500 U/mL) that was five-fold more concentrated than the comparator 0.3 U/Kg NovoRapid (100 U/mL). AT278 matched or exceeded key measures such as glucose lowering, onset of action, and absorption profile, and there were no safety signals.

Exhibit 6: AT278 Phase I clinical study PK/PD results

Source: ATTD April 2022 Pharmacokinetics is the upper pair, Pharmacodynamics the lower

We have stated before how the outcomes are highly impressive and better than we expected. The top-line results showed AT278 has, despite the five-fold greater concentration, an absorption profile that does not simply match the rapid insulin criteria. Instead, the PK/PD data justifies AT278 classification as an ultra-rapid insulin. AT278 showed enhanced early insulin exposure compared to IAsp, with a six-minute earlier insulin appearance, a 23-minute faster t_Early50%Cmax (time to 50% of maximum insulin concentration in the early part of the PK profile), and a four-fold higher insulin exposure within the first 30 minutes. Looking at accelerated glucose lowering properties compared to IAsp there is a ten-minute earlier onset of action, a 20-minute faster t_{Early50%GIRmax} (time to early 50% of maximum glucose infusion rate), and a two-fold higher glucose-lowering effect within the first 60 minutes. The overall insulin exposure and glucose-lowering properties were comparable and AT278 was, as expected, well tolerated and safe.

Exhibit 7: AT278 Phase I study: early exposure and glucose-lowering effect

Source: ATTD April 2022

Interestingly, all the seminar participants viewed these results as “fantastic” and felt AT278 offers a step-change in the treatment, management, and dosing of the rising number of patients with high insulin needs. They also expressed the view that AT278 precisely meets the needs of the next generation of more compact insulin devices currently in development. Such positive endorsement from leading industry experts has led us to review our expectations for AT247 and, materially, AT278. Typically, we employ conservative assumptions in our valuation modelling but these discussions with practicing clinicians have raised our confidence that Arecor’s emerging diabetes franchise has greater clinical, and commercial, potential than we had originally expected.

Exhibit 8: Arecor diabetes franchise development timelines

Source: Arecor Therapeutics

Valuation

We value Arecor using an rNPV model, explicitly valuing the diabetes franchise, four partnered assets, and the in-house specialty hospital products research programme(s). We have updated our valuation to reflect recent detailed AT278 Phase I data and highly positive KOL commentary that clearly outlined the unmet medical need for a rapid-acting ultra-concentrated insulin. This has resulted in valuation uplift to £159.8m, or 574p per share (from £140.9m and 506p), largely on an increased contribution for AT278. Exhibit 9 summarises the model outputs and underlying assumptions.

Exhibit 9: Arecor rNPV valuation

Source: Trinity Delta   Note: AATD = Alpha-1 antitrypsin deficiency; assumptions include a 12.5% discount factor, £/$ FX rate of 1.30, and 10% taxation from 2026 (UK patent box).

Under this methodology, the rNPVs of the individual R&D projects are assessed and success probabilities adjusted for the clinical, commercial, and execution risks carried. These are summed and netted against operational costs and cash. Success probabilities, based on standard industry criteria for development stage, are flexed to reflect the inherent risks of the individual asset, indication, and development and regulatory pathway. Although the current strategy envisages out-licensing most of Arecor’s assets before the later costlier stages of clinical development, we allow for commercial and execution risks which are integral to any asset’s intrinsic value. We continue to apply conservative assumptions throughout.

For AT278 we have increased peak sales to $516m (from $424m) given a likely larger market of patients that could benefit from a rapid-acting ultra-concentrated insulin, as outlined during the KOL event and discussed earlier in this report. This is still conservative, given the significant and growing size of the diabetes market. AT278 now contributes c 29% of our risk-adjusted NPV and, together with AT247, the in-house diabetes franchise is now c 52% of our overall valuation. There could also be upside to AT247, notably with top-line data from the ongoing US Phase I pump study of AT247, expected in H222. Underlying assumptions for other programmes are largely unchanged, albeit we have rolled our valuation forward in time. There could be upside to all of these as progress and updates are made available in due course.

Key areas which could represent valuation upside include progress of the current pipeline and earlier-stage formulation development collaborations, while the Arestat technology platforms are a source of intangible value underpinning Arecor’s business model. Not only will development progress de-risk the pipeline further but it is also likely to reveal more about the commercial terms of partnered programmes. Sensitivities around the terms of these inevitably mean visibility is limited until later in the development process. For in-house assets that are yet to be partnered, more information on their profile could have a positive impact on the deal terms achieved. Hence, until our knowledge improves (especially with respect to the identity of some of the underlying programmes), we employ modest assumptions for launch timings, pricing, and market shares.

In addition, we only include very modest risk-adjusted development milestone assumptions for actual and potential licensing deals, with assumed royalty rates at the lower end of management guidance. Limited visibility on the formulation development collaborations means these are not included in our valuation until they convert to longer-term licence partnerships, and hopefully further disclosures are made with respect to key factors such as the identity of the underlying assets, indications to be pursued and likely development timeline. Management expectations for the licencing of one formulation development programme each year therefore provides upside.

Exhibit 10: Summary of financials

Source: Company, Trinity Delta  Note: Due to subsequent restatement of accounts FY19 relates to the 12 month period ending 31 May 2019.