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Arecor has delivered FY21 results in-line with expectations. More importantly, these demonstrate continued progress and highlight the breadth of opportunities to which the Arestat platform, and in-house formulation expertise, can be applied. There are five additional technology partnerships, with sizeable players, that generate near-term value, validate the technology, and offer future significant licence potential. However, it is the in-house diabetes programmes, AT247 (ultra-rapid insulin) and AT278 (ultra-concentrated ultra-rapid insulin), that we find particularly attractive. Phase I data suggest both have highly promising, differentiated profiles that are particularly suited to emerging pump applications and high insulin users. We value Arecor at £140.9m, or 506p per share, with significant upside from clinical and operational progress.
| Year-end: December 31 | 2020 | 2021 | 2022E | 2023E |
| Revenues (£m) | 1.7 | 1.2 | 1.4 | 1.6 |
| Adj. PBT (£m) | (4.3) | (7.2) | (13.0) | (9.4) |
| Net Income (£m) | (2.8) | (6.2) | (9.8) | (7.2) |
| EPS (p) | (0.2) | (0.3) | (0.4) | (0.3) |
| Cash (£m) | 2.9 | 18.3 | 9.0 | 2.4 |
| EBITDA (£m) | (3.3) | (6.3) | (11.0) | (8.0) |
Update
25 April 2022
| Price | 390p |
| Market Cap | £108.6m |
| Enterprise Value | £90.3m |
| Shares in issue | 27.8m |
| 12-month range | 222p-472p |
| Free float | 34.2% |
| Primary exchange | AIM London |
| Other exchanges | N/A |
| Sector | Healthcare |
| Company codes | AREC.L |
| Corporate client | Yes |
Company description
Arecor Therapeutics is a revenue-generating clinical stage drug developer, with a well-balanced portfolio of in-house and partnered programmes. Its proprietary Arestat formulation platforms result in enhanced products with lower development risks and less onerous regulatory approvals.
Analysts
Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043
Philippa Gardner
pgardner@trinitydelta.org
+44 (0) 20 3637 5042
Arecor is exploiting its Arestat formulation platform to create a portfolio of proprietary and partnered clinical assets. There are currently four partnered products (two from technology partnerships, two from internally developed specialty hospital products) that will generate milestones, plus royalties or equivalent on sales. These should provide a blend of medium- and longer-term revenue streams. However, we view the diabetes programmes, AT247 (ultra-rapid insulin) and AT278 (ultra-rapid ultra-concentrated insulin), as particularly attractive. These are undergoing a series of Phase I studies, with early data suggesting they offer competitive and differentiated clinical profiles that may be ideally suited for use in integrated insulin delivery systems (“artificial pancreas”) and more effective treatments for high insulin users. The successful IPO (June 21) raised £20m to fund these key programmes to value inflection points. We value Arecor with an rNPV model using conservative assumptions. Continued progress would see us revisit our current valuation of £140.9m (506p per share).
FY21 results are as expected and highlight the progress being made. Arecor’s investment case lies in its proprietary Arestat platform 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.
This is undertaken for clients through technology partnerships, which bring in near-term revenues, and licensing deals, that involve better success-based economics, including clinical and commercial milestones and net sales royalties or equivalent. Management is also developing a portfolio of in-house development programmes that are focussed on diabetes and specialty hospital products. We covered these elements in our Initiation note, with a further Update note detailing the opportunities and prospects for the diabetes franchise.
The two key clinical stage diabetes programmes are the ultra-rapid insulins (AT247 and AT278). AT247 is a novel formulation of existing insulin that aims to materially accelerate absorption after injection, achieving a profile that closely approximates healthy (non-diabetic) physiological insulin secretion, giving 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, fast-acting insulin. Such high concentration insulins are expected to become increasingly in demand, reflecting the rising number of Type II and refractory Type I diabetics requiring higher daily dosing. These programmes offer the prospect of absorption profiles that closely match the emerging clinical needs.
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. The advantage of eliminating multiple daily injections was initially particularly attractive for children and adolescents. However, the improved short- and longer-term clinical outcomes have become a key uptake driver for many Type I and, increasingly, Type II diabetics.
Whilst the advances in miniaturising and integrating the various technologies have been impressive, major obstacles remain. For instance, the inherent delays in absorption of subcutaneous injected insulin compared with endogenous insulin production means that postprandial hyperglycaemia remains a challenge for these closed-loop systems. The pharmacokinetics and pharmacodynamics of current rapid-acting insulins are known to be sub-optimal. 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 AT278 (ultra-concentrated ultra-rapid insulin) and AT247 (ultra-rapid insulin) appear particularly well suited.
AT247 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 I diabetics using a standard glucose clamp setting to determine the pharmacokinetic (PK), pharmacodynamic (PD), and safety characteristics of AT247. Full results were published in Diabetes Care February 2021, with AT247 having successfully met all study endpoints and suggesting a best-in-class profile.
These data 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.
A second Phase I study with c 24 Type I diabetics evaluating AT247 administered over three days through a continuous subcutaneous infusion via an insulin pump dosed its first patient in January 2022. The study design is a double blind, randomised, three-way crossover which will examine PK and PD, using a glucose clamp, against active controls (NovoRapid and Fiasp). The top-line results are anticipated in H222. A multi-centre Phase II study with c 42 diabetic patients will likely then explore AT247 against Fiasp when administered through an insulin pump over an extended period (around six weeks).
AT278 reported top line results from the Phase I study in Type I diabetics in September 2021. The trial met all primary and secondary endpoints, demonstrating a superior PK and PD profile to a comparable dose of a lower concentration of NovoRapid (Novo Nordisk’s gold standard rapid acting insulin). The trial evaluated 38 adults with Type I diabetes in an euglycemic clamp setting aiming to establish PK/PD equivalence between subcutaneous AT278 0.3 U/kg (500 U/ml) that was five-fold more concentrated than the comparator NovoRapid 0.3 U/kg (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.
The outcomes are impressive and better than we expected. The top-line results showed AT278 has, despite the five-fold greater concentration, the absorption profile not simply matching the rapid insulin criteria, but the PK/PD data justifies AT278 being labelled an ultra-rapid insulin. Full data are expected to be presented at ATTD on Thursday 28 April. The next steps should see further European and US Phase I trials in both injected and pump settings; with the first of these expected to start during H222. Assuming smooth progress through the clinical programmes and approval processes, first launch could happen as early as 2025 (we have assumed 2026 in our modelling).
Arecor’s Specialty Hospital Products development is focussed on improving injectable products that have clear issues, such as the need to be reconstituted (for instance the drug is a lyophilised powder). The desire to minimise the preparation of any injectable in a clinical setting is not simply the time element, where numerous studies have shown the staff time savings comfortably justify the price premiums, but, more importantly, minimising handling materially reduces dispensing and administration errors.
Arecor currently has two active licensing agreements in place for specialty hospital products. Both programmes are partnered with Hikma, with the most advanced, AT282, being a novel formulation of an already marketed product that is only available as a lyophilised powder that needs to be re-constituted before use. The new formulation is a stable RTU liquid concentrate which was initially developed to proof of concept by Arecor and then partnered. The deal was struck in January 2020 and the next milestone is expected during 2022. The regulatory pathways for AT282 are expected to be the abbreviated 505(b)(2) in the US and under the Directive 2001/83/EC Hybrid pathway in Europe. As these will reference the originator drug for evidence of clinical efficacy and safety, no major clinical trials are expected to be required. Current timelines suggest first marketing approval could happen as early as 2024.
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 the model to reflect the FY21 results however the closeness of key numbers to our expectations means there is no tangible change to our current valuation of £140.9m or 506p a share. We are aware there is a raft of potential news flow, notably clinical trial related, over the coming months and intend to revisit our assumptions as these arise.
As mentioned, FY21 results were in-line with our expectations. The highlight was the June AIM IPO which raised £20m gross (£18.5m net), boosting December 2021 cash to £18.3m (vs £2.9m at end-December 2020). These resources provide funding for the planned activities through 2023, a comfortable runway to achieve multiple value inflection points and upside potential.
FY21 revenue of £1.8m (FY20: £2.2m, boosted by a £0.9m licence milestone) was primarily derived from formulation development programmes (£1.2m) and grant funding (£0.6m). The grant element was part of the £2.8m Innovate BioMedical Catalyst grant awarded in March 2021 to support the Phase II development of AT247. R&D expenditure rose to £5.3m (FY20: £3.9m), reflecting the spend on clinical trials for AT278 and AT247. G&A expenditure increased to £2.0m (FY20: £1.3m), with a further £0.5m being the non-recurring costs of the placing and AIM admission. The operating loss was £6.5m (FY20: £3.5m) and net loss was £6.2m (FY20: £2.8m).
For FY22 onwards we expect modestly higher partnering income as infrastructure and headcount expansion increases capacity for formulation work, both in-house and with partners. Our forecasts do not include any assumptions on potential conversion(s) of pre-licence technology partnerships to longer-term licence agreements (which bring the potential for small upfront payments, plus future milestones and single-digit royalties). The magnitude of licence derived income will be determined by development and commercial progress of licensed programmes, the timing and terms of new partnership deals (particularly for the in-house diabetes assets), and product launches. Arecor’s four existing partnered products (two that emerged from technology partnerships, two from out-licensing internally developed formulations) are expected to generate development and commercial milestones, plus royalties or equivalent on sales from 2023 onwards following anticipated launches.
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