Arecor: Tetris Pharma adds an extra dimension

Arecor’s H122 results confirmed progress is being maintained as we expect. The two in-house diabetes programmes, AT247 (ultra-rapid insulin) and AT278 (ultra-rapid and ultra-concentrated insulin) are on track with their Phase I clinical trials. The key near-term news will be data from the AT247 insulin pump study, expected during H222, which should establish whether AT247 has a suitable absorption profile for use in “closed loop” insulin pumps (also known as an “artificial pancreas”). The recent £6m equity raise supported the acquisition of Tetris Pharma, a sales and marketing business whose main attraction is exclusive UK and European rights to Xeris’ Ogluo, a ready-to-use glucagon rescue pen. Longer term, Tetris Pharma will provide the commercial infrastructure for selected niche programmes within the Specialty Hospital Products pipeline. Cash of £13.7m should fund the proprietary programmes through a number of value inflection points. We value Arecor at £177m, equivalent to 581p a share.

H122 results were as expected and confirm continued operational progress. Financially, total income was £1.1m (H121: £0.6m), which consisted of formulation development revenues of £0.7m (H121: £0.5m) and grant income of £0.4m (H121: £0.1m). The latter is part of the March 2021 £2.8m Innovate UK grant to support AT247’s development. The investment in R&D increased to £4.8m (H121: £1.9m), reflecting the spend on the Phase I programmes for AT247 and AT278. SG&A costs were maintained at £1.6m (H121: £1.5m). R&D tax credits of £0.9m (H121: £0.3m) resulted in a loss after tax of £4.3m (H121: £3.1m). The cash balance at end-June 2022 was £13.7m, down from £22.1m at H121 and £18.3m at FY21. These resources, coupled with continuing partner development incomes and the £6m placing, are ample to fund the key activities through to several important value inflection points.

Tetris Pharma acquisition brings commercial flexibility

Post-period, the most recent highlight was the August 2022 acquisition of Tetris Pharma for an initial consideration of 651,726 new shares, with an aggregate value of £2m, with further earn-outs worth up to £4m payable on revenue and EBITDA targets being achieved on the first, second, and third anniversaries of deal completion. Tetris Pharma is a commercial specialty pharma company that sells and distributes injectable specialty products across the UK and Europe. Its key asset currently is Ogluo, the first ready-to-use glucagon auto-injector pen that is used to treat severe hypoglycaemia in patients with diabetes.

The Tetris Pharma acquisition complements Arecor’s formulation and development efforts and brings several strategic benefits across both Specialty Hospital Products and for the important diabetes franchise:

• Strategic benefits: Tetris Pharma offers a low-cost, and low-risk, way to capture greater long-term value for Arecor’s development efforts in Speciality Hospital Products. Tetris Pharma’s emerging sales and marketing infrastructure for Ogluo addresses a largely specialist and targeted audience. As this grows and Ogluo roll-out is increased, this should lead to an acceleration in revenue generation. Once the infrastructure is fully established, this could be employed to market selected future niche products directly across Europe. While we expect the majority of the proprietary Arestat derived projects to be partnered, the Tetris Pharma organisation will provide additional options and offer the means to crystallise further value. The marketing of Ogluo to diabetic specialists, patient groups, and payors should also provide valuable insights for Arecor’s key AT278 and AT247 programmes.
• Complementary products: As an easy-to-use autoinjector pen, Ogluo fits well within Arecor’s formulation and development efforts, which seek to create products that are more effective, easier to use, more stable, clinically optimised, and commercially relevant. In addition, as a product for patients with diabetes, it fits well with Arecor’s diabetes franchise.

Exhibit 1 shows the complementarity of Tetris Pharma with Arecor’s strengths and how it helps accelerate the goal of becoming a research-led self-sustaining pharmaceutical company.

Exhibit 1: Tetris Pharma’s fit within Arecor’s existing skill sets

Source: Arecor Therapeutics

Ogluo is the pan-European name for Xeris’ Gvoke. Ogluo/Gvoke is a stable glucagon formulation available in a pre-mixed, pre-filled autoinjector pen that is rapidly and easily administered through a two-step process, versus a complex eight stage process which is the current standard of care for hypoglycaemic emergencies in the UK. The UK reimbursement price for Ogluo is £73 per single-use pen. Ogluo became available in December 2021 with active launch in March 2022. There have been 1,729 units sold to end June, contributing to Tetris Pharma’s H122 sales of c £600k. Xeris launched Gvoke in the US in Q419 and it now has a 22.8% US glucagon market share. Xeris retains US rights and has granted a minimum 16-year licence agreement to Tetris Pharma. Ogluo is patent protected across Europe until at least 2035.

Severe hypoglycaemia (very low blood sugar) is generally related to diabetic treatment, including insulin and sulfonylureas, and affects both Type I and Type II diabetes patients. It can lead to seizure and loss of conscious and is generally an emergency situation that requires rapid treatment, often administered by another person. Glucagon is an effective treatment for severe hypoglycaemia, however until recent years, it was only available as part of a kit, including from Eli Lilly (Glucagon Emergency Kit, GEK, which will be discontinued from 31 December 2022) and Novo Nordisk’s GlucaGen Hypokit. These kits have to be prepared for use, often via multiple steps, which takes time, and the complexities can lead to limited 7.9% treatment success, compared to 90.6% for a nasal glucagon spray, and 99% for Gvoke/Ogluo, according to Xeris.

Since the availability of easier to use options, such as rescue pens and nasal sprays, the more complex glucagon kits are now being superseded, evidenced by Eli Lilly’s decision to discontinue its kit. Ready-to-use glucagon options now include: Eli Lilly’s Baqsimi, a nasal spray; Xeris’ Gvoke/Ogluo, a rescue pen; and Zealand Pharma’s Zegalogue, a rescue pen, which will now be marketed by Novo Nordisk. Ogluo is the only glucagon rescue pen currently approved in Europe.

It is reported that Type I diabetes patients have 1.15 severe hypoglycaemic events per year, and Type II patients have 0.35 events per annum, suggesting a significant opportunity. Not all patients who are prescribed insulin are also prescribed a glucagon for use in case of severe hypoglycaemia. However, glucagon prescriptions in the US have risen since the availability of more convenient options. It is this market that Arecor/Tetris Pharma is seeking to develop in the UK in the near-term and in Europe via a phased launch over the next 24 months.

Diabetes programmes are the main focus

We view the in-house diabetes programmes as underpinning Arecor’s investment case. Both AT247 (ultra-rapid insulin) and AT278 (ultra-rapid ultra-concentrated insulin) are progressing through clinical trials. The clinical appeal and patient relevance of these programmes, as well as the commercial opportunities and prospects, were covered in our September 2021 Initiation and expanded in our January 2022 Update. The positive results of AT278’s Phase I trial were presented at ATTD in April and their importance discussed in our May 2022 Update note.

Exhibit 2: A broad portfolio of de-risked and innovative assets

Source: Arecor Therapeutics  Note: 1, 2, 3, and 5 Management estimates; 4 based on FDA 505(b)(2) guidelines; 6 Company annual report; 7 Inhibrx Corporate presentation.

The focus in now on AT247, which is completing a US Phase I trial evaluating its use in a three-day insulin pump study. The aim is to establish the evidence base to support AT247’s use in fully closed insulin pump systems, which are also known as the artificial pancreas. The format is a three-way crossover examining AT247 and Novo Nordisk’s NovoLog and Fiasp in 24 patients with Type I diabetes. All will be delivered subcutaneously by CSII (continuous subcutaneous insulin infusion) using the popular Medtronic 670G pump. The study will examine the onset of insulin action following bolus dose (PK) and the glucose lowering action (PD) of AT247 compared to both NovoLog and Fiasp, as well as safety and tolerability. The top-line results of this study are expected to be known during H222 and given dosing was completed in July, we expect these could become available in early Q422.

AT220 could be the first launched partner programme

Within Specialty Hospital Products and technology partnerships, in June 2022 a formulation study collaboration was agreed with a global top five pharmaceutical company to employ Arestat to develop improved formulations of a number of their existing products. Of the four existing licensed programmes, AT220, an undisclosed biosimilar addressing a blockbuster market, is the most advanced and on track for approval during 2023. This would trigger a milestone payment and then royalties (or equivalent) on commercialisation.

Valuation and Financials

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 H122 results, the £6m equity raise in August, and the subsequent acquisition of Tetris Pharma. This sees our valuation rise to £177m (581p per share), which compares with our previous £159.8m (equivalent to 574p per share). The details are summarised in Exhibit 3. 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 they arise.

Arecor is revenue generating, with relatively predictable income from its formulation development partnerships and more variable income from licence agreements, which consist of upfront payments when licences are granted and milestones which are contingent on development progress and commercialisation. The Tetris Pharma acquisition will bring an income stream from commercial sales, principally Ogluo as it gains traction in the UK and then benefits from subsequent launches across Europe.

We have modelled the Ogluo sales uptake conservatively, in line with our philosophy of employing modest assumptions throughout, with break-even occurring no earlier than year 3 post-launch in any major market. This results in an rNPV of £6.9m, which feels intuitively appropriate for this stage of the launch rollouts. For context, Zealand Pharma’s agreement with Novo Nordisk for its ready-to-use glucagon, Zegalogue, saw an upfront of DKK25m (c $3.3m) and subsequent development, regulatory and manufacturing-based milestones of DKK45m (c $6m), plus up to DKK220m (c $30m) in sales milestones and royalties of high single- to low double-digit percent.

H122 cash of £13.7m, together with the August £6m (gross) placing, should enable Arecor to progress its in-house diabetes and Specialty Hospital Products to partnering inflection points, as well as expanding its internal capabilities to support progression and growth in its earlier-stage formulation portfolio. Assuming continued progress, we anticipate a significant increase in R&D investment to £10.0m for FY22e and £11.0m for FY23e (FY21: £5.4m) as the more extensive (and expensive) Phase II diabetes trials are initiated. We expect only modest growth in underlying Arecor SG&A spend, with a base run rate of c £3.0m, but the Tetris Pharma spend in supporting Ogluo’s UK launch and subsequent European marketing plans means we forecast SG&A of £4.4m in FY22e (consolidating 5 months of Tetris Pharma) and £7.2m in FY23e.

Exhibit 3: Arecor rNPV valuation

Source: Trinity Delta   Note: AATD = Alpha-1 antitrypsin deficiency; assumptions include a 12.5% discount factor, £/$ FX rate of 1.20, and 10% taxation from 2026 (UK patent box).

Our forecasts (in Exhibits 3 and 4) are deliberately conservative and 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). Similarly, the magnitude of licence derived income will be determined by development and commercial progress of licenced 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-licencing internally developed formulations) are expected to generate development and commercial milestones, plus royalties or equivalent on sales from 2023 onwards following anticipated launches (obviously these will build over time).

Exhibit 4: 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.