Formulating the recipe for success
Initiation | 14 September 2021
Arecor is exploiting its proprietary formulation expertise to create a portfolio of clinical assets. Drug agnostic technology partnerships with established global companies and internal work focused on Diabetes and Specialty Hospital Products are two sources of potential future licence deals. Arecor currently has four partnered products that will generate development and commercial milestones, plus royalties on sales. More significantly, select assets are in development in-house through to greater value-generation points, typically Phase II proof-of-concept, before out-licensing. Two projects, AT247 (ultra-rapid insulin) and AT278 (rapid ultra-concentrated insulin), are progressing through Phase I and show highly promising, differentiated profiles. The recent IPO raised £20m ensuring sufficient funding to achieve several material inflection points. We initiate coverage with a valuation of £103.7m, or 374p per share.
|Year-end: December 31||2019*||2020**||2021E||2022E|
|Adj. PBT (£m)||(4.0)||(4.3)||(9.3)||(12.9)|
|Net Income (£m)||(2.4)||(2.8)||(7.4)||(10.0)|
|Adj. EPS (p)||(107.7)||(101.6)||(49.0)||(36.2)|
Initiation of coverage
14 September 2021
|Shares in issue||27.7m|
|12 month range||222p-258p|
|Primary exchange||AIM London|
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.
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Arecor Therapeutics was created in 2007 as a spin-out of Insense, itself part of Unilever. The initial focus was the reformulation of existing products using a proprietary technology platform to address known issues on a fee-for-service basis, building both the platform and relationships. Over time the formulation technologies were augmented and broadened, now collectively known as Arestat, adding greater functionality and applicability. In 2016 the current CEO (appointed in 2015) implemented a decisive strategy shift to develop a portfolio of in-house products in addition to implementing a technology licencing model. Partnership deals typically involve research fees, milestones, and single to low-double digit percentage royalties on eventual sales. In-house programmes are expected to be self-funded through to proof-of-concept trials, typically Phase II, and out-licensed for upfront payment, milestones, and high single- to double-digit sales royalties. To date, Arecor has raised a total of £36.3m in equity (including £20m [gross] through its June 2021 IPO) and secured c £8.3m in grants. Arecor currently employs 35 FTEs and is based in Chesterford Research Park, near Cambridge, UK.
We value Arecor using a pipeline rNPV model of the known development programmes, both in-house and partnered, which is netted against operational costs and cash. Success probabilities are based on standard industry criteria but are flexed to reflect the nature of the programmes and the particulars of the differing indications/markets. The use of well-characterised active pharmaceutical ingredients (APIs) reduces development risk and shortens regulatory pathways; however, precise deal terms remain largely undisclosed. We deliberately employ conservative assumptions throughout, and despite such a cautious approach value Arecor at £103.7m, equivalent to 374p per share (fully diluted).
Our forecasts suggest the £20m (gross) fund raise in June 2021 provides a cash runway into 2023. This could be bolstered through subsequent milestone and licensing receipts from partnerships, either as existing programmes progress or new deals are struck. Over the near- and medium-term we expect operating expenses to rise, as increased R&D investment is made into the proprietary pipeline, while G&A will grow at a more modest pace. The development and regulatory timelines suggest partnered programmes could be ready for launch from 2023 onwards, with meaningful royalty streams possible from 2025.
Arecor’s in-house programmes address commercially attractive market segments and, as it currently develops novel formulations of existing, approved, drugs, it inherently carries a lower risk profile than a classic drug discovery company. Yet, the typical industry risks associated with clinical trial results, navigating regulatory hurdles, ensuring sufficient financing is in place, partnering discussions and, eventually, pricing and commercialisation still apply.
Arecor employs its proprietary technology and expertise to develop novel formulations of established drugs with enhanced properties, creating products with improved physical characteristics and better therapeutic profiles. Developmental and financial risks are actively managed through reformulation of existing drugs and by working through partnerships respectively. Progression of selected in-house assets to proof-of-concept clinical trials is an important element in our investment thesis. The solid balance sheet provides a cash runway that encompasses several significant value inflection points over the next 18-24 months. We conservatively value Arecor at £103.7m, or 374p/share.
Arecor has a proven expertise in reformulating existing compounds into novel products with improved properties; these can range from a better shelf-life through greater patient convenience to a superior therapeutic profile. In the past decade there has been a notable shift as the current management has evolved the business effectively from a fee-for-service model towards creating, and retaining, more of the value added. This strategy derives licencing deals from technology partnerships and in-house product out-licencing; while the economics differ, both include clinical and commercial milestones and net sales royalties or equivalent.
Arecor currently has four licenced programmes: two specialty hospital products with Hikma and two technology partnerships (a late-stage biosimilar with an undisclosed global player and an early-stage project with Inhibrx). It also has an in-house pipeline as well as pre-licence stage technology partnerships with pharma enhancing their products. The internal assets include two clinical stage innovative insulin formulations (ultra-rapid and ultra-concentrated rapid) and several specialty hospital products in the earlier stages of formulation. The proprietary diabetes programmes will be taken to proof-of-concept Phase II studies, while the specialty hospital products are assumed to require little/no clinical development, ahead of out-licencing for an upfront and milestone payments, plus royalties.
We view the application of the Arestat technologies to create an in-house product pipeline as particularly attractive, offering the potential to create meaningful value to both partners and patients in a highly cost-effective manner. Importantly, reformulation of known and well-characterised drugs means development risk is lower than for a novel API. Additionally, the favourable regulatory environment for reformulations of existing compounds means that, if required, any clinical trials will be smaller. The appeal for partners is these pathways tend to be significantly less costly and faster than standard routes, which when coupled with the potential to develop differentiated drugs with improved outcomes could also support pricing and reimbursement that ensures broad access.
We believe Arecor has a commercially attractive and relatively low-risk clinical pipeline, with a sustainable flow of future development opportunities. Albeit largely out of management’s control, partnered assets could launch from 2023 onwards and begin generating sizeable royalty streams from 2025. During this period, we also expect rising visibility on the likelihood, and possible deal sizes, for the products within the in-house diabetes franchise. June’s £20m IPO provides funds to progress the main programmes to key value-inflection points. Ahead of a steady stream of news flow in 2021/2, our valuation is £103.7m or 374p/share.
Arecor is a clinical stage development company and, unusually, is already revenue generating. Currently revenues arise from fees paid by partners, typically larger pharmaceutical or biotech companies, for the reformulation of their “difficult” or “problem” products. Whilst these revenues ease cash flows, and help validate the value of the technologies, they will be dwarfed by future income arising from royalties and milestone payments as existing, and future, licensing deals progress through development and are commercialised.
New management has galvanised the business, bringing a genuine commercial focus and commendable ambition. The near-term focus is on progressing the late-stage pipeline on time, with the aim of the first partnered programme being ready for commercialisation in 2023. The timings of the expected product flows reflect the decisive move in 2016 to shift away from providing a straightforward formulation service, the historic “fee-for-service” type model, towards an integrated and higher value-add technology partnership offering that involves closer collaboration with a client or, in selected cases, the in-house development of programmes to defined points ahead of out-licensing.
Future revenues will arise from two primary activities: technology partnerships (also known as research-derived income) and licence agreements.
Arecor’s Arestat platform consists of a series of over ten different families of formulation techniques. These employ different combinations of excipients and formulation methods to achieve the enhanced or superior product features and physical properties. The excipients used are generally well characterised and typically pose no additional safety or regulatory burdens. Arecor employs a wide range of excipients, ranging from relatively simple molecules, such as mannitol (a tonicity modifier) and TRIS (a displacement buffer), through to large polymeric structures, such as PLGA and carbomers (release modifiers). Here appropriate, even slight, chemical modifications can materially alter the physical characteristics of the product (eg lipophilicity vs hydrophilicity).
Selection of the appropriate formulation(s) is facilitated through proprietary algorithms that ease the development greatly, both in evaluating possible alternatives and actual formulation timeliness, and often results in conventional excipients being used in unconventional ways. It is these insights that create the solutions to what are often viewed as intractable problems. The algorithms essentially help turn what could be termed a chemistry “art”, with an inevitable degree of serendipity, into a more logical, predictable, and stepwise process, albeit still retaining the scientific know-how and individual creativity of Arecor’s formulation team.
These skills have been applied to create improved formulations of an array of existing products; these range from enhancing stability (especially extending the shelf-life of protein products), changing supply chain requirements (with a greater temperature stability eliminating the need for cold chains), and creating stable aqueous formulations (converting lyophilised powders to ready-to-use liquid dosage forms). The technologies can also alter and improve therapeutic profiles, with the examples of the in-house insulin programmes, AT247 and AT278, showing improved speed of onset (ultra-rapid acting) and early glucose lowering action even at low concentrations (ultra-concentrated rapid acting) respectively.
Arecor’s formulation technologies and know-how can be applied to products that are at any stage of development, from preclinical phases through to those already on the market. They are particularly helpful in improving the profiles, kinetics, and stabilities of complex biological products such as novel antibodies, biosimilars, vaccines, and peptides. This flexibility means future revenues are not limited to a particular therapeutic segment or product type. Currently Arecor’s focus is on established biological products which have one or more limitations that can be addressed relatively swiftly and yet result in material clinical improvements.
However, the versatility of the Arestat technology means it can be applied to a variety of therapeutic modalities for various purposes, depending on the need or commercial priorities of Arecor’s clients or partners. Reformulation offers the potential for enhancing the properties of existing products for life-cycle management or franchise protection, or for gaining a competitive edge in an entrenched market with a differentiated, and IP protected, product that improves patient outcomes. The ability to develop such products in a cost-effective manner, with lower development risk and potentially shorter regulatory pathways is appealing to partners. Such affordable innovation may also translate into a compelling health economics argument that supports pricing and reimbursement at a level that is acceptable to payors and ensures an attractive commercial return though promoting broad patient access.
Arecor’s development pipeline is well-balanced, with a combination of in-house and partnered programmes that are in various stages of development, ranging from preclinical through to late-stage clinical studies. The main elements are the diabetes programmes, two of which are in clinical trials, the specialty hospital care projects, the two most advanced being licenced with Hikma, and an undisclosed partnered biosimilar which is likely to be the first product incorporating Arecor’s Arestat technology to launch.
Arecor’s primary proprietary development focus is currently on diabetes, where its formulation expertise is particularly suited to the modification of insulins. There are three active programmes: two are clinical stage specific rapid-acting insulins (AT247 and AT278), and the third is an insulin co-formulation (AT299) completing preclinical stages. Exhibit 3 provides an overview of their current status and plans.
The diabetes market is attractive not simply because of its growth prospects, due to well-documented shifts in demographics and lifestyles, but the clinical trends towards better monitoring and tighter glucose control are creating a demand for insulins that are faster acting and have better physiological characteristics. Possibly more importantly in our view is the rise of innovative delivery devices, initially CSII (continuous subcutaneous insulin infusion) pumps allied with digital technologies, where a fast and predictable onset of action is essential.
The treatment of diabetes with insulin replacement is nearly a century old; the first commercially available insulin, Iletin a short-acting insulin derived from porcine pancreas, was introduced by Eli Lilly in 1923. It was sixty years before the next major breakthrough, when in 1982 the first recombinant human insulins, Humulin R and N, were approved (Genentech/Eli Lilly). The introduction of new insulin analogues represented the next innovative leap, notably the first rapid-acting analogue Humalog insulin lispro (Eli Lilly, approved in 1996), followed by Novolog insulin aspart (Novo Nordisk, in 2002), and Apidra insulin glulisine (Sanofi, in 2004). The more recent focus is on faster, more physiological insulins: the ultra-rapid insulins, such as Fiasp (Novo Nordisk, 2017) and Lyumjev (Eli Lilly, 2020), allowed for better post-prandial glucose control. Interestingly, the first insulin lispro biosimilar, Admeolog, was introduced by Sanofi in 2017.
The ultra-rapid insulins typically achieve their pharmacokinetic profiles through specific formulations, with Fiasp (faster aspart) containing niacinamide (vitamin B3) for faster absorption and L-arginine (a naturally occurring amino acid) to improve stability, whilst Lyumjev contains treprostinil (a prostacyclin analogue that improves absorption via local vasodilation) and citrate (increases local vascular permeability). These achieve a faster onset of action and a faster time to peak effect, typically being seven to 14 minutes quicker than an equivalent first-generation rapid insulin. Initially these insulins were indicated for patients who were not achieving optimal glycaemic control, particularly in the important postprandial period, where the accelerated kinetics can make a clinical difference; but while this improved profile is beneficial, it is still not ideal. As mentioned, it is the advent of sophisticated automated insulin delivery (AID), also colloquially known as artificial pancreas, that has brought ultra-rapid insulins to the fore.
AT247 is a second-generation ultra-rapid prandial insulin analogue. Its formulation is based on insulin aspart, NovoNordisk’s well-characterised and proven Novolog, but now off-patent. The aim is to materially accelerate absorption after injection, achieving a profile that closely approximates healthy (non-diabetic) physiological insulin secretion, and so enabling more effective management of blood glucose levels. Such effective control not only reduces near-term issues such as hypoglycaemia and hyperglycaemia, but also diminishes longer-term complications such as neuropathy and kidney damage.
Typically, such an insulin consists of a mixture of hexamers (principally), dimers, and monomers. Whereas monomers are rapidly absorbed after injection, dimers and hexamers are absorbed at target cells more slowly on account of their size and must dissociate into monomers to become active. Insulin monomers are absorbed in c 5-10 minutes, dimers are absorbed in c 20-30 minutes, and hexamers can take 1-2 hours and result in prolonged activity. So, a primarily monomer insulin formulation would appear to offer an optimal absorption prolife. However, a hexamer-free ultrafast insulin formulation will face multiple challenges, notably stability, due to the propensity for insulin monomers to aggregate into amyloid fibrils. Hence, despite efforts to find suitable stability enhancers, the focus remains on improving absorption from the injection site.
AT247 contains excipients that bind calcium ions and cause a transient disruption of calcium-dependent cell adhesion through reversible interactions with the calcium-cadherin complex at the cell surfaces. The disruption at the injection site results in increased tissue permeability and the desired faster absorption. In addition, AT247 contains a stabilising surfactant and standard preservatives (phenol and m-cresol).
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. The relevant data are shown in the table and graphics (Exhibits 4 and 5).
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 will evaluating AT247 administered over three days through a continuous subcutaneous infusion via an insulin pump. The IND application was cleared by the FDA in September 2021. 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). Results are anticipated in 2022. A multi-centre Phase II study with c 42 diabetic patients will then explore AT247 against Fiasp when administered through an insulin pump over an extended period (around six weeks).
We expect AT247 to follow the FDA’s PHS 351(a) regulatory pathway, the traditional pathway for approval of biologics and innovator biologics, and not the 351(k) application employed for biosimilars (products that are highly similar to a reference or originator product). This reflects the expectation that AT247 will show “clinically meaningful differences” to existing products. Whilst PHS 351(a) is termed a “stand alone” application, the data burden is not expected to be onerous. For context, Eli Lilly’s Lyumjev approval was based on the results from the Phase III PRONTO clinical trial programme. This consisted of two 26-week studies: PRONTO-T1D enrolled 1,222 patients with Type I diabetes and PRONTO-T2D had 673 patients with Type II diabetes. In part this reflects that fact that Lyumjev (insulin lispro-aabc) is a reformulation of Humalog (insulin lispro).
We expect Arecor will complete the Phase II data package, and supporting stability documentation, before it seeks to out-licence AT247 ahead of the Phase III trials. Assuming smooth progress, the timings suggest first approvals, and commercialisation, could happen as early as 2025. AT247 is well placed for partnering, offering the potential of a best-in-class clinical profile and patent protection through to at least 2037. The appeal is that AT247 has demonstrated a superior profile in its first Phase I study and has the potential to be the fastest acting most physiological insulin available to patients in what is a clearly growing and attractive marketplace.
Although it is difficult to predict the terms for any out-licensing deal, we would expect the format to include an upfront payment, with development and commercial milestones, together with high-single digit to double-digit royalties on net sales. Understandably, given its timings and commercial potential, AT247 contributes £23.9m, equivalent to 86.4p per share, to our rNPV valuation model. AT247 currently is the second largest contributor to our valuation, although clinical progress and attractive deal terms could see it leapfrog Hikma-partnered specialty hospital product, AT282.
AT278 is also a novel formulation of insulin aspart but here the focus is 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. Around 35% of Type II diabetics are already using over 60 units of insulin daily, with a growing number needing 200 units or more. The appeal is not simply to reduce the burden of daily therapy through fewer injections and lower injection volumes, but also to allow wider access to modern insulin pumps (where their smaller size often results in limited reservoir capacities). Importantly, algorithm-driven devices require a rapidly acting insulin to optimise glycaemic control.
Type II diabetes is characterised by increasing insulin resistance and relative insulin insufficiency. Despite the advent of a variety of non-insulin treatments for glycaemic control, a sizeable number of patients (notably those with unresolved weight issues) will progress to requiring daily insulin. Over time, with progressive β-cell failure and rising resistance, the demand for higher daily insulin doses increases. The typical concentration of insulin products is U-100 (100 units/ml), with only a limited number of higher concentration products, such as Humulin R U-500 (human insulin, Eli Lilly), and the highest concentration rapid products available being U-200 (200 units/ml), such as Humalog U-200 (lispro, Eli Lilly).
At present, there is no high-concentration rapid-acting mealtime (prandial) insulin which means that the available options necessitate a choice between either a rapid-acting insulin at typical concentrations (such as NovoRapid U-100) or a slower acting concentrated insulin (Humalin U-500). The former has the speed advantage, while the latter, whilst it enables reduced injection volumes and/or fewer injections, is not fast acting with a slower more basal-type profile. Neither option is ideal, particularly for heavy insulin users (Type II diabetics with insulin resistance). AT278 is seeking to disrupt this prandial insulin market by offering the only concentrated rapid-acting insulin, which could also lower the barrier to entry for insulin pump use. Availability of a rapid ultra-concentrated insulin could facilitate the use of smaller pumps and miniaturised devices, as well as potentially longer-term infusion pumps where insulin volumes are critical.
The formulation of a higher dose rapid-acting insulin is not straightforward; for example, a simple increase in concentration will result in slower absorption. Two main issues slow the onset of action and shift the absorption curves of concentrated formulations to the right. The first is hexamerisation: a higher insulin concentration favours the formation of monomers and dimers into hexamers, which inherently slows absorption. The second is the simple physical constraint of having a smaller relative surface area through which a concentrated insulin diffuses into tissues to reach capillaries. Hence the use of appropriate excipients that improve absorption significantly are critical to achieving the desired PK/PD profiles and showing bioequivalence to the available rapid-acting but not concentrated insulins.
AT278 is following a similar development pathway to AT247. A Phase I PK and PD study in 38 adults with Type I diabetes in an euglycaemic clamp setting comparing AT278 with NovoRapid is well-advanced, with results expected by end-2021. A second Phase I study evaluating the PK/PD profile when administered via an insulin pump is planned for 2022. We expect AT278 will also undergo a Phase II study and that out-licensing to a larger pharmaceutical player will happen when a suitable data package (clinical, stability and toxicology) is available. The partner would be expected to undertake the Phase III trials required for marketing approval, with the PHS 351(a) regulatory pathway most likely. Again, assuming smooth progress, first launch could happen as early as 2025.
We also expect a similar out-licensing deal, with an upfront fee, development, and commercialisation milestones and mid- to high-single digit royalties. However, given AT278’s currently smaller market potential compared to AT247 we would expect the overall deal metrics to be smaller. Partnering both programmes with the same company in a single deal also remains a possibility. The timings and commercial potential mean that AT278 contributes £5.4m, equivalent to 19.4p per share, to our rNPV valuation model
AT299, a stable formulation of pramlintide and rapid insulin, is the third programme in Arecor’s proprietary diabetes franchise. It is currently only a small part of our valuation reflecting the fact that it is both early-stage (preclinical) and high risk; however, its profile could have considerable commercial promise. Pramlintide (Symlin) is an injectable amylin analogue for use together with insulin by Type I and II diabetics. Amylin is a natural hormone that is co-secreted by the pancreas alongside insulin. Amylin and pramlintide have similar effects on lowering both postprandial glucose and glucagon, and also in delaying gastric emptying. Pramlintide has a chequered history, with concerns over limited efficacy and potential hypoglycaemia curtailing its clinical uptake. Additionally, the incremental injection burden was seen as a major negative by patients.
However, combining pramlintide with insulin improves glycaemic control after a meal, induces weight loss, and produces a satiety effect. This, coupled with the advent of improved diagnostics and sophisticated pumps (artificial pancreas), has brought the appeal of replicating the body’s natural secretion cycle to the fore. Arecor is one of three companies that are exploring ways to co-administer pramlintide with insulin: the others are Adocia and Xeris. Adocia is the most advanced, with its lead programme, M1Pram (ADO09, human insulin and pramlintide) in Phase II trials. A second programme, BioChaperone LisPram (insulin lispro and pramlintide), is in Phase I. Xeris’ XP-3924 (human insulin and pramlintide) reported encouraging results from a Phase II trial. Arecor’s AT299 is finalising formulation work, with this phase of development supported by a fund matching grant from the JDRF (Juvenile Diabetes Research Foundation).
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. The term RTU (ready to use) refers to injectable drugs that are prepared to the right concentration and volume but require transfer to the final device, such as an infusion bag; while RTA (ready to administer) injectable drugs are already in the final administration form (often an IV bag).
Understandably manufacturers are keen to address these market needs and the lack of a RTU or RTA presentation is usually due to limitations in developing stable liquid formulations. The Arestat platforms are proficient at reformulating existing products into RTU and RTA injectables and Arecor has a dedicated research group that aims to maintain a continuous pipeline of product opportunities. Currently there is an early-stage portfolio of different specialty hospital products under development at Arecor in addition to the two products partnered under licence to Hikma. Although the products are not disclosed, management states the combined global market size of their specialty hospital pipeline is c $3.8bn.
Arecor currently has two active licencing agreements in place for specialty hospital products. Both programmes have been partnered with Hikma, with the most advanced, AT282, a novel formulation of a biosimilar product, expected to be launched as soon as 2023/4.
AT282 is a novel formulation of an already marketed product that is only available as a lyophilised powder which needs to be re-constituted before use. In contrast, the new formulation uses Arestat technology to create a stable, RTU liquid concentrate which was initially developed to proof of concept by Arecor and then partnered. A co-development and licencing deal was struck with the multinational generic pharmaceutical company Hikma Pharmaceuticals in January 2020 and Arecor expects to reach the next milestone under this collaboration later in 2021. Hikma will then fund and generate the necessary data to support approvals in its territories. 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 in 2023/4.
Under the terms of the agreement Arecor received an upfront payment and will be eligible for further payments as development, regulatory and commercial milestones are achieved. Royalties on sales are also payable and while the precise terms are undisclosed, they are expected to be high-single to double-digit percentages. Hikma is responsible for manufacturing and commercialisation in its chosen geographies, but Arecor has retained commercial rights in certain, undisclosed but assumed to be relatively minor, markets. Given the limited information disclosed, we have modelled AT282 conservatively and only attribute a value of £35.8m, equivalent to 129.2p per share.
AT307 is the second RTA specialty hospital product being developed with Hikma, with the co-development and licence deal struck in October 2020. The terms of the agreement are similar to those for AT282 and, again, due to commercial sensitivities the details in the public domain are limited. AT307 is a reformulation of an existing marketed product and here the aim is to create a ready to administer (RTA) product. The development work appears to be progressing well, with the next licence milestone expected to be achieved during 2022. The same abbreviated regulatory pathways will be employed, and we have assumed market launch in 2025. We have modelled AT307 as being valued at £10.5m, or 37.9p per share.
Arecor also has a number of technology partnerships where pharmaceutical partners’ own products are being reformulated to enhance their properties. Arecor is targeting its technology partnering programmes towards high value biologics, including biosimilars, novel biologics, and vaccines. These can be at any stage in development from early phase clinical development through to products that are already on the market. The aim is to identify formulation issues where Arestat can make a difference, for instance differentiating a biosimilar from the originator product or reducing the cold-chain requirements for a vaccine. These programmes usually involve an initial study to explore the feasibility of a reformulation achieving the desired characteristics which, once completed, leads to a licensing agreement. Examples of enhancements achievable include making:
Arecor currently has two licenced programmes that have emerged through formulation development technology partnerships. One is a biosimilar with an undisclosed global pharmaceutical company (with launch also possible in 2023) and the other is a Phase I clinical programme with Inhibrx. The company also has multiple active formulation development contracts with disclosed companies including Eli Lilly, Intas Pharmaceuticals, and Par Pharmaceuticals. This portfolio of pre-licence collaborations represents potential upside given that the some of these programmes are likely to progress and transition to full licences over time.
AT220 is a novel and differentiated formulation of a biosimilar under development by the partner. A partnering deal with an undisclosed “global pharmaceutical and healthcare company” was struck in late-2017 and two milestone payments have already been received. The final formulation has been transferred to the partner, and this novel formulation of the product is in late phase development. Latest timelines suggest first approvals and launches could happen in 2023. In which case further milestones and royalties on sales would arise. None of the financial terms have been made public. Again, given limited disclosure, we employ conservative assumptions attributing a provisionally modest value of £6.2m, equivalent to 22.4p per share, to AT220.
AT292 is the lead programme in a multi-product collaboration with Inhibrx (NASDAQ: INBX), a California-based biotech company that currently has four differentiated programmes in clinical development. AT292 is a novel, enhanced formulation of INBRX 101, a recombinant Alpha-1 Antitrypsin Fc-fusion Protein that is completing Phase I studies for the treatment of Alpha-1 antitrypsin deficiency (AATD). Arecor has received an upfront payment, with further payments due on the achievement of development, regulatory and commercial milestones along with payments on commercial sales. Similar terms will apply to any additional products selected for reformulation. Inhibrx will have rights, and the associated intellectual property, to the new formulations developed and will undertake the manufacture and commercialisation of the product(s). Given the early clinical stages, we attribute a valuation of £4.2m, or 15.3p a share, to AT292 and do not include any contribution from any additional future programmes.
Arecor’s key strength is its ability to formulate a broad variety of challenging molecules into clinically viable, and commercially attractive, drugs. This is particularly relevant to biological proteins, where the ability to produce stable liquid formulations is particularly difficult. The various elements of the tools employed have been developed and refined since 2007 and form the basis of the Arestat technology platforms. A key element is a series of proprietary algorithms and computer-based systems that operate across these techniques and facilitate rapid formulation optimisation for any specific programme.
Although arguably overly simplifying, these technologies can be considered skilful insights into how specific combinations of excipients and other formulation ingredients interact with the active drug to alter performance characteristics and achieve the desired outcomes. These physical changes can range from improved stability to better solubility and are particularly important with biological therapeutics, typically expensive products such as antibodies and peptides, or with vaccines. Interestingly, the resulting clinical improvements, which are often sizeable, are based on often subtle interplays between various well-documented excipients with known attributes. These insights are protected through a combination of broad technology patents, knowhow, trade secrets, and patents on specific product applications (Exhibit 7).
Arecor has built a substantial patent estate, with over 50 patents granted and a further 70+ pending, across the major geographies, including the US, Europe, India and China. These can be classified into 35 patent families covering areas such as displaced buffer technologies, stabilised protein formulations containing amphiphilic excipients, stabilised antibody formulations, and stabilised Fc protein construct formulations. Elements from each of these families, as applicable, form the “background IP” that is employed to resolve a particular formulation problem, with any resulting insights used to create new “foreground IP”. The novel formulations generated can then be protected specifically by elements of the background IP, the new foreground IP, or a selected combination of both. With partnered programmes the IP ownership typically remains with Arecor and the partner licences exclusive rights to its use.
Arecor’s proprietary insulin programs, AT247 (ultra-rapid insulin) and AT278 (rapid ultra-concentrated insulin), provide an apt example of how the patent strategy is employed to generate additional product-specific IP. The formulation work has created a further series of five patent families that not only cover the lead novel enhanced formulations, but also offer various defensive strategies against future competitive threats. Similarly, other work, including with partnered programmes, has resulted in a further nine patent families being created.
These families of patents are enhanced by trade secrets and specialist know-how. For instance, a number of processes and formulations have been deliberately not disclosed in patent applications so as to not reveal any potentially useful competitive information. Examples include the precise formulation of specific excipients that are employed to stabilise a particular protein, together with the computational models used to identify the appropriate structure that optimises stabilisation. The know-how elements are broader and relate to the processes and approaches used to achieve the stabilisation. Key features of the Arestat technologies are their scalability and transferability, which makes them highly versatile as a means of achieving rapid evaluation of the various formulation options that could be utilised. Additional factors are a thorough understanding of stability requirements, development processes, and regulatory requirements for such pharmaceutical products.
The strength of the patent estate has been established by several challenges being successfully rebuffed. However, more pragmatically, we would view the ease with which attractive licensing deals, with major global companies, have been struck as a tangible demonstration of not only the technical value of the Arestat platforms but the inherent robustness of its IP protection strategies.
Formulation expertise is found across the whole spectrum of the drug industry, with all the large players having sizeable teams and capabilities. The initial formulation, and subsequent reformulation, of a pharmaceutical is routine practice within the industry, being used to enhance a product’s usefulness (such as reducing dosing frequency) or extend commercial life (typically with longer-acting products). Historically much of this work was undertaken in-house; however, outsourcing to specialists, especially for the more complex and technically challenging molecules, is common.
There are over a dozen small companies, both public and private, that arguably operate in areas similar to Arecor, albeit with differing approaches. Arecor’s Arestat technology means that it is uniquely positioned; it can develop novel formulations that deliver enhanced versions of existing products that are otherwise unachievable. In terms of a peer group, we have examined companies with a specific interest in the reformulation of existing products as well as those with similar programmes in diabetes and hospital products.
Adocia is a French biopharmaceutical company founded in 2005, which listed on EuroNext Paris in 2012. It seeks to make best-in-class medicines using its BioChaperone platform to optimise the performance of existing therapeutic proteins. The platform mimics the electrostatic interactions first noted with heparin, a natural polysaccharide, which forms physical complexes with various peptide-based molecules. The concept is used with polymers, oligomers, and small organic compounds to create patentable complexes that are reversible and do not modify the active protein itself. While over 300 compounds have been made (with improvements such as faster onset of action, modified absorption, improved bioavailability, longer efficacy, and better stability), there are seven disclosed pipeline assets.
Of Adocia’s five clinical stage programmes, four are insulin formulations: two ultra-rapid formulations of lispro (BioChaperone Lispro U100 and U200), a combination of the basal insulin glargine and the rapid-acting insulin lispro (BioChaperone Combo), and a prandial insulin with the amylin analogue pramlintide combination (M1Pram). The fifth is an aqueous formulation of human glucagon (BioChaperone Glucagon) for the treatment of hypoglycemia; this is on hold awaiting partnering. Additionally, four programmes are in late-preclinical evaluation, again mainly centred on diabetes. Adocia is actively seeking partners for further development and commercialisation. Currently there is one major partnership, from April 2018, with the Chinese insulin producer Tonghua Dongbao. A licensing agreement with Eli Lilly was struck for BioChaparone Lispro in 2011, terminated in 2013, re-licensed in 2014, and terminated again in 2017.
Eagle Pharmaceuticals is a US-based specialty pharmaceutical company founded in 2007, which listed on NASDAQ in 2014, raising $50.3m. Eagle reformulates existing injectable products using a variety of techniques (eg nanosuspension) to improve factors such as delivery, ease of use, and stability. It is focused on treatments for oncology, critical care, and orphan diseases that can be approved through the FDA’s less onerous 505(b)(2) regulatory pathway. Marketed products include Ryanodex, an easier to reconstitute formulation of dantrolene, and Belrapzo and Bendeka, reformulations of bendamustine. Pemfexy, a branded generic to Eli Lilly’s Alimta (permextred), is expected to launch in the US in February 2022. Similar programmes are underway with reformulations of vasopressin and fulvestrant. Earlier programmes include a new dantrolene formulation for protecting against chemical warfare nerve agents.
Eagle’s FY20 revenues were $187.8m, with non-GAAP EBITDA of $64.7m, and operating cash flow of $37.5m. Cash and equivalents were $103.2m, with debt of $34.0m. The strong balance sheet was used to repurchase $35.0m of common stock in 2020 but is expected to be employed in pursuing external opportunities in the near term. In 2018 Eagle acquired Arsia Therapeutics for up to $78m in order to access their formulation technology for reducing viscosity of proteins. In 2020 it invested $20m in TYME Technologies for co-promotion rights to SM-88, a novel oral small molecule in Phase II/III studies for difficult-to-treat solid tumours such as pancreatic cancer. Eagle is responsible for 25% of US marketing costs and receives 15% of the relevant net sales.
Xeris Pharmaceuticals is a US-based specialty pharmaceutical company that uses its formulation technology platforms to develop and commercialise ready-to-use, liquid, and stable injectables. It was founded in 2005 and listed on NASDAQ in 2018, raising $98m. There are two principal technologies that create highly concentrated, non-aqueous, RTU injectable (subcutaneous and intramuscular) formulations: Xerisol for peptides and small molecules, and Xeriject for large biologics such as antibodies, enzymes, and vaccines. Its primary focus is to expand its RTU glucagon portfolio (for severe hypoglycaemia). Two forms are already approved: Gvoke Hypopen (Ogluo in Europe) is a rapid, easy-to-use, rescue auto-injector pen, and Gvoke PFS (pre-filled syringe) is a more traditional injector similar to existing glucagon syringe kits.
Xeris is also pursuing partnerships where its technology is utilised for third-party products. These Technology Platform Collaborations (TPCs) aim to be self-funding, with partners resourcing clinical development, and offer the potential for development and commercialisation milestone receipts and royalties on net sales. The Gvoke approvals have raised Xeris’ visibility and it has three active projects with unnamed Top 10 pharmaceutical companies. Xeris also has a pipeline of clinical programmes, such as pramlintide-insulin and diazepam (for orphan drug indications such as Dravet Syndrome and Acute Repetitive Seizures), it is seeking to out-license.
Other companies that provide useful comparisons and insights include:
Aegis Therapeutics was a US-based drug delivery company with three patented drug delivery and drug formulation technologies (Intravail, ProTek, and Hydrogel) applicable to a wide-range of molecules including therapeutic proteins, peptides, macromolecule,s and small molecules. It was acquiredin December 2018 by Neurelis whose lead product, Voltoco (a diazepam nasal spray approved in January 2020), used Intravail to enhance transmucosal absorption.
Coherus BioSciences’ employs its formulation IP and technology to make high-quality biosimilar therapeutics for oncology, immunotherapy, and ophthalmic indications that it also commercialises. In January 2021, it in-licensed Junshi Biosciences’ toripalimab, an anti-PD-1 antibody, to form the cornerstone to build a leading immuno-oncology franchise in North America funded with the cash generated by its biosimilar business. It listed on NASDAQ in 2014, raising $92m, with subsequent equity and convertible loan note placings raising over $400m.
Coriolis Pharma is a private German company founded in 2008. It specialises in producing robust and stable complex biologics, such as virus-like particles (VLPs), nucleic acid-based products, and gene and cell therapies. Coriolis works on a fee for service basis and seeks no financial participation in any IP generated, noting that once the formulation is delivered there are no royalties and no milestone payments. The business is family owned and proudly independent, with most of the staff having strong academic backgrounds.
Halozyme Therapeutics’ technology Enhanze, based on its patented recombinant human hyaluronidase PH20 enzyme (rHuPH20), improves sub-dermal dispersion and absorption allowing previously IV injectables to be administered subcutaneously. Halozyme has a roster of blue-chip pharmaceutical companies as clients, including Roche, Pfizer, AbbVie, Eli Lilly, and BMS. Five products are approved, and the improved formulations generate mid-single digit royalties and performance-based milestone payments.
Zealand Pharma is a Danish biopharmaceutical company that develops and commercialises peptide-based medicines, with a focus on metabolic and gastrointestinal diseases. There are two marketed products: VGo, a series of wearable insulin devices, and Zegalogue (dasiglucagon), a rescue pen auto-injector for severe hypoglycaemia. Development programmes include glepaglutide, a long-acting GLP-2 analogue for short bowel syndrome, and BI 456906, an acylated GLP-1-glucagon agonist licensed to Boehringer Ingelheim and under evaluation for diabetes, obesity, and NASH.
Ziylo is a 2014 University of Bristol spin-out that was acquired by Novo Nordisk in 2018 for up to $800m. It developed proprietary synthetic molecules that bind glucose in the bloodstream more effectively and may become a key component in glucose responsive insulins (GRIs). These GRIs, also known as smart insulins, could react rapidly to metabolic need, mimicking natural insulin responses in real time, with multiple benefits including avoidance of hypoglycaemia. If this still theoretical promise is realised, GRIs could become the gold standard future diabetes therapy.
In common with most innovative healthcare companies, Arecor’s three main sensitivities relate to clinical and regulatory aspects, commercial execution, and the financial resources required to accomplish these. More specifically, the key near- and medium-term sensitivities are directed to clinical progress of the two main development (AT247 and AT278) and partnered programmes:
More generally, clinical development risks are known and documented; <8% of preclinical assets reach the market. Success probabilities improve as a programme progresses through development, with a key inflection point at the Phase II proof-of-concept stage. This is viewed as attractive timing for value optimisation as the risk profile improves materially but expensive pivotal Phase III trials still lie ahead. As already mentioned, Arecor’s focus is on improving existing products, hence much of the clinical/regulatory risk inherent with novel molecules is minimised.
We view the partnering process as the key test of a management’s strategy. A well-struck deal validates not only the attractiveness of the proprietary technology and scientific skills, but commercial terms are a tangible insight into management acumen. However, Adocia provides a pertinent example of how what may initially appear an attractive deal, as attested by the then share price performance, can turn sour. In Arecor’s case, the majority of its future revenue streams depend on how partners perform in competitive markets, where it will have no control or influence on the commercial process or strategy. Nonetheless, we would argue this is an industry-wide risk, and Arecor is no different to other similarly sized companies. The fact that Arecor’ pipeline of differentiated assets largely comprises enhanced existing therapeutic products, should mitigate this somewhat given lower development risk and potential for improved outcomes. This could offer a competitive edge and support attractive pricing/reimbursement.
Financing is a perennial element to any innovative research-based company and Arecor is no exception. We believe the strategy to develop selected assets to a greater value creation point is sound, the inherent scientific expertise is proven, and the current management is well respected. The real question is whether investors appreciate the investment case and can support Arecor through to the next phase of its journey. Our judgement suggests appropriate funding will become available if or when the need arises.
Arecor can be viewed as a classic discovery and development play, albeit with a lower development risk profile, hence valuing the business using an rNPV model is appropriate. However, we acknowledge that such models tend to attribute most value to later stage clinical compounds, underplaying earlier stage programmes and the value of the platform, and hence we are likely to be erring on the side of conservatism. Our model explicitly values the diabetes franchise, the four partnered assets, and the in-house specialty hospital products research programme(s) as this is a focus area.
The rNPV of the individual development projects are assessed and success probabilities adjusted for the inherent clinical, commercial, and execution risks each carry. These are summed and netted against the costs of running the business and net cash. The success probabilities are based on standard industry criteria for the respective stage of clinical development but, importantly, flexed to reflect the inherent risks of the individual programme, indication targeted, and the development/regulatory pathway. We also seek to factor in known commercial and financial considerations.
Even though Arecor’s current strategy envisages the out-licensing most of the programmes before the later, and more expensive, stages of clinical development, we allow for commercial and execution risks as we view these as integral to any programme’s intrinsic value. Also, we consciously employ conservative assumptions throughout; for example, erring on the cautious side with factors such as the timing of clinical studies, product launches, royalty rates, adoption curves, market sizes and growth rates, net pricing, and patient penetration.
The commercial sensitivities surrounding the nature and terms of the partnered programmes inevitably mean visibility is limited until late in the development process. Hence, until our knowledge improves (especially with respect to the identity of some of the underlying programmes), we also employ modest expectations for launch timings, pricing, and market shares. At present, we only include very modest risk-adjusted development milestones assumptions for actual and potential licensing deals, with assumed royalty rates at the lower end of management guidance.
Our conservative approach also means there are other key areas of potential upside to our model. At this stage, we do not attribute a value to the earlier-stage formulation development collaborations due to the limited visibility surrounding the underlying assets, timing and likelihood of conversion to longer-term licence partnerships, or the potential economics. We note that management expectations are for one formulation development programme to be licenced each year. In addition, we do not provide an indicative valuation of the Arestat technology platforms. Nevertheless, we highlight that Arecor has a solid track record of both formulating attractive compounds and a management history of striking commercially sound licensing deals which gives us a satisfying degree of comfort of the sustainability of the business model. We believe that our valuation is realistic but, in line with our philosophy, errs on the side of caution
Our model ascribes a valuation for Arecor of £103.7m, equivalent to 374p per share. The outputs and underlying assumptions of our model are presented in Exhibit 8. The main contributors are AT282 (Hikma) which accounts for around a third of our valuation, AT247 (ultra-rapid insulin) which represents 23%, and the other Hikma programme, AT307, contributing 10%.
To provide context we have collated data from peers (Exhibit 9) with similar business models and/or a comparable development pipeline in terms of disease focus, size, and maturity. All are publicly listed and range from Adocia, which has a similar development pipeline to Arecor (albeit with a somewhat chequered corporate history), through to Halozyme Therapeutics, which has successfully demonstrated the financial viability of the partnering model.
Our key takeaway from this comparison is that Arecor’s current commercial strategy has been shown to work in related fields, with its peer group demonstrating that development progress and commercial execution is reflected in attractive market valuations. Assuming management’s focus on strategic execution results in continuing delivery of development progress and successful completion of partnership deals, this has the potential for material upside to the market valuation.
Arecor generates steady revenues from its formulation development partnerships, with more variable income from licence agreements, with the latter including upfront payments when licences are granted and milestones which are contingent on development progress and commercialisation. The company reported FY20 revenues of £1.7m in the year-ending 31 December 2020 (FY19 [12 months ending May 2019]: £748k), with licence income (upfront, milestone, and other partner payments) comprising £920k (FY19: nil) and research income (from formulation development contracts) of £778k (FY19: £748k).
FY20 operating expenses were £5.58m (FY19: £4.5m) with R&D spend of £3.94m (FY19: £3.09m) and SG&A costs of £1.64m (FY19: £1.42m). The pre-tax loss for FY20 was £3.51m (FY19: £2.87m), with a net loss of £2.75m (FY19: £2.44m) as the company will likely continue to benefit from R&D tax credits (FY20: £760k; FY19: £435m) until profitability.
Arecor’s cash and equivalents at end-December 2020 stood at £2.9m (£3.1m at end-December 2019). The IPO provided a boost with closing cash of £22.1m (unaudited) at end-June 2021. Use of IPO funds has been ear-marked as follows:
IPO proceeds will 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. Consequently, we anticipate a significant increase in R&D investment to £7m for FY21e and £11m for FY22e with initiation of the Phase II diabetes trials. FY21e should also see higher SG&A spend due to one-time IPO costs, but we expect this to fall to a run rate of c £2.5m from FY22e.
We expect Arecor’s research-derived income to increase modestly from FY21 as the infrastructure is established to increase capacity for both in-house and formulation development work with partners. We do not include any assumptions on potential conversion(s) of pre-licence technology partnerships to longer-term licence agreements in our forecast (which would entail a small upfront payment, and future milestones and single-digit royalties). The level of licence income will be determined by development and commercial progress of Arecor’s licenced programmes, the timing and terms of new partnership deals (particularly for the in-house diabetes assets), and product launches. Royalty revenues are expected from 2023 onwards following launch of partnered products. Other income consists of government grant funding; a £2.8m grant was awards by Innovate UK in March 2021 for AT247 clinical development.
Our forecasts presented in Exhibit 10 assume that Arecor is funded through 2023. Partnering/licence income in the form of upfront payment or development milestones from the diabetes and/or specialty hospital products could extend the cash runway further or support future product opportunities.
Chesterford Research Park,
Saffron Walden, UK
|BGF Investment Management Ltd||13.6|
|Albion Capital Funds||5.5|
|Chelverton Asset Management||4.7|
|Martin & Kathleen Wood||4.2|
|Unicorn AIM VCT||4.0|
|Amati AIM VCT||3.0|
|Andy Richards||Non-Executive Chair||Appointed 2008. Chair of Congenica, Abcodia, Ieso Digital Health, and Closed Loop Medicine, and a director of Owlstone Medical, Cancer Research Technology (the commercial board of Cancer Research UK) and The Scale-Up Institute. Also a council member of the UK Medical Research Council. Previously a founder of Chiroscience and director of Chiroscience, Vectura, Ixico and Silence Therapeutics. Holds a PhD from Cambridge University.|
|Sarah Howell||CEO||Joined as COO in 2011, appointed CEO in 2015. Responsible for Arecor’s transformative switch from a third-party reformulation contractor to a development specialist with in-house clinical programmes. Previously Vice President CMC & Technical Development at BTG and Director of Outsourced Manufacturing at UCB-Celltech. Holds a BSc in Chemistry from the University of Birmingham and a PhD in Physical Organic Chemistry from the University of St Andrews.|
|Susan Lowther||CFO||Joined as CFO in 2019. Extensive board level experience of public and private life sciences companies. Previously CFO at IXICO, Novacyt SA, and BioWisdom. Before this, Finance Director at RiboTargets and Head of Finance at Lonza Biologics. A Fellow of the Chartered Institute of Management Accountants since 2003.|
|Jan Jezek||CSO||CSO since 2007. Responsible for all R&D activities, platform development, and IP strategy. Instrumental in creating the various interlocking Arestat formulation platforms and translating these into commercial applications. Previously Principal Scientist at Insense Limited, also a spin-out from Unilever. Holds a joint Doctorate from the University of Bedfordshire and the University of Chemical Technology, Prague.|
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