Investment case

Arecor Therapeutics, created in 2007, is a spin-out of Insense (part of Unilever). Its initial focus was on the reformulation of existing products using a proprietary technology platform to address known issues on a fee-for-service basis. This built both the platform and relationships, over time augmenting and broadening the formulation technologies (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 alongside a technology licensing model. Partnership deals typically involve research fees, milestones, and single to low-double digit percentage royalties on sales. In-house programmes are expected to be self-funded through to proof-of-concept, typically Phase II trials, and out-licenced for an upfront, milestones, and high single- to double-digit sales royalties. To date, Arecor has raised £42.3m in equity (including £20m [gross] via its June 2021 IPO, and £6m in August 2022) and secured c £8.1m in grants. Arecor, based in Chesterford Research Park, near Cambridge, UK, currently employs 43 people (with an additional seven at Tetris).

Valuation

Our Arecor valuation uses 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 £179.6m, equivalent to 586p per share (fully diluted).

Financials

Cash and equivalents of £13.7m (end-June 2022) plus August placing proceeds of £6m gross should progress proprietary assets through next value inflection points and expand internal capabilities to support the early-stage formulation portfolio. Potential partner/licence income from existing or new deals could extend this runway beyond FY24 or support future product opportunities. Higher R&D spend on the in-house pipeline is expected near-term, but G&A growth will be modest. Timelines suggest first partner launches from 2023+, with meaningful royalties from 2025. Ogluo Europe sales should gain traction over the same period.

Sensitivities

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 pricing, reimbursement, and commercialisation still apply.

Arecor: facilitating affordable innovation

Arecor employs its Arestat platform to develop enhanced, novel formulations of established drugs which are otherwise unachievable. Typically, the originator drugs have clear clinical benefits but are hampered by specific issues with their therapeutic profiles. Arecor’s approach has created a broad portfolio of innovative products that offer similar milestone and royalty streams to classic drug discovery companies, but it has done so in a less costly and more rapid manner. Similarly, working with well characterised drugs materially lowers the risk profile. The pipeline is well balanced, with partnered and in-house assets and timelines that provide a blend of value inflection points. While all the programmes provide attractive commercial prospects, it is the emerging diabetes franchise that, in our view, provides the most upside within our investment case. The two lead compounds – AT278, an ultra-concentrated, ultra-rapid insulin, and AT247, an ultra-rapid pump optimised insulin – are completing Phase I studies. If successful, these could be ideally placed for the notable shifts underway in diabetes therapy. Ahead of upcoming news flow our updated valuation is £179.6m or 586p/share.

Arecor’s balanced clinical pipeline of in-house and partnered assets, and growing portfolio of pre-licence tech formulation collaborations is based on its proven expertise in reformulating existing compounds into novel products with improved properties. Leverage of its Arestat platform and formulation expertise enables Arecor to maintain a sustainable flow of commercially attractive and relatively low risk future development opportunities that appeal to partners, as evidenced by the four partnered projects and seven collaborations over the past 18 months.

Reformulation of known and well-characterised drugs means development risk is lower than for a novel API, and the favourable regulatory environment for reformulations means that, if required, any clinical trials will be smaller. The appeal for partners is that these pathways tend to be significantly cheaper and faster than standard routes, which, coupled with the potential to develop differentiated drugs with improved outcomes, could support cost-effective pricing and reimbursement that ensures broad patient access. These shorter and less costly pathways also provide Arecor with the opportunity to optimise value creation by progressing certain programmes further through the clinic ahead of out licensing.

Arecor currently has four licenced programmes: two specialty hospital products with Hikma and two from technology partnerships (a late-stage biosimilar with an undisclosed global player and a Phase II-ready orphan disease drug with Inhibrx). The first of these could launch from 2023+ onwards, contributing to potentially sizeable royalty streams from 2025.

Internal development focuses on diabetes (with two Phase I stage novel insulin formulations: ultra-rapid and ultra-concentrated ultra-rapid) and several specialty hospital products (in the earlier formulation stages). In our view, the diabetes franchise is the key near-term value driver; these assets will be taken through proof-of-concept Phase II studies to determine the optimal partner and maximise Arecor’s deal economics. Conversely, the specialty hospital products are assumed to require little/no clinical development ahead of either out licensing, or self-commercialisation in Europe through the newly acquired Tetris Pharma subsidiary.

The three Ps: platform, pipeline, and partnering

Arecor is a clinical stage development company that has built a balanced pipeline of in-house and partnered assets, all produced by the application of its Arestat formulation technology platforms. This pipeline ranges from preclinical through to late-stage development and spans a variety of indications. However, the wholly owned programmes are focused on Diabetes and Specialty Hospital products. An overview of the current pipeline is presented in Exhibit 1.

Arecor’s lead in-house assets are the diabetes programmes AT247 and AT278 (which are in Phase I trials), while the most advanced partnered programmes include two specialty hospital products licenced to Hikma (AT282 and AT307), AT292 (INBRX-101), a drug candidate for Alpha-1 antitrypsin deficiency (AATD), and AT220, an undisclosed partnered biosimilar which is likely to be the first product employing the Arestat technology to launch.

Exhibit 1: Arecor pipeline summary

Source: Trinity Delta, Arecor Therapeutics   Note: AATD – Alpha-1 antitrypsin deficiency; GvHD – graft vs host disease; RTU – ready to use; RTA – ready to administer; CVD – cardiovascular disease * licence and distribution agreements from Tetris Pharma

Unusually for a development-stage company, Arecor is already revenue generating. These revenues currently come from fees paid by partners, typically larger pharmaceutical or biotech companies, for the reformulation of their ‘difficult’ or ‘problem’ products, as the Arestat technologies can create novel formulations of existing therapeutics with enhanced properties that would otherwise be unachievable. This revenue source eases cash flows and provides important external validation for Arestat, however, we expect this to be dwarfed by future income arising from royalties and milestone payments as existing, and future, licensing deals progress through development and are commercialised.

Arecor’s partnering model has evolved from a ‘fee for service’ type arrangement 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 assets to defined points ahead of out-licensing. Consequently, future revenues will be derived from two primary activities: technology partnerships (also known as research-derived income) and licence agreements.

• Technology partnerships: These involve a formulation development collaboration where elements of the Arestat platform are applied to reformulate and develop enhanced versions of one or more of a partner’s own products or product candidates. Such collaborations are revenue generating from day one through research fees and represent upside licence potential should these deals ultimately convert to licences. Arecor has a portfolio of pre-licence formulation partnerships, with two having transitioned to a licence: AT220, a late-stage biosimilar (undisclosed partner) and AT292, a clinical orphan drug project (Inhibrx).
• Licence agreements: These are derived from two sources: the conversion of technology partnerships, or the out-licensing of internally developed products. The former includes an upfront fee on grant of the licence, with further modest payments on the achievement of agreed development milestones, and low (typically single-digit) royalties, or equivalent amounts, on eventual sales. The latter has more attractive economics reflecting Arecor’s greater value contribution and has been commercially validated by the specialty hospital product deals with Hikma. While proprietary licence deals are structured similarly to those for technology licences, they are associated with larger development and commercial milestones and higher royalties, typically ranging from high-single to low-double digit.

The recent acquisition of Tetris Pharma adds another near-term revenue stream. It holds exclusive European commercial rights to Xeris Pharmaceuticals’ ready-to-use glucagon auto-injector pen for people with diabetes, Ogluo, which has so far launched in the UK and Germany pending a wider European roll-out. More broadly, as illustrated in Exhibit 2, Tetris Pharma complements Arecor’s strength in formulation development and focus on Diabetes and Specialty Hospital products, bringing several strategic benefits across both franchises.

Exhibit 2: Tetris Pharma’s fit within Arecor’s existing skill sets

Source: Arecor Therapeutics

Our September 2022 Update provides further details on the Tetris Pharma acquisition. Ogluo’s profile fits well with Arecor’s skillset in improving ‘difficult to use’ injectable products and while we emphasise that the glucagon commercial opportunity is attractive on a standalone basis, longer term, Tetris Pharma also provides Arecor with the infrastructure to directly market selected niche products from its Specialty Hospital products franchise. This should accelerate Arecor’s goal of becoming a research-led self-sustaining pharmaceutical company.

The platform: capabilities, benefits, and IP

Arecor’s key strength is its ability to formulate a broad variety of challenging molecules into clinically viable, and commercially attractive, drugs. This is especially relevant to biological proteins, where the creation of stable liquid formulations is notoriously difficult. Since 2007, the company has developed and refined the various elements of the tools employed which form the basis of the Arestat technology platforms. A key element of this is a series of proprietary algorithms and computer-based systems that operate across these techniques and facilitate rapid formulation optimisation for any specific programme.

The versatility of the Arestat technologies means they 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. This flexibility also means future revenues to Arecor are not limited to a particular therapeutic segment or product type. In our view, the application of Arestat technologies to create an in-house product pipeline is particularly attractive and offers the potential to create meaningful value to both partners and patients in a highly cost-effective manner.

Arecor’s Arestat 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 biologics such as novel antibodies, biosimilars, vaccines, and peptides. Currently, Arecor is focused on established biologics that have one or more limitations that can be addressed relatively swiftly and yet result in material clinical improvements.

The selection of the appropriate formulation(s) for further development is facilitated by proprietary algorithms. These algorithms have a central role in the development process, both in identifying and evaluating possible alternatives and in the speed at which the eventual formulation is achieved; interestingly, this frequently results in conventional excipients being used in unconventional ways. It is these insights that help create the solutions to what are often viewed as intractable problems. The algorithms essentially 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 novel and improved formulations of an array of existing products; these range from significantly enhanced stability (extending the shelf-life of protein product, or greater temperature stability eliminating the need for cold chains), to converting lyophilised powders to stable, ready-to-use liquid dose forms (to enable fast, safe, and effective use of these medicines), to superior therapeutic profiles (improving patient outcomes and quality of life). A prime example of the use of Arestat technologies to alter and improve therapeutic profiles are the in-house insulin assets, AT247 and AT278, showing improved speed of onset (ultra-rapid acting) and early glucose lowering action even at high concentrations (ultra-concentrated rapid acting), respectively.

Exhibit 3: How Arestat can make a beneficial difference

Source: Arecor Therapeutics, Trinity Delta

Protecting the platform and resulting products

The Arestat platform consists of a series of more than ten different families of formulation techniques that use different combinations of excipients and methods to achieve enhanced or superior product features and physical properties. These excipients are generally well characterised and typically pose no additional safety or regulatory burdens. Arecor uses 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).

Exhibit 4: Four pillars of Arestat technology and associated IP

Source: Trinity Delta, Arecor Therapeutics

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, to high concentration but low viscosity, and are particularly important with biological therapeutics, typically expensive to produce products such as antibodies, peptides, or more complex protein constructs, 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, know-how, trade secrets, and patents on specific product applications (Exhibit 4).

Arecor has built a substantial patent estate, with over 50 patents granted and a further 70+ pending, across the major geographies, including US, Europe, Japan, India, and China. These can be classified into 36 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’ employed to resolve a particular formulation problem, with any resulting insights used to create new ‘foreground IP’. Any novel formulations generated can then be protected specifically by elements of background IP, new foreground IP, or a selected combination of both. With partnered programmes Arecor usually retains IP ownership, licensing the right of use to its partner.

Arecor’s proprietary insulin programs, AT247 (ultra-rapid insulin) and AT278 (rapid ultra-concentrated insulin), exemplify how the comprehensive patent strategy is used to generate additional product-specific IP. The formulation work on these innovative products has led to filing a series of nine patent applications directed to novel insulin compositions that cover the lead novel enhanced formulations and also offer various defensive strategies against future competitive threats. We note that a first US patent from this portfolio was granted in the first half of 2022, with additional key patents also granted in Japan and South Korea and many other patent applications being in advanced stage of prosecution.

Arecor’s IP strategy includes both narrow and broad interrelated patents, with these patent families further 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 not to reveal any potentially useful competitive information. Examples include the precise formulation of specific excipients used to stabilise a particular protein, together with the computational models applied to identify the appropriate structure that optimises stabilisation. The know-how elements are broader and relate to 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 pharma products.

The strength of the patent estate has been established with several challenges successfully rebuffed. Notably, in October 2021 Arecor’s polysaccharide vaccine patent was upheld as granted by the European Patent Office, following opposition by GSK and its subsequent appeal to the original ruling in Arecor’s favour. More pragmatically, we view the ease with which attractive licensing deals, with several 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.

The pipeline: a deeper dive

Arecor is leveraging its Arestat platform and formulation expertise to create a portfolio of proprietary and partnered clinical assets with enhanced properties. Its pipeline, which includes a combination of partnered assets, coupled with selected in-house development, carries a lower risk profile than a typical development stage pharma company, in our view, yet still offers scope for material upside. The reformulation of well-characterised drugs brings lower development risk and less onerous regulatory pathways. The partnered programmes reduce financial risks, yet success will lead to milestones and royalties or equivalent. The strategy for the internal programmes is to develop these diabetes and specialty hospital products to key inflection points and use these data to inform decisions on optimal partnering strategy. The proprietary diabetes assets are likely to 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-licensing for an upfront, milestone payments, plus royalties.

In this section we review the status and plans for Arecor’s internal diabetes assets (AT278 and AT247), the Specialty Hospital products franchise which includes two programmes partnered with Hikma (AT282 and AT307) plus several specialty hospital products in the earlier stages of formulation. Current pipeline status is presented in Exhibit 5.

Exhibit 5: A broad portfolio of de-risked and innovative assets

Source: Arecor Therapeutics   Note: 1. management estimates; 2. prandial insulin market 2019 estimate (based on Eli Lilly, Novo Nordisk and Sanofi Aventis 2019 sales); 3. Range of currently marketed products (company annual reports, IQVIA); 4. management assumption to be validated for each product with US FDA; 5. product towards upper end of hospital RTU/RTA market sales; 6. company annual report; 7. Inbibrx Corporate presentation, Jan 2021

The two disclosed drug candidates under licence that have emerged from technology partnerships (AT292, a drug candidate for Alpha-1 antitrypsin deficiency, and AT220, an undisclosed partnered biosimilar which is likely to be the first product incorporating the Arestat technology to launch), as well as pre-licence stage technology partnerships with pharma, are covered in a later section.

Diabetes: responding to emerging clinical needs

Arecor’s two key clinical stage diabetes programmes are the ultra-rapid insulins AT247 and AT278, both of which are novel formulations of insulin aspart, the active ingredient in Novo Nordisk’s well-characterised, proven and now off patent Novolog (US)/NovoRapid (ex-US). AT247 is a novel 100U formulation of aspart 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 highly concentrated 500U (500 units/ml) fast-acting insulin formulation. The company also has two further diabetes assets: Ogluo, its ready-to-use glucagon auto-injector pen which is commercially available in select European countries; and AT299, an insulin co-formulation of pramlintide and insulin that is still in the preclinical stages.

Diabetes is a growing global problem, with rising patient numbers (the IDF estimates 537m people are living with diabetes globally), while advances in delivery devices create a need for specifically formulated insulins. Such trends underpin the commercial attractiveness of Arecor’s two ultra-rapid insulins: AT247 and AT278 (an ultra-concentrated formulation). Two of our prior reports provide an in-depth review of Arecor’s diabetes assets, their clinical data, the current diabetes market, and the potential opportunity and prospects: January 2022 Update and May 2022 Update.

To recap here briefly, diabetes care is evolving rapidly, reflecting changing demographics and technological advances. The market is commercially attractive not simply due to its growth prospects, reflecting well-documented shifts in lifestyles and obesity-related insulin resistance, 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. Ultra-rapid acting, and high concentration, insulins offer the prospect of absorption profiles that more closely match emerging clinical needs and, importantly, are highly applicable to innovative delivery devices, such as continuous subcutaneous insulin infusion pumps which are allied with digital technologies, and the potential development of integrated insulin delivery systems (‘artificial pancreas’).

AT278 and AT247 Phase I data to date show highly promising, differentiated profiles that could capture larger market shares and open new market opportunities. These two diabetes assets represent an attractive, and low-risk, franchise, with the recent data raising our confidence in achieving future growth and value realisation. These data also provide evidence that Arecor’s formulation expertise can modulate the absorption profile of insulins selectively and consistently. This, in our view, should help not only in attracting pharma or device partners for the diabetes assets, but also other potential collaborators interested in the capabilities of the Arestat platforms.

The proprietary diabetes programmes will be taken to proof-of-concept Phase II studies before future development decisions are made. Typically, this is a value-inflection point, where the terms of an out-licensing agreement (upfront and development and commercialisation milestone payments, plus royalties on net sales) are optimised against the costs of the more expensive Phase III clinical trials. However, we argue the costs (and risks) of progressing such insulin formulations further, despite their novelty, is less than for conventional new drugs. Hence, we expect that eventual decisions on timing of a deal and type of partner(s) will be driven by the quality of data from the clinical studies.

Supporting this, we continue to expect both AT278 and AT247 will follow the FDA’s PHS 351(a) regulatory pathway, the traditional pathway for approval of biologics and innovator biologics, rather than the 351(k) application used for biosimilars (products that are highly similar to a reference or originator product). This reflects the expectation that the totality of the respective data packages will show ‘clinically meaningful differences’ to existing products. While PHS 351(a) is a standalone application, the data burden is not expected to be onerous, with two modestly sized pivotal Phase III trials likely to be sufficient. For context, Eli Lilly’s Lyumjev (insulin lispro-aabc, a reformulation of Humalog, insulin lispro) approval was based on the results from the Phase III PRONTO clinical trial programme, which consisted of two 26-week studies: PRONTO-T1D (n=1,222) and PRONTO-T2D (n= 673) patients with Type II diabetes.

AT278: ultra-concentrated ultra-rapid insulin

AT278 is a novel highly concentrated (500 units/ml, U-500) and fast-acting formulation of insulin aspart. 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. The increase in incidence of both Type I and Type II diabetic patients is being driven by rising obesity rates across most geographies which results in greater incidence of obesity-related insulin resistance, such that average usage for Type II diabetics is now 97 units of insulin daily, with a growing number needing 200 units or more. For context, the average adult needs between 0.5 and 1.0 units/kg daily. However, despite this expanding addressable population, only three concentrated bolus insulins are available: Humulin R U-500 (human insulin, Eli Lilly) which has similar profile to a basal insulin, and two more rapid acting but less concentrated products, Humalog U-200 and Lyumjev U-200 (both lispro, Eli Lilly).

Challenges in formulating a higher concentration (>200 U/ml) rapid or ultra-rapid acting insulin means that there are no such options commercially available, nor do we know of any in clinical development. The lack of a high-concentration rapid-acting mealtime (prandial) insulin means that patients face a trade-off between choosing a rapid-acting insulin at the typical U-100 (100 units/ml) concentration or a slower acting concentrated insulin with a more basal-type profile (eg Humulin R U-500) albeit benefitting from reduced injection volume and/or fewer injections. Neither option is ideal, particularly for those diabetics requiring high daily insulin doses.

These formulation difficulties stem from the fact that increases in concentration typically result in slower absorption, both in terms of delayed onset of action and of the entire absorption curve. This is mainly due to two physical phenomena. The first is hexamerisation: a higher insulin concentration favours the formation of monomers and dimers into hexamers, inherently slowing absorption. The second is the simple physical constraint of 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 (pharmacokinetic/pharmacodynamic) profiles and showing bioequivalence to the available rapid-acting but not concentrated insulins. Arecor has successfully overcome this issue with AT278.

AT278 is seeking to disrupt the insulin market with the first concentrated (>200 U/ml) yet rapid acting insulin. AT278’s profile should provide more optimal glucose control – and hence improved clinical outcomes – for both the prandial (mealtime) market and for diabetics with high daily insulin requirements, while also reducing the burden of daily therapy (through fewer injections and lower injection volumes). It also has the potential to convert more Type II diabetics to insulin pump therapy and more generally widen access to longer-term infusion pumps, as well as enable the development of next-generation miniaturised devices (where smaller size imposes a limit on reservoir capacity so insulin volumes are key).

AT278 has successfully completed one Phase I trial in Type I diabetics and will shortly begin enrolling a second Phase I in patients with Type II diabetes. The Phase I PK/PD study in 38 adults with Type I diabetes in an euglycemic clamp setting comparing AT278 with NovoRapid (IAsp, Novo Nordisk’s gold standard rapid acting insulin) read out positively in September 2021. Detailed data were presented at the April 2022 Advanced Technologies and Treatments for Diabetes (ATTD) meeting and are comprehensively covered in our May 2022 Update.

The Phase I trial met all primary and secondary endpoints, demonstrating that a subcutaneous dose of AT278 0.3 U/kg (500 U/ml) had a faster insulin absorption with a superior accelerated PK and PD profile (Exhibit 6) when compared to the same dose (0.3 U/kg) of lower concentration NovoRapid (100 U/ml). AT278 matched or exceeded several key measures, including glucose lowering, onset of action, and absorption profile, and as expected, was shown to be well tolerated with no safety signals. These PK/PD data indicate that, despite a five-fold greater concentration, AT278 has an absorption profile that does not simply match the criteria for a rapid insulin but can justifiably be classified as an ultra-rapid insulin.

Exhibit 6: AT278 Phase I PK (top) and PD (bottom) results

Source: Advanced Technologies and Treatments for Diabetes (ATTD) April 2022

Next steps for AT278 are the initiation of further Phase I trials; the first of these, an EU Phase I study evaluating the PK/PD profile in Type II diabetics when administered via a single subcutaneous injection, is expected to start in December 2022. This Phase I will be a double blind, randomised, crossover study comparing the PK/PD profile following a single subcutaneous dose of 0.5 U/kg of AT278 (500 U/ml) with NovoRapid (100 U/ml) and with 0.5U/kg Humulin-R U-500 in 32 adults with Type II diabetes in a euglycemic clamp setting. Completion is anticipated during Q423.

We expect AT278 will also undergo a Phase II study, at which point Arecor has multiple available options. The company could use the sizeable and robust data package (clinical, stability and toxicology) to:

• initiate out-licensing discussions with larger pharmaceutical companies with the resources to fund the required Phase III registration trials. In this scenario, the obvious partnering candidates are the three global insulin players (Novo Nordisk, Eli Lilly, Sanofi); or
• initiate partnering discussions with a device manufacturer to help maximise its commercial positioning and integrate an optimised bespoke insulin into its device offering. Here, potential partners would naturally include large device manufacturers, such as Medtronic, or alternatively smaller, nimbler, companies such as Tandem or Insulet where AT278 could play a central role in helping to differentiate their pump systems; or
• continue in-house development and progress AT278 through to US approval itself. Given the likelihood that the PHS 351(a) regulatory pathway will be pursued, this could, in our view, be a mechanism by which Arecor maximises AT278’s value ahead of a commercial partnership with either an existing diabetes franchise or a supply agreement with a pen and/or pump manufacturer.

Assuming smooth progress with either a partner- or Arecor-run Phase III programme and subsequent regulatory review, first launch could happen as early as 2026. However, the plethora of commercialisation options means predicting AT278’s value as a single outcome is difficult. In our modelling we assume a typical clinical stage out-licensing deal, with an upfront payment and development and commercial milestones, plus high single digit to low double-digit royalties on net sales. Our peak sales expectation of $516m is based on AT278 use principally in Type II and refractory Type I diabetic patients with high daily insulin requirements (>200 units/day), where a high concentration rapid (not necessarily ultra-rapid) insulin has several benefits including the reduction of the injection burden (both volume and frequency).

These arguably overly conservative assumptions reflect the early stage of development and an initial focus on the sizeable insulin pen market but significant upside potential from use in conjunction with an insulin pump. At this stage, assessing AT278’s potential in the pump segment is fraught with difficulties, not least understanding which patient groups will be early adopters and identifying the rate limiting factors in ensuring wider clinical adoption (each market has differing patient criteria, reimbursement rules, and educational/support infrastructure). Nonetheless, over the longer term, pump usage will likely become a key element in our valuation. We intend to review our assumptions as further clinical data emerge supporting AT278’s clinical profile, and/or deal(s) are concluded. AT278 currently contributes £61.2m, equivalent to 199.7p per share, to our Arecor rNPV valuation.

AT247: ultra-rapid pump-optimised insulin

AT247, a next-generation ultra-rapid prandial insulin analogue, is a U100 formulation of insulin aspart. It has been formulated to materially accelerate absorption after injection, achieving a profile that closely approximates healthy (non-diabetic) physiological insulin secretion. The goal is to improve control of post-prandial glucose and increase time in range (the percentage of time spent in the target glucose range). Enabling more effective control of blood glucose levels improves patient outcomes by reducing the risk of acute issues such as hypoglycaemia and hyperglycaemia, but also diminishing long-term complications (eg cardiovascular disease, neuropathy, nephropathy, or retinopathy).

AT247 has been formulated as a superior ultra-rapid acting insulin for both Type I and Type II diabetes patients who self-administer insulin either via pen devices (also known as multiple daily injections, MDI) or a pump. It works by improving absorption from the injection site as it contains excipients that bind calcium ions and are hypothesised to cause a transient disruption of calcium-dependent cell adhesion through reversible interactions with the calcium-cadherin complex at the cell surface. This disruption at the injection site results in increased tissue permeability and the desired faster absorption.

An ultra-rapid insulin with fast absorption and early onset of action would allow patients to have more flexibility around timing their insulin dosing rather than needing to do so at a specific time ahead of eating, and also provides greater post-prandial glycaemic control. In addition, AT247’s PK/PD properties suggest it has the potential to be an ideal pump insulin, facilitating automated continuous subcutaneous insulin infusion (CSII) devices and ultimately a fully closed loop artificial pancreas system. The main constraint to developing such devices is not the physical or software aspects but the suboptimal absorption profiles of currently available rapid insulins as a fast and predictable onset, and short duration, of action is essential. The issue is two-fold: systemic exposure of subcutaneous injected insulin is slower than with endogenous insulin production (potentially leading to postprandial hyperglycaemia), while clearance is also delayed (leading to a potential risk of dose stacking resulting in hypoglycaemia).

AT247 has successfully completed two Phase I clinical trials in Type I diabetics, one evaluating the PK/PD of a single subcutaneous injection and the second the PK/PD over three days of continuous subcutaneous infusion via pump. Results of the first, a double-blind Phase I study in 19 Type I diabetics that compared AT247 with NovoRapid and Fiasp (faster aspart) using a standard glucose clamp setting to determine PK/PD and safety characteristics, were published in Diabetes Care February 2021. AT247 met all study endpoints, suggesting a best-in-class profile.

These data (Exhibit 7) 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 7: AT247 Phase I PK/PD clinical study results

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

Encouraging top line results of the Phase I trial, a three-day pump US study in 24 adult Type I diabetic patients, reported in October 2022 with full data expected to be presented at a future international diabetes conference. This double-blind, randomised, three-way crossover trial compared the PK/PD profiles and safety/tolerability for AT247, NovoLog, and Fiasp delivered by continuous subcutaneous infusion via an insulin pump in 24 adult Type I diabetic patients. The trial had two co-primary endpoints of PK (serum insulin at 0-30 minutes) and PD (glucose infusion rate at 0-60 minutes). On the first measure, AT247 showed a superior PK profile, with statistically accelerated insulin absorption and early exposure compared with both NovoLog and Fiasp. The PD profile did not meet the bar of statistically significant superiority; however, a post-hoc analysis controlling for the variable baseline characteristics showed a statistically superior early glucose lowering effect vs NovoLog and a similar PD profile to Fiasp.

Taken together both Phase I studies demonstrate that AT247 has accelerated insulin absorption and a promising glucose lowering effect vs the current gold standard rapid-acting (NovoLog/NovoRapid) and ultra-rapid acting (Fiasp) insulins, with a clean safety profile and flexibility of administration. This growing body of evidence will help inform next steps for the development of AT247, including on its potential for use in a fully closed loop artificial pancreas. An ultra-rapid acting insulin will be one of several key components of an artificial pancreas, alongside the device itself and associated algorithms, that will work together to enable better clinical outcomes for diabetics.

Clearly, more extensive studies are warranted but so far AT247’s superior ultra-rapid acting profile is suggestive of a central role in supporting the development of an artificial pancreas. Next steps, however, are likely to focus on further demonstrating the benefit of At248 to enable the artificial pancreas and positioning AT247 for partnering. We would expect that the size and scope of the Phase II and Phase III programmes for AT247 should be similar to, or possibly slightly smaller than, for AT278, albeit both assets will likely pursue the PHS 351(a) regulatory pathway. Arecor’s experience and learnings from its AT278 clinical programme should help inform subsequent plans for AT247. Assuming smooth progress, the timelines for AT247 suggest first approvals, and commercialisation, could happen as early as 2025.

We believe that AT247 is well placed for partnering, with a demonstrated superior profile, patent protection through to at least 2037, and the potential to be the fastest acting most physiological insulin available to patients in a growing and attractive market. However, as with AT278, there are multiple options for partnering both in terms of timing of a deal and the profile of partner.

In our modelling, we assume a typical post-Phase II out-licensing deal including an upfront payment and development and commercial milestones, plus high single digit to low double-digit royalties on net sales. Our peak sales expectation of $358m is based on AT247 use in both the insulin pen and pump settings, with significant future upside potential if a closed loop system is successfully developed. Again, we intend to review modelling assumptions in response to further clinical data and/or deal execution. AT247’s contribution to our Arecor rNPV valuation is currently £50.4m, equivalent to 164.5p per share.

Ogluo: commercially available RTU glucagon

The flagship product of Arecor’s commercial subsidiary, Tetris Pharma, is Ogluo, the first ready-to-use (RTU) glucagon auto-injector pen for the treatment of severe hypoglycaemia in paediatric and adult patients with diabetes. Tetris Pharma holds a minimum 16-year licence agreement from Xeris for European rights to Ogluo (the pan-European name for Xeris’ Gvoke), which is patent protected across Europe until at least 2035. We note that Xeris launched Gvoke in the US in Q419 and has captured around a 23% share of the US glucagon market as of end-October.

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 consciousness 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. RTU glucagon options now include Eli Lilly’s Baqsimi nasal spray, and rescue pens from Xeris (Gvoke/Ogluo) and Zealand Pharma (Zegalogue, marketed by Novo Nordisk). Ogluo is the only glucagon rescue pen currently approved in Europe.

Ogluo/Gvoke is a stable glucagon formulation available in a pre-mixed, pre-filled autoinjector pen that can be ambiently stored and is rapidly and easily administered through a two-step process, vs a complex eight stage process which is the current standard of care for hypoglycaemic emergencies in the UK. Ogluo became available in December 2021 in the UK, with active launch in March 2022. Tetris Pharma’s pan-European commercial plans are being rolled out, with launch in the first EU territory, Germany, occurring in November 2022. Ogluo received EU marketing authorisation in February 2021 and discussions with various European health authorities are ongoing. Further launches in core countries across Europe are pencilled in for the coming months.

At present, commercial data for Ogluo are limited to the UK market, where the UK reimbursement price is £73 per single-use pen. 1,729 units had been sold to end-June, contributing to Tetris Pharma’s H122 sales of c £600k. We expect growing Ogluo sales as it gains traction in the UK and then benefits from subsequent European launches, but model this sales uptake conservatively, in line with our philosophy of employing modest assumptions throughout, assuming break-even occurs no earlier than year three post-launch in any major market. This results in an rNPV of £7.9m (equivalent to 25.8p per share), which feels intuitively appropriate at this stage of the launch rollouts.

For context, Zealand Pharma’s agreement with Novo Nordisk for its RTU glucagon, Zegalogue, included an upfront payment of DKK25m (c $3.3m) with downstream 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.

Specialty Hospital products: a plethora of options

Arecor’s Specialty Hospital products development is focused on improving injectable products that have clear issues, such as the need to be reconstituted (eg when the drug is a lyophilised powder). Application of the Arestat technologies to such products could unlock the potential of combining better quality, improved safety, and ease of use with probable cost savings and superior patient outcomes.

The desire to minimise the preparation of any injectable in a clinical setting includes both the time element, where numerous studies have shown the staff time savings comfortably justify the price premiums, and, 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).

Manufacturers are understandably keen to address these market needs, but 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.

These opportunities include an early-stage portfolio of different specialty hospital products under development at Arecor, several assets within existing technology partnerships, and two products partnered under licence to Hikma Pharmaceuticals. Although the identity of none of these products has been disclosed, management states the combined global market size of their specialty hospital pipeline is c $3.8bn.

In our view, there are a broad range of existing specialty hospital products which could be prime candidates for Arecor to improve through application of its Arestat technologies and expertise. We believe that there is significant scope for Arecor to proactively identify products for reformulation and internal development with a view to subsequently partnering or, alternatively, retaining select opportunities that can be self-commercialised in certain territories through Tetris Pharma.

The acquisition of Tetris Pharma complements Arecor’s focus on improving ‘difficult to use’ injectable products. While its main product Ogluo, as a RTU glucagon autoinjector, is not a speciality hospital product, Tetris Pharma does sell and distribute other injectable specialty products across the UK and Europe. These include antibiotics, products focused on endocrinology or cardiovascular disease, and those for paediatric anaesthesia. Hence, while we expect the majority of the proprietary Arestat derived projects to be partnered, Tetris Pharma does provide Arecor with optionality given this infrastructure which, in future, could be used to directly market selected niche specialty hospital products across Europe.

Hikma partnership focused on superior generics

The most advanced assets in the Specialty Hospital products franchise, AT282 and AT307, are under active licensing agreements with Hikma, and have potential to be launched from 2024 onwards. Visibility on progress with both is limited, although at least one licence milestone is expected within the next 12 months.

• AT282 is a novel stable RTU liquid concentrate formulation of an existing marketed product only available as a lyophilised powder that needs to be reconstituted before use. AT282 was initially developed to proof of concept by Arecor and then partnered. Considering the limited public disclosures, we model AT282 conservatively, now assuming launch in 2025, and only attributing a value of £16.5m, equivalent to 53.7p.
• AT307 is also a novel RTA formulation of an undisclosed already marketed specialty hospital product. Development work appears to be progressing well and, despite this collaboration being signed later, the next licence milestone expected to be achieved in a similar timeframe to AT282. We assume market launch in 2025, and conservatively model AT307 with a valuation of £16.7m, or 54.6p per share.

The co-development and licence deals for AT282 and AT307 were struck in January 2020 and October 2020 respectively, but specific deal terms and the identity of the underlying assets are not disclosed due to commercial sensitivities. However, it is known that Arecor received upfront payments and will be eligible for further payments as development, regulatory and commercial milestones are achieved. Undisclosed royalties on sales are also payable, which are expected to be in the high-single to double-digit percentages. Management estimates that the combined market size is in excess of $300m.

Hikma is responsible for funding and generating the necessary data to support approvals in its territories (Arecor has retained commercial rights in certain, undisclosed but assumed to be relatively minor, markets), and will be responsible for manufacturing and commercialisation in its chosen geographies. The regulatory pathways for both assets are expected to be the abbreviated 505(b)(2) route 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.

One of Hikma’s key focus areas is to invest in differentiated/specialty generic products and to expand specialty products to form 30% of revenues by 2026 (H122: 27%); Hikma’s total revenues in 2021 were $2.55bn. We note that Hikma is the top two generic injectable manufacturer in the US by volume and has 31 products in its generics pipeline, which are largely centred around complex generics. Given Hikma’s focus and expertise, the existing deals provide a strong external validation of Arecor’s capabilities, and we believe Hikma is well placed to capitalise on the potential of these novel formulations developed by Arecor.

Technology partnerships: a licence incubator

Formulation expertise is found across the whole spectrum of the drug industry, with all the large players having sizeable teams and capabilities. Initial formulation, and subsequent reformulation, of a pharmaceutical is routine industry practice 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.

Arecor’s technology partnership model involves working with pharmaceutical and biotechnology companies to deliver enhanced formulations of their therapeutic products. The company 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 applying the Arestat technologies can make a difference (Exhibit 8), 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 (funded by the partner) to explore the feasibility of a reformulation achieving the desired characteristics. Once completed, the partner has the option to acquire the new formulation and IP rights to it under a licensing agreement, allowing further development and commercialisation of the product.

Exhibit 8: Arestat schematic

Source: Arecor

The reformulation of known and well-characterised drugs means development and regulatory risk is lower than for a novel API. The favourable regulatory environment for reformulations of existing compounds means that, if required, any clinical trials will be smaller, and regulatory pathways potentially shorter, offering the promise of a cheaper and faster route to market. This affordable innovation, when coupled with the potential to solve formulation challenges and to develop differentiated drugs which are safe, effective, and more convenient for patients thus improving adherence and treatment outcomes, 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.

Currently, two licenced programmes have emerged through formulation development technology partnerships. One, AT220, is a biosimilar with an undisclosed global pharmaceutical company (with potential for launch in 2023) and the other, AT292, is a Phase I clinical programme with Inhibrx. Arecor also has multiple active formulation development contracts. Disclosed companies include:

• Eli Lilly: to develop a differentiated thermostable formulation of one of Lilly’s proprietary products for self-administration;
• Intas Pharmaceuticals: to develop a differentiated stable liquid product formulation of a currently marketed product; and
• Par Pharmaceuticals: to develop a differentiated, stable, single dose, RTU formulation of an undisclosed IV medicine.

Over the past 12 months, Arecor has secured a further four exclusive formulation study collaboration contracts with undisclosed companies for undisclosed programmes. Two of these partnerships cover the development of differentiated stable RTU or RTA liquid formulations of intravenous injectable drugs (the November 2022 deal with the pharmaceutical division of one of the largest global chemicals and pharmaceuticals companies, and the November 2021 deal with a leading global medical product company). One covers the development of stable injectable high concentration formulations of proprietary products for a top five global pharmaceutical company (signed June 2022). Interestingly, the remaining deal signed December 2021 with a ’global technology leader’ with customers ‘across research, clinical and applied markets’ expands Arecor’s reach into the diagnostics market and personalised medicine as it covers the development of an improved, stable, liquid formulation for use within the partner’s molecular testing platform technology.

This latter portfolio of pre-licence collaborations represents potential upside given the expectation that some of these programmes are likely to progress and transition to full licences over time. In addition, successful conversion to a licence would further highlight Arecor’s formulation capabilities, potentially attracting additional formulation study collaborations with new partners or repeat business. However, take up of a licence does not necessarily mean the partner or underlying product will immediately be disclosed, as illustrated by the two current licenced programmes: AT220 and AT292.

AT220: biosimilar set for launch in 2023

AT220 is an undisclosed biosimilar product under development in partnership with an undisclosed global pharmaceutical company. It is on track for approval during 2023 and if launched, would represent the first commercially available product that incorporates the Arestat formulation technology. Under the terms of the deal executed in 2017, approval would trigger a milestone to Arecor, plus royalties on sales, although none of the financial terms have been made public. While limited details have been provided with respect to the partner and product, it has been disclosed that AT220 addresses a multi-blockbuster market.

Given the limited visibility and disclosure, it is hard to predict potential future sales of AT220 and thus future royalties and value to Arecor. In line with our typical approach, we currently employ conservative assumptions attributing a provisionally modest value of £9.6m, equivalent to 31.4p per share. This is based on peak AT220 sales of $500m, with Arecor earning a modest royalty.

There could be material upside to our valuation if sales of AT220 exceed our current forecasts. This could be driven by the size of the reference biologic, which could potentially range from perhaps $2bn to maybe $5bn, given the ‘multi-blockbuster’ descriptor, in addition to the rate of biosimilar uptake. According to a report by Cardinal Health, and based on IQVIA data, the more recent biosimilar launches, including for Avastin (bevacizumab), Herceptin (trastuzumab), and Rituxan (rituximab), have all reached market shares >60% in the US within the first two years of launch. These are all in oncology, whereas biosimilars of Remicade (infliximab), used to treat a number of autoimmune disorders, have thus far only reached >30% since US launch in 2016.

Assuming AT220 is the first biosimilar to launch for the underlying undisclosed reference biologic, taking the majority 70-80% of the biosimilar market, and is priced at an average 15-30% discount to the reference product, AT220 peak sales, based on a simple analysis, could range from:

• Bear case: $300m based on a 30% discount, and a 30% penetration of a $2bn reference biologic
• Base case: $500m which implies c 25% discount, and a 45% penetration of a $2bn reference biologic
• Bull case: $2bn based on a 15% discount and a 60% penetration of a $5bn reference biologic.

Disclosure of the reference biologic for AT220 would prompt us to refine our assumptions. For additional context, we note that the Cardinal Health report highlights that potential biosimilar launches in 2023 could include:

• Amgen’s Neulasta Onpro (pegfilgrastim): an at-home formulation of Neulasta, which stimulates white blood cells and for which there are already four US-approved biosimilars;
• Roche’s Actemra (tocilizumab): used largely to treat rheumatoid arthritis (RA) and COVID-19; 2021 sales of c $3.9bn albeit global sales to date in 2022 have fallen -23% CER as COVID-19 demand declined;
• AbbVie’s Humira (adalimumab): also for RA and other autoimmune conditions; 2021 sales of $20.7bn. We note there are a number of adalimumab biosimilars already approved and ready to launch in the US and Arecor is also working on its own biosimilar version;
• Johnson and Johnson’s Stelara (ustekinumab): for psoriasis; 2021 sales of $6.8bn; and
• Regeneron/Bayer’s Eylea (aflibercept): for eye condition wet AMD, with sales of $9.2bn in 2021.

AT292: a novel product with Inhibrx

AT292 is the lead programme in a multi-product collaboration with Inhibrx (NASDAQ: INBX), a California-based biotech company that currently has four differentiated clinical stage assets in development. AT292 is a novel, enhanced formulation of INBRX-101, a recombinant Alpha-1 Antitrypsin Fc-fusion Protein that has completed Phase I studies for the treatment of Alpha-1 antitrypsin deficiency (AATD). A potential accelerated approval pathway has been discussed with the FDA in the post Phase I meeting; a potentially registration-enabling study for INBRX-101 in AATD is planned to initiate in Q223 using functional serum AAT levels as a surrogate endpoint. In addition, Inhibrx intends to file an IND for a second indication, graft vs host disease (GvHD), in H123 and is targeting dosing of the first patient in mid-2023.

Arecor has received an upfront payment from Inhibrx, 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). We note that Inhibrx management anticipates filing the BLA for INBRX-101 in 2025 and forecasts blockbuster peak sales in AATD alone. We have updated our valuation to reflect these disclosures and, assuming a launch in 2026 and conservative peak sales of $515m, now attribute a valuation of £9.1m, or 29.6p per share, to AT292 in AATD. At this stage, we do not include any contribution from other indications for AT292 nor any additional future programmes.

Sensitivities

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 in-house diabetes assets (AT278 and AT247) and partnered programmes:

• AT278 and AT247 are both based on aspart, a well-characterised insulin, hence development risk is lowered, especially as Phase I PK/PD data has confirmed their differentiated profiles. However, questions pertinent to fully realising their potential remain, centred on clinical and partnering strategy, and priorities in addressing the various segments of the respective target markets which go hand in hand with device selection, including compatibility with next generation insulin delivery devices.
• Partnered assets include those licenced to Hikma (AT282 and AT307), to Inhibrx (AT292), and AT220 (undisclosed partner). In all cases clinical and commercialisation plans are under partner control and, apart from Inhibrx, there is limited disclosure on timelines, or the identity of the underlying asset or indication targeted. This makes valuing these assets challenging. The next Hikma licence milestone is imminent, while AT220 should be the first of Arecor’s reformulated compounds to be approved.

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 mentioned earlier, Arecor’s focus on improving existing products means much of the clinical/regulatory risk inherent with novel molecules is minimised.

The partnering process is a key test of a management’s strategy. A well-struck deal validates the attractiveness of the proprietary technology and scientific skills, and the commercial terms provide a tangible insight into management acumen. The majority of Arecor’s future revenue streams depend on how partners perform in competitive markets, where it will have no control or influence on commercial process or strategy. This contrasts with the commercialisation of Ogluo, and other assets in future, through its newly acquired Tetris Pharma subsidiary. Nonetheless, we would argue this is an industry-wide risk, where Arecor is no different to other similarly sized companies. Where Arecor may have an advantage is through its pipeline of superior differentiated formulations of existing therapeutics, which offer a potential competitive edge given lower development risk and improved outcomes that may support attractive pricing/reimbursement.

As with any development stage company, availability of sufficient and timely financing is a constant sensitivity. Arecor’s strategy of developing selected assets to an optimal inflection point is sound, the inherent scientific expertise is proven, and the current management is respected. Its ability to generate revenues and potential for non-dilutive financing from partners eases financing pressure, however the real question is whether investors appreciate the investment case and can support Arecor through to the next phase of its journey.

Valuation

Arecor can be viewed as a classic discovery and development play, albeit with a lower development risk profile. We value the company using an rNPV model, explicitly valuing the diabetes franchise, four partnered assets, and the in-house specialty hospital products research programme(s). 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 central operational costs and net cash. 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.

We have taken the opportunity to review our assumptions for each of Arecor’s pipeline assets, specifically revisiting the programmes within the Specialty Hospital products franchise and partnered assets AT220 and AT292. The outputs and underlying assumptions of our model are presented in Exhibit 9. Our updated Arecor valuation is £179.6m, equivalent to 586p per share, vs £177m previously.

Exhibit 9: Arecor rNPV valuation

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

The internal diabetes programmes, AT278 and AT247, are the main value drivers for Arecor, collectively contributing 62% of the company value and more than supporting the current share price. As we had stated in an earlier note, discussions with practicing clinicians at the Key Opinion Leader (KOL) event in May 2022 have raised our confidence that this emerging diabetes franchise has greater clinical, and commercial, potential than our original expectation.

The four partnered assets represent 29% of Arecor’s value, with upside potential once these programmes are disclosed and more informed assessments of their market potential can be made. As visibility on progress with both Hikma-licenced specialty hospital products remains limited, we have adjusted our valuation assumptions to reflect this. However, our analysis of upcoming biosimilar launches means we are more confident in the basis for our AT220 valuation, albeit continuing to err on the conservative side. Similarly, disclosures from Inhibrx on AT292 have informed our revised peak sales, probability of success, and launch timing assumptions for AATD.

Overall, we take a conservative approach to valuation. In our Arecor model we acknowledge that rNPV methodology tends to attribute most value to later stage clinical compounds, underplaying earlier stage programmes and the value of the platform. We consciously employ cautious assumptions throughout; for example, erring on the prudent 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. While the current strategy envisages the out-licensing of 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.

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.

This approach also means there are multiple areas of potential upside to our model. For example, at this stage, we do not attribute a value to the technology 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. Additionally, 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 clinically, and commercially, attractive compounds and a management history of striking commercially astute 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.

Financials

Arecor generates steady revenues from its formulation development partnerships, with more variable income from licence agreements. The latter include upfront payments on licence grant and milestones that are contingent on development progress and commercialisation. Following acquisition of Tetris Pharma in August 2022, Arecor also has commercial income, mainly from European Ogluo sales.

FY21 revenue of £1.16m was lower than in FY20 (£1.70m) due to receipt of £0.9m in licence income (upfront, milestone, and other partner payments) in FY20 (FY21: nil). FY21 revenue contributors were research income (from formulation development) of £1.0m (FY20: £666k) and non-government grants of £144k (FY20: £112k). H122 revenue (£693k; H121: £460k) was solely research derived.

Operating expenses for FY21 were £8.24m (FY20: £5.58m) with R&D investment of £5.39m (FY20: £3.94m) and SG&A spend of £2.85m (FY20: £1.64m). Pre-tax loss was £6.95m (FY20: £3.51m), with a net loss of £6.17m (FY20: £2.75m) due to R&D tax credit benefit (FY21: £776k; FY20: £760k). Increased H122 operating expenses (£6.35m vs H121: £3.47m) largely reflected the cost of larger Phase I clinical studies for the in-house diabetes assets. R&D spend for H122 was £4.76m (H121: £1.93m), while prudent financial control kept SG&A spend broadly flat at £1.59m (H121: £1.53m) despite increased headcount. H122 pre-tax loss was £5.23m (H121: £3.45m loss) with net loss of £2.37m (H121: £3.01m loss). Higher R&D tax credits in H122 (£867k vs £347k) mirrored increased R&D spend.

H122 cash and equivalents of £13.7m at end-June 2022 (H121: £22.1m; FY21: £18.3m), together with the August £6m (gross) placing, should enable Arecor to progress its in-house diabetes and specialty hospital products to partnering inflection points, and expand its internal capabilities to support progression and growth in the earlier-stage formulation portfolio. Investment into increased capacity for both in-house and formulation development work with partners should drive an initially modest growth in research income from FY22 onwards. Our forecasts do not assume any potential conversion(s) of pre-licence technology partnerships to longer-term licence agreements. The magnitude of licensing income will be determined by development and commercial progress of Arecor’s licenced programmes, the timing and terms of new partnership deals, and product launches. We anticipate royalty revenues from 2023 onwards following launch of partnered products: AT220 is on track to be the first of these. The Tetris Pharma acquisition means first commercial revenues will be reported in H222.

Assuming continued development 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 costs, 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 six months of Tetris Pharma) and £7.2m in FY23e.

Our forecasts (Exhibit 10) indicate that Arecor has sufficient funding on current plans into FY24. Partnering/licence income from upfront payment or development milestones from the diabetes and/or specialty hospital products could extend this runway further or support future product opportunities.

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.

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www.arecor.com

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Source: Arecor Therapeutics Note: as at 11/11/2022