Arecor: low-risk innovation

Arecor is leveraging its proprietary Arestat platform and formulation expertise to create a portfolio of internal and partnered clinical assets with enhanced properties that would otherwise be unachievable. This has created a broad and well-balanced pipeline of innovative products that offer similar milestone and royalty streams to classic drug discovery companies, yet with lower development risks and in a less costly and more rapid manner. A mix of in-house assets and partnered products provide an attractive blend of value inflection points. We view the emerging diabetes franchise as particularly interesting, with the most upside potential within our valuation. The two lead compounds are AT278, an ultra-concentrated, ultra-rapid insulin, and AT247, an ultra-rapid pump-optimised insulin. If successful, these could be ideally placed for the notable shifts underway in diabetes therapy. Our Arecor valuation is £176m, equivalent to 575p a share.

Arecor’s lead in-house assets are the Phase I diabetes programmes AT278 and AT247, while the three most advanced partnered programmes are: (1) AT220, an undisclosed partnered biosimilar which is likely to be the first product employing the Arestat technology to launch pending regulatory approval(s) expected this year; (2) a specialty hospital product licenced to Hikma (AT307); and (3) a late stage clinical orphan disease drug with Inhibrx (AT292/INBRX-101). An overview of Arecor’s pipeline is shown in Exhibit 1.

Exhibit 1: Summary of Arecor’s current pipeline

Source: Arecor Therapeutics

In-house programmes address diabetes

Arecor’s two key in-house clinical stage programmes are the ultra-rapid insulins AT278 and AT247, both of which are innovative formulations of insulin aspart, the active ingredient in Novo Nordisk’s well-characterised, proven and now off patent Novolog (US)/NovoRapid (ex-US). AT278 is well positioned for the demographic and technology shifts that are underway within diabetes (outlined in our April 2023 Update) and AT247 has an ideal profile for “artificial pancreas” pumps. AT278 and AT247 Phase I data to date show highly promising, differentiated profiles that could capture larger market shares and open new market opportunities (discussed in detail in previous reports including December 2022 Outlook). There are also two further diabetes assets: Ogluo, a ready-to-use glucagon auto-injector pen, which is commercially available in select European countries; and AT299, a preclinical stage co-formulation of pramlintide and insulin.

AT278 is currently in a second Phase I trial in patients with Type II diabetes. Recruitment is progressing well and Arecor is evaluating the opportunity to increase the powering of the study (enrolling 42 subjects instead of the planned 32) for a modest increase in investment. This would increase the robustness and value of the data generated from a highly variable Type II diabetes population, and would shift the data read out into early 2024 (from Q423). AT278 has the potential to be a disruptive insulin as an ultra-concentrated U-500 (500 units/ml) and ultra-fast acting insulin formulation. Such high concentration insulins are expected to become increasingly in demand, reflecting the rising number of people with Type II and refractory Type I diabetes that require higher daily dosing. The increase in incidence of both Type I and Type II diabetics is being driven by rising obesity rates across most geographies, which result in a greater incidence of obesity-related insulin resistance, such that average usage for Type II diabetes patients 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. The challenges in formulating a higher concentration (>200 U/ml) rapid or ultra-rapid acting insulin mean there are no such options commercially available, nor do we know of any in clinical development.

AT247 is a next-generation ultra-rapid prandial insulin analogue of U-100 insulin aspart. It has been specifically 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 postprandial glucose and increase time in range (the percentage of time spent in the target glucose range). It is suitable 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 any insulin pump system. Importantly, AT247’s attractive PK/PD profile suggests it has the potential to be an ideal pump insulin, enabling optimal use of automated continuous subcutaneous insulin infusion (CSII) devices, and ultimately a fully closed loop artificial pancreas system.

First commercial Arestat-based product in sight

Arecor has three partnered programmes with future milestone and recurring royalty potential: one internally generated specialty hospital product (AT307), and two from technology partnerships (AT220 and AT292).

The most advanced partnered asset, AT220, is likely to be the first product incorporating the Arestat technology to launch. It is an undisclosed biosimilar product under development with a global pharmaceutical company for a multi-billion market. Regulatory approval(s) continue to be expected this year, with potential for first sales in 2023/4. A further milestone is expected to be triggered prior to the receipt of royalties on sales, although none of the financial terms have been made public. Disclosure of the underlying reference biologic and partner would enable a review and refinement of our current conservative forecasts and assumptions.

Further progress has been made by partner Hikma with AT307, a ready-to-use (RTU) injectable of an undisclosed already marketed specialty hospital product. Following a recent FDA pre-IND meeting, Hikma has confirmed that AT307 development in the US will continue under the abbreviated 505(b)(2) approval pathway. As this references the originator drug for evidence of clinical efficacy and safety, no major clinical trials are expected to be required, allowing for significantly more rapid development than a typical new drug, in-line with our 2025/6 launch expectations. In addition, this further supports the likelihood that the 505(b)(2) pathway will apply across Arecor’s internal specialty hospital pipeline of enhanced RTU and RTA (ready-to-administer) formulations of existing drugs.

AT292, partnered with Inhibrx as part of a multi-product collaboration, is a novel, enhanced formulation of INBRX-101, a recombinant Alpha-1 Antitrypsin Fc-fusion Protein. It was recently granted Fast Track Designation in the treatment of emphysema due to alpha-1 antitrypsin deficiency (AATD), and a registration-enabling trial, ElevAAte, in this indication was initiated in April. Dosing of the first patient in this trial will trigger the next milestone to Arecor under the terms of the licencing agreement. Top line data from ElevAAte are expected in late-2024.

Additional revenue generating deals are expected

Since IPO, Arecor has secured eleven revenue-generating collaborations with major pharmaceutical and biotechnology companies, including technology partnerships (typically formulation development using the Arestat platform to develop novel formulations of partner proprietary products) and licence agreements (either through the conversion of technology partnerships, or the out-licensing of internally developed products). These agreements provide near-term revenue via research fees, with upside potential from licencing (clinical/commercial milestones and royalties or equivalent). Three new deals have already been signed during 2023, and further collaborations are expected:

• an additional formulation agreement with an existing top five pharma partner, building on a 2022 collaboration to develop stable injectable high concentration formulations of the partner’s proprietary products; the partner will fund initial development work and has the option to acquire new formulations under a typical technology licensing model;
• an additional agreement with a leading biopharma supporting biosimilar development following an earlier technology partnership; and
• a collaboration with a top 10 pharma company to develop a novel, stable formulation of a liquid, high concentration antibody.

Valuation and Financials

We continue to value Arecor using an rNPV model, explicitly valuing the diabetes franchise, partnered assets, and the in-house specialty hospital product research programme(s). More details on our valuation methodology and key assumptions are available in previous notes (December 2022 Outlook and April 2023 Update). Our valuation is £176m, equivalent to 575p per share. An overview of our valuation is provided in Exhibit 2.

Exhibit 2: 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).

Revenues in H123 were £1.7m (H122: £0.7m) comprising £0.3m of formulation development (H122: £0.7m), milestones of £0.1m (H122: nil), and product sales of £1.2m (H122: nil). The latter largely relate to Ogluo sales in select EU countries, following the Tetris Pharma acquisition. This was incorporated from August 2022, hence no product sales were recorded in the prior period. For reference, product sales during H222 for the five months post-acquisition (4 August to 31 December 2022) were £1.0m. Arecor also recorded £0.6m (H122: £0.4m) of other operating income as part of a £2.8m grant awarded from Innovate UK in March 2021. We note that sales and EBITDA targets to trigger the first contingent Tetris Pharma earn-out of £1m were not deemed achieved, and hence this is not payable.

R&D investment decreased to £2.9m in H123 (H122: £4.8m) following completion of the US Phase I trial of AT247 in October 2022. The main clinical trial costs now relate to the ongoing European Phase I trial of AT278, which was initiated in December 2022. SG&A spend increased to £4.4m (H122: £1.6m), as this now includes Tetris Pharma related costs, which were not included in the prior period. When adjusting for Tetris Pharma SG&A, like-for-like underlying H123 Arecor SG&A was £1.9m (H122: £1.6m), suggesting core costs remain controlled. Pre-tax loss was £4.8m (H122: £5.2m), and net loss was largely unchanged at £4.5m (H122: £4.4m).

We have made minor adjustments to our FY23e revenue forecast and now forecast £4.8m (from £4.9m) based on the H123 trends. Our FY24e revenue forecast remains £7.1m. Following H123, we have decreased our R&D spend forecasts to £5.9m in FY23e (from £6.3m) and to £6.2m in FY24e (from £6.6m) to reflect H123 trends, albeit the latter is largely illustrative and future R&D investment will depend on clinical trial plans, likely to be refined as data become available. We have increased SG&A forecasts reflecting higher Tetris Pharma spend in H123; we now forecast SG&A of £9.0m in FY23e (from £7.1m), rising to £9.5m in FY24e (from £7.9m).

Arecor had cash and equivalents (including short-term investments) at end-June 2023 of £8.2m (end-June 2022: £13.7m; end-December 2022: £12.8m). Post period end, Arecor also received £0.4m in grants and £1.3m in R&D tax credits. Our updated forecasts (Exhibit 3) indicate that Arecor has sufficient funds to execute on current strategic plans, including the ongoing Phase I trial of AT278, and to provide optionality into 2024 to prepare for potential future development plans, as these are refined. Our forecasts do not assume any potential conversion(s) of pre-licence technology partnerships to longer-term licence agreements, nor any significant uncertain milestones. Hence partnering and/or licence income from upfront payments, development milestones, or higher revenues from product sales and royalties, could extend the runway.

Exhibit 3: Summary of financials

Source: Company, Trinity Delta. Note: FY24e R&D is largely illustrative pending development plans.