Allergy Therapeutics: all set for next R&D steps

Allergy Therapeutics is on the cusp of initiating the next trials for key pipeline programmes Grass MATA MPL, for severe hay fever, and VLP Peanut, a short-course vaccine for peanut allergies. These innovative products could transform the company, enabling entry into the commercially important US market. Cash resources of £20.5m at end June-2022 have been bolstered by c £17m (gross) through equity and debt. This should be sufficient to fund the planned trials for both key programmes through to material value-inflection points next year, whilst also preparing for future advancement of both these programmes in an efficient manner. Meanwhile, the underlying European commercial business remains solid despite some short-term headwinds, with a return to near double-digit growth expected in FY23. We value Allergy Therapeutics at £327.7m, or 48.3p per share, with the base business & net cash effectively underpinning the current share price. The development pipeline holds significant future potential and there could be material upside to our valuation as the pipeline progresses.

Allergy Therapeutics’ FY22 results provided additional insights into various markets and products, following the recent trading update detailed in our July 2022 Lighthouse. FY22 revenues of £72.8m (FY21: £84.3m) declined 14% (-9% CER), but, notably, the temporary headwinds mainly affected Germany, the largest market for Allergy Therapeutics. This masked growth in other countries, including Spain, the second largest market, which grew 11% CER, whilst the Netherlands, Czech Republic and UK grew 8%, 7% and 5%, respectively, on a constant currency basis. In terms of products, growth was driven by Pollinex, Venomil and Acarovac. A new product was launched in Spain for Paper Wasp allergies.

Exhibit 1: Allergy Therapeutics FY22 geographic split (left) and product mix (right)

Source: Allergy Therapeutics adapted by Trinity Delta

Germany contributed £44.8m (FY21: £53.8m) and now represents 59% of revenues (FY21: 64%). Sales were impacted by the ongoing regulatory shift from older products to the newer regulated treatments leading to portfolio streamlining and some commercial disruptions. The latter affected Pollinex Quattro (PQ) in Germany, which is currently available on a named patient basis; both the Grass and Birch PQ products are currently in the TAV (Therapieallergene Verordnung) regulatory process. These effects were also compounded by ongoing pandemic disruptions, with physicians redeployed to focus on COVID-19 vaccinations.

These effects should wash out and normalise in the near-term, in our view, and management expects a return to near double-digit revenue growth in FY23. This should help to drive a trading profit pre-R&D above break-even, even as clinical development increases with the start of new trials. Our updated financial forecasts are detailed later in this note.

Imminent trial initiations for key R&D programmes

The pipeline of R&D programmes should ensure medium- and longer-term growth and will be key to unlocking future value. The focus remains the development of innovative and transformational products, with the key platforms Pollinex Quattro (ultra-short course injections), and the VLP (virus-like particle) technology. The most advanced products on these platforms, notably Grass MATA MPL and VLP Peanut underpin future expansion in Europe and entry into the US. Both products are set to start the next stage of development this year.

VLP peanut allergy vaccine Phase I will provide initial insights

Allergy Therapeutics received FDA clearance to initiate the Phase I PROTECT study for its novel VLP (virus-like particle) short course peanut allergy vaccine candidate in January 2022. Clinical trial sites have been contracted and the first patient is expected to be recruited imminently. Updates on the trial’s development will be provided as the study progresses through the various dosing cohorts, outlined below, with initial top-line data expected during summer 2023. Progression through the ascending dose cohorts in Part B of the study will be an important indicator on the safety of VLP Peanut, which could be a key factor towards future commercial success.

The Phase I PROTECT study is a two-part study that will be conducted in the US. The aim of the study is predominantly safety and tolerability, and the first part of the study will include both healthy adult volunteers and adult patients with peanut allergy. Preliminary proof of efficacy will also be explored in the second part of the trial. The two-parts of the trial are:

• Part A: The first part of the study is open label and will include two parallel groups: (1) the first group will include four cohorts of one to four healthy adult subjects that will receive six ascending subcutaneous doses of VLP Peanut; (2) the second group will include adults with peanut allergy, who will undergo skin prick tests with ascending concentrations of VLP Peanut. As this is the first in human trial, Part A is to ensure the vaccine does not induce severe allergic reactions.
• Part B: Assuming acceptable safety and tolerability in Part A, the study will then move to the second stage, which will be double-blind and placebo-controlled and will include adults with peanut allergy. Cohorts in Part B will receive ascending subcutaneous doses of VLP Peanut.

Paediatric and adolescent peanut allergy patients, which will be key for commercialisation, will be assessed in future Phase II proof-of-concept trials. These could potentially start as early as 2024 pending Phase I PROTECT data that will guide the Phase II design. The recent funding round will allow manufacture of batches ahead of the Phase II trial, to enable progression in an efficient manner.

If future trials confirm the profile seen in the highly promising preclinical studies, which were replicated in the Imperial College biomarker study, then the clear medical need for such a potentially life-saving treatment could allow for an expedited approval pathway. Preclinical data to date suggest that VLP Peanut could induce long-lasting protective immunity without inducing allergic reactions (hypoallergenic) with only a short course approach, potentially three injections with a further booster. The ability to elicit a response after only a few injections could be a key differentiator to drive uptake, especially if the vaccine also does not induce allergic reactions, as parents are generally reticent to subject their child to multiple and frequent injections. Our March 2022 Outlook provides a more detailed overview of prior data and the potential commercial opportunity.

Grass MATA MPL Phase III is key for US entry

The pivotal G306 Phase III trial is expected to start in Q422 and run over the next US and European hay fever allergy season in 2023. The design of the planned G306 trial has been optimised based on the highly positive G309 exploratory Phase III field trial, which demonstrated a c 40% improvement in the 14-week treatment group in the combined symptom and medication score (CSMS), a measure of daily symptoms and the use of relief medication, averaged over the peak grass pollen season. Please see our March 2022 Outlook for a detailed summary of the G309 data.

This magnitude of effect appears larger than that observed in other trials for other severe hay fever treatments, with the usual caveat of the limitations of cross trial comparisons. For context the FDA approved label shows ALK Abello’s GRASTEK grass sublingual tablet, when taken daily for 24-weeks, achieved a 29% improvement over placebo on TCS (total combined score, a sum of daily symptoms and daily medication scores) over the peak grass pollen season in the first season of its multi-season trial.

Design of the G306 trial has been based on observations and full data from the G309 trial, and will recruit around 1,200 patients, at the top-end of previous expectations in order to increase the confidence level. The larger trial size is fully funded with the c £17m (gross) cash boost via the issuance of equity and debt. The trial will be conducted in the US and Europe and subjects will receive six injections over 13-weeks. Initial top-line data are expected during Q423.

Assuming the G306 trial is positive, this will form the basis of the efficacy element for US filing. A safety database will also be required in the US, that will be mostly satisfied with data from G306 plus other trials, with G306 now planned to be expanded to subsequently treat placebo patients with Grass MATA MPL. This should reduce the size of the final safety database trial needed to complete the FDA dossier. A one-year paediatric trial will be required to support the regulatory filing in Germany and could potentially be used to also support a paediatric indication in the US at a later date.

The Grass MATA MPL development programme is a key element in Allergy Therapeutics’ medium-term strategy. Assuming the positive G309 results are replicated in G306, this should help to secure both first FDA approval and market expansion in Europe. If G306 is positive then pivotal trials for the PQ MATA MPL range, which includes Birch and Ragweed for the US portfolio, would likely be initiated, subject to funding.

Valuation

Our valuation for Allergy Therapeutics continues to be based on a combination of an rNPV model, with risk adjusted NPVs calculated for the key development programmes, combined with a DCF of the base commercial business comprising detailed expectations of the European cash flows over a five-year forecast period. In line with our philosophy, we use conservative assumptions throughout. Updating our model assumptions, to reflect the latest financial guidance post-FY22 and development progress, results in a valuation for Allergy Therapeutics of £327.7m, equivalent to 48.3p per share. The commercial base business contributes £112.8m (16.6p/share), with the pipeline valued at £190.0m (28.0p/share). Exhibit 2 provides a breakdown of the various components.

Exhibit 2: Allergy Therapeutics valuation summary

Source: Trinity Delta   Note: $/£ FX rate of 1.2 (previously 1.3); 10% discount rate for commercial business, 12.5% for pipeline

For the revenue generating and profitable base European business we forecast near-to-mid-term market growth of 6-7% with no market share gains (history would suggest this is arguably over-conservative), coupled with a modest 2% terminal growth rate, and 10% cost of capital. On this basis, this business alone is valued at £112.8m (16.6p/share), which with pro forma net cash (FY22 plus new equity) of £24.9m (3.7p/share) underpins much of the current share price.

This provides a level of downside protection that is unusual for a company which also has potentially transformational R&D projects in the pipeline. The implication is that the pipeline is under appreciated. This seems unwarranted given that our valuation suggests that the pipeline, even on a risk-adjusted basis with conservative assumptions, is worth £190.0m (28.0p/share), markedly more than the base business.

Our valuation leaves ample room for upside from various sources. For example, our peak sales forecasts for both Grass MATA MPL and VLP Peanut in the US are relatively conservative given the potential market opportunity for each. As these progress through clinical development and approach US market entry, unwinding our current risk adjustment would also unlock upside. See our March 2022 Outlook note for a more detailed overview of the key assumptions underpinning our forecasts for the main valuation contributors.

Financials

Allergy Therapeutics’ FY22 revenues were £72.8m (FY21: £84.3m). Revenues were impacted by the temporary effects of the planned portfolio streamlining, commercial disruptions, and some ongoing COVID-19 interruptions, all predominantly affecting Germany, leading to a -14% reported and -9% CER decline in total revenue. Sales in Germany declined by 17% CER to £44.8m from £53.8m in FY22, with Germany now representing 59% of revenues (FY21: 64%). In Spain, Allergy Therapeutics’ second largest market, 11% CER growth was achieved, whilst the Netherlands grew 8%, the Czech Republic 7% and the UK 5%, all on a constant currency basis. In terms of products, growth was driven by Pollinex, Venomil and Acarovac, whilst Pollinex Quattro, as a named patient product, was adversely impacted in Germany given the shift towards newer regulated treatments.

Gross profit decreased to £49.5m (FY21: £62.2m), with a gross margin of 68%, a decline against 74% in FY21, given investment in the supply chain and fixed facility costs. Operating profit, excluding R&D spend, dropped to £3.4m (FY21: £16.9m), largely owing to the revenue decline, compounded by the lower gross margin and coupled with slightly higher sales, marketing, and distribution costs of £26.0m (FY21: £25.2m). Other administration expenses were maintained at £20.8m (FY21: £20.7m). R&D expenditure increased to £15.7m (FY21: £12.9m) owing to continued investment into key pipeline programmes including VLP Peanut and Grass MATA MPL. Reported operating loss was £12.2m (FY21: profit of £4.0m) with pre-tax loss of £12.7m (FY21: profit of £3.7m). Similarly, net loss (after tax) was £13.8m (FY21: profit of £2.9m) equating to a loss per share of 2.14p (FY21: EPS of 0.45p and 0.43p on a diluted basis).

Cash and cash equivalents at 30 June 2022 were £20.5m (from £41.4m at 31 December 2021 and £40.3m at 30 June 2021). These have been boosted by £7m (gross) in new equity, based on the issuance of 35m shares at a price of 20p, in addition to £10m in loan notes which will be issued in February 2023. These have warrants to the same value attached with an exercise price of 30p. The loan notes can be repaid at any point, have a five-year term and carry an annual interest rate of 8.25% over the Bank of England base rate (paid semi-annually, equating to c £1m per annum at current interest rates). We estimate current pro forma cash and equivalents of £27.3m and debt of £2.5m for net cash of £24.9m. Current cash resources should be sufficient to fully fund the G306 pivotal Grass MATA MPL Phase III registration study and the Phase I trial of the VPL peanut allergy vaccine, while also investing in preparations to efficiently advance both programmes beyond the current planned trials.

For FY23 we forecast revenues of £80.0m, reflecting a return to growth of 9.9% as German headwinds abate. For FY24 we forecast revenues of £85.6m, growth of 6.9%, which underplays the potential boost that positive G306 data may have on Pollinex Quattro/Grass MATA MPL prescribing. Non-R&D operating costs should rise broadly in line with sales, albeit also reflecting investment into further market access and regulatory expertise. However, we forecast R&D investment to increase to £26.9m in FY23 and then decrease to £20.2m in FY24 given current clinical trial plans. This leads to operating profit, excluding R&D spend, of £2.1m in FY23 and £1.4m in FY24, whilst on an underlying basis we expect operating losses of £24.9m in FY23 and £18.8m in FY24. Exhibit 3 details our forecasts.

Exhibit 3: Summary of financials

Source: Company, Trinity Delta