A breath of fresh air - DMD pipeline is on steroids with vamorolone

A breath of fresh air - DMD pipeline is on steroids with vamorolone

A breath of fresh air - DMD pipeline is on steroids with vamorolone

22 November 2018 Please see important research disclosures at the end of this document Page 1 of 60 VALUATIONLAB | info@valuationlab.com | Valuation Report | November 2018 A breath of fresh air DMD pipeline is on steroids with vamorolone Santhera has a late-stage product pipeline that targets rare, neuromuscular, lung and mitochondrial diseases. Key value driver is idebenone (branded “Raxone”), which in 2015 became the first-ever drug approved for treating Leber’s Hereditary Optic Neuropathy (LHON), a rare genetic eye disease that leads to sudden blindness. Raxone has far larger potential in Duchenne Muscular Dystrophy (DMD) with EU and US filings planned in 2019.

In February 2018, global exclusive rights were obtained for POL6014, a first-in-class drug for treating cystic fibrosis, with blockbuster sales potential from Polyphor. In November 2018, the option to sub-license the global rights (ex. Japan/South Korea) for vamorolone, a first-in-class dissociative steroid for DMD, were obtained from Idorsia, which also became an anchor shareholder with a 13.3% stake. In December 2018, Santhera plans a targeted share placement of CHF ~50 mn to finance vamorolone and ongoing projects. We calculate another CHF 80 mn is needed to fully develop all key pipeline projects up to commercialization to be raised when key inflection points are reached at higher share prices to minimize share dilution or paid by the sale of a rare pediatric disease voucher on US approval of Raxone in DMD.

We derive a sum-of-parts r(risk-adjusted) NPV of CHF 61/share, conservatively based on 16.5 mn shares to raise CHF 130 mn at current share prices. We qualify Santhera as High Risk as it has to timely secure sufficient funding. Key catalysts: 1) EGM & targeted share placement (11 December 2018): of CHF ~50 mn is planned to finance the option to in-license vamorolone and other pipeline projects 2) Raxone EU re-filing in DMD (late Q1 2019): a re-filing in the EU for treating DMD patients (not on steroids) would increase our rNPV by CHF 3/share 3) Raxone US filing in DMD (H2 2019): Acceptance of a US filing in DMD patients (not treated with steroids) would increase our rNPV by CHF 3/share.

SANTHERA PHARMACEUTICALS VALUATIONLAB FINANCIAL ANALYSIS FOCUS AREA: NOVEL THERAPIES IN RARE NEUROMUSCULAR, (NEURO)OPHTHALMOLOGY AND LUNG DISORDERS KEY DATA SIX: SANN MARKET CAPITALIZATION (CHF MN) 109 SHARE PRICE ON NOVEMBER 21, 2018 15 ENTERPRISE VALUE (CHF MN) 75 RISK-ADJUSTED NPV PER SHARE* (CHF) 61 CASH (30 JUNE 2018) (CHF MN) 35 UPSIDE/DOWNSIDE (%) 319% MONTHLY OPERATING EXPENSE (CHF MN) 7.0 RISK PROFILE HIGH CASH LIFE 2019 SUCCESS PROBABILITY LEAD PROJECT 82.5% BREAK-EVEN (YEAR) 2021 EMPLOYEES 120 FOUNDED (YEAR) 2004 LISTED (YEAR) 2006 KEY PRODUCTS: STATUS MAJOR SHAREHOLDERS: (%) - RAXONE (LHON) APPROVED (EU) - IDORSIA 13.3 - RAXONE (DMD - NON-STEROID PATIENTS) PHASE III - IGLU GROUP 8.4 - RAXONE (DMD - STEROID PATIENTS) PHASE III - WAYPOINT 7.3 - VAMOROLONE (DMD - ALL PATIENTS) PHASE IIB - EXECUTIVE MANAGEMENT & BOARD 1.9 - POL6014 (CYSTIC FIBROSIS) PHASE I COMPLETED - FREE FLOAT 98.1 - OMIGAPIL (CMD) POC COMPLETED - AVERAGE DAILY VOLUME (30-DAY) 11,834 UPCOMING CATALYSTS: DATE ANALYST(S): BOB POOLER - EGM AND FUND RAISE 11 DEC 2018 BP@VALUATIONLAB.COM - RAXONE DMD (NON-STEROID) EU RE-FILING LATE Q1 2019 +41 79 652 67 68 - RAXONE DMD (NON-STEROID) US FILING H2 2019 * BASED ON 16.5 MN FULLY DILUTED SHARES TO RAISE CHF 130 MN TO ACQUIRE VAMOROLONE (EX.

JAPAN/SOUTH KOREA) AND FULLY DEVELOP ALL KEY R&D PROJECTS UP TO COMMERCIALIZATION ESTIMATES AS OF 21 NOVEMBER, 2018 SOURCE: VALUATIONLAB ESTIMATES, SANTHERA PHARMACEUTICALS

A breath of fresh air - DMD pipeline is on steroids with vamorolone

22 November 2018 Please see important research disclosures at the end of this document Page 2 of 60 VALUATIONLAB | info@valuationlab.com | Valuation Report | November 2018 Recent Developments Since our last Santhera Valuation Report in February 2018, the company has made significant progress with the expansion of its pipeline by the option to in-license the global rights (excluding Japan/South Korea) of vamorolone, a first-in-class dissociated steroid for treating Duchenne Muscular Dystrophy (DMD), from Idorsia in November, which effectively became an anchor shareholder retaining a 13.3% stake in Santhera.

Vamorolone is set to replace mainstay steroids, where long-term use is often hampered by side effects, and complements Raxone in DMD with the potential of combination therapy. Other important pipeline news includes POL6014, the cystic fibrosis compound in-licensed from Polyphor in February, which started a phase Ib/IIa MAD (multiple ascending dose) trial in October. We conservatively estimate that vamorolone together with POL6014 will add approximately CHF 1.6 bn in peak sales potential to Santhera’s pipeline, thereby reducing the large reliance on key driver Raxone.

On 11 December, Santhera will hold an Extraordinary General Meeting to allow for a targeted share placement of up to 3.5 mn registered shares to raise approximately CHF 50 mn to finance the option to in-license vamorolone and ongoing R&D projects. Existing and new shareholders have already committed to participate in ~40% of the placement. For Santhera to fully develop all its key pipeline projects up to commercialization, we calculate an additional CHF 80 mn (next to the CHF ~50 mn share placement in December) will be needed before becoming profitable. The additional funds can be raised at a later stage and at higher share prices to minimize share dilution.

For instance, when Santhera reaches key inflection points such as the US/EU filing or approval of Raxone in DMD. Alternatively, the company could sell the rare pediatric disease designation voucher it should receive upon US approval of Raxone in DMD, with an average value of USD 154 mn, to fill the remaining funding gap. To account for the funding gap, we conservatively calculate our per share forecasts based on 16.5 mn shares to raise the total CHF 130 mn cash requirement needed to reach profitability expected in 2021. This leads to a share dilution of 119% based on Santhera’s current low share price.

20 November – Vamorolone (DMD) in-licensed, Idorsia anchor shareholder Santhera Santhera acquired the option to the global rights (excluding Japan/South Korea) of vamorolone in all indications from SIX-listed biopharmaceutical company Idorsia (ticker: IDIA). Idorsia will become Santhera’s largest shareholder with a 13.3% stake (1 mn Santhera shares). Vamorolone is a first-in-class dissociative steroid in pivotal phase IIb development for DMD, where we conservatively forecast peak sales of CHF 550+ mn in DMD alone. Vamorolone could potentially be developed in other diseases where steroids are involved such as asthma, inflammatory bowel disease, rheumatoid arthritis, multiple sclerosis, cystic fibrosis, among others.

We believe this agreement underlines Santhera’s first-rate development capabilities in rare diseases and is an excellent strategic fit, strengthening the company’s pipeline further. Vamorolone complements Santhera’s current DMD program with Raxone, resulting in significant synergies such as marketing and sales costs, boosting margins considerably. Santhera now has the potential to become the undisputed leader in the DMD market with Raxone and vamorolone both in pivotal development.

A breath of fresh air - DMD pipeline is on steroids with vamorolone

22 November 2018 Please see important research disclosures at the end of this document Page 3 of 60 VALUATIONLAB | info@valuationlab.com | Valuation Report | November 2018 Vamorolone is targeted at replacing glucocorticoids (steroids) such as prednisone or deflazacort, currently standard of care in early stages of disease to prevent muscle deterioration in DMD patients.

Chronic use of steroids is often hampered by side effects such as facial puffiness, weight increase and obesity, upper respiratory infection and cough, or unwanted hair growth. Vamorolone appears to have a superior safety and tolerability profile largely lacking these typical steroid side effects. Raxone is targeted at patients in later stages of disease with breathing difficulty to prevent lung function decline. We forecast total peak sales of Raxone in DMD to amount to CHF 850 mn. Both drugs can be given irrespective of the underlying genetic mutation with the potential of combination therapy.

Moreover, vamorolone and Raxone have been developed for chronic treatment, both with an excellent safety and tolerability profile.

ReveraGen’s phase IIb trial “VISION-DMD” (VBP15-004) trial in approximately 120 steroid- naïve (not have taken prednisone or deflazacort) DMD patients was developed under FDA and EMA scientific advice and is considered a pivotal trial for US accelerated approval and EU conditional approval. First patient enrolment started in August 2018, and is expected to take about 12 months, with a total trial duration of about 24 months, with top line results expected in H2 2020. First launches could occur in 2022. Santhera will commercialize vamorolone with its own European and US specialist field force that it uses to sell Raxone in LHON and DMD, leading to considerable marketing and sales cost synergies, and seek distributors outside these areas.

Conservatively applying a 35% (phase IIb) success rate and peak sales of CHF 550+ mn, we calculate a risk-adjusted NPV of CHF 315 mn or CHF 20 per share for vamorolone in DMD alone.

Originally, Actelion acquired the exclusive option for the global rights from the private US biopharmaceutical company ReveraGen in November 2016. Idorsia, the SIX-listed spin-off of Actelion, which was acquired by Johnson & Johnson in 2017 for USD 30 bn, retained the exclusive option for the global rights of vamorolone. Many of Idorsia’s executives were responsible for the exceptional success of Actelion, including co-founders and CEO Jean- Paul Clozel and CSO Martine Clozel. Only recently, on 5 November 2018, Idorsia renegotiated the vamorolone rights with ReveraGen and paid the company USD 15 mn 0 2 4 6 8 10 12 14 16 18 20 AGE (YEARS) VAMOROLONE ABILITY RAXONE B R E A T H I N G W A L K I N G SOURCE: VALUATIONLAB DMD TREATMENT POSITIONING WHEELCHAIR ASSISTED VENTILATION

22 November 2018 Please see important research disclosures at the end of this document Page 4 of 60 VALUATIONLAB | info@valuationlab.com | Valuation Report | November 2018 following the receipt of the clinical study report for the phase IIa proof-of-concept trial with vamorolone in DMD. Under the new structure, milestone payments will be more dependent on commercial success and more back-end loaded than the original agreement. The Idorsia agreement with Santhera largely reflects the recent new deal terms. The vamorolone in-licensing deal terms with Idorsia include: • Upfront payment: USD 20 mn in cash (subject to financing) • Strategic shareholding: Idorsia receives 1 mn Santhera shares (locked up until US approval of vamorolone) equaling an 13.3% equity stake with Idorsia effectively becoming Santhera’s largest shareholder (unconditional and not redeemable) • Regulatory & sales milestones: up to USD 80 mn in the DMD indication • Sales milestones: four one-time payments of up to USD 130 mn in aggregate • Royalties on net sales: tiered single digit to low double-digit percentage of sales • Regulatory milestones: for three additional indications up to USD 205 mn in aggregate Santhera may exercise the option upon receipt of data from the phase IIb “VISION-DMD” trial and following a one-time consideration to Idorsia of USD 30 mn.

To finance the acquisition of the global rights (excluding Japan/South Korea) of vamorolone in all indications and for ongoing projects, Santhera will hold an Extraordinary General Meeting on 11 December to allow for a targeted share placement of up to 3.5 mn registered shares to raise approximately CHF 50 mn. Existing and new shareholders have already committed to participate in ~40% of the placement.

24 October – Start of phase Ib/IIa MAD trial of POL6014 in cystic fibrosis The phase Ib/IIa MAD (multiple ascending dose) trial with POL6014 in patients with cystic fibrosis started and will be conducted in sites in Germany and Poland. The MAD trial will evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of orally inhaled multiple doses of POL6014 in up to 40 cystic fibrosis patients. Patients will be treated for 15 days with one of three ascending doses of POL6014 given once or twice daily or placebo. Top line results are expected in H2 2019.

15 October – Positive opinion COMP for orphan drug designation POL6014 in EU The COMP (Committee for Orphan Medicinal Products) of the EMA (European Medicines Agency) issued a positive opinion on ODD (Orphan Drug Designation) for POL6014 for the treatment of cystic fibrosis, a rare lung disorder that affects around 35,000 people in the EU.

An ODD grant typically follows within 30 days (mid-November). ODD is an incentive for pharmaceutical companies to develop treatments for rare diseases and provides up to 10 years marketing exclusivity from the date of approval.

4 September – H1 2018 results: FY 2018 sales guidance raised to CHF 30 to 32 mn In H1 2018, product sales of Raxone in LHON amounted to CHF 16 mn, an increase of 48% from H1 2017 (CHF 10.9 mn). Santhera reported an operating loss of CHF -26.3 mn (H1 2017: CHF -21.4 mn) due to higher operating expenses of CHF 39.9 mn (H1 2017: CHF 30.5 mn) largely caused by the in-licensing of POL6014 for cystic fibrosis and other lung diseases from Polyphor in February 2018. As a result, the net loss widened to CHF - 27.4 mn from CHF -22.7 mn in H1 2017. Cash, cash equivalents and short-term financial assets amounted to CHF 34.8 mn (30 June 2018).

22 November 2018 Please see important research disclosures at the end of this document Page 5 of 60 VALUATIONLAB | info@valuationlab.com | Valuation Report | November 2018 Raxone is currently sold in 20 European countries. By end of H1 2018 full reimbursement for Raxone in LHON was achieved in 8 countries. In the remaining 12 countries availability is covered by special reimbursement schemes. Commercial operations in the 4 regional country clusters in Europe were expanded to support marketing of Raxone in LHON. Based on the continued rollout of Raxone in Europe in the first half and the increasing number of countries where full reimbursement will be achieved, Santhera guides Raxone product sales in LHON to reach CHF 30 to 32 mn in FY 2018 from previously CHF 28 to 30 mn.

This represents an acceleration of growth to around 34% in FY 2018 compared to 21% FY 2017.

8 July – New data supports PEF as predictor of disease progression in DMD New data further supports the clinical relevance of PEF (peak expiratory flow) - a primary endpoint in the positive phase III “DELOS” - and provides a link between the treatment of Raxone observed in “DELOS” and measures of disease progression. The new data shows that: • PEF%p (peak expiratory flow as percent predicted) is a sensitive and early marker of respiratory function decline in DMD applicable over a wide range • PEF and FVC (forced vital capacity) are predictors of time to clinically relevant events including time to hospitalization due to respiratory causes, time to initiation of assisted ventilation and death • Comparative analysis of the outcome of “DELOS” and data from natural history studies allows the extrapolation of the observed treatment benefit of Raxone in PEF%p.

The treatment effect with Raxone in “DELOS” can be linked to a delay in the initiation of assisted ventilation by 3 years, which is of high clinical relevance The new data will be included in the data package for a new EU re-filing for conditional approval in DMD patients not using steroids in late Q1 2019 and is in line with the advice of the CHMP after the committee issued a negative opinion. Although the CHMP acknowledged the positive outcome of the phase III “DELOS” trial, the CHMP invited Santhera to present additional data to further link the observed treatment effects on respiratory function outcomes to patient benefit.

22 June – UK EAMS renewed for Raxone in DMD The UK’s MHRA (Medicines and Healthcare products Regulatory Agency) renewed the EAMS (Early Access to Medicines Scheme) scientific opinion for Raxone for patients with DMD in lung function decline who are not taking glucocorticoids. The aim of EAMS is to provide patients with life threatening or seriously debilitating illnesses access to drugs that have not yet been approved when there is a clear unmet medical need. The MHRA confirmed its positive scientific opinion under the EAMS and renewed it for another year. Raxone has been available in the UK through EAMS since June 2017 and at present over 40 DMD patients are enrolled at several specialized DMD centers in the UK.

We believe the renewal, which follows the negative CHMP appeal in February, underlines the positive benefit-risk of Raxone in this population as seen in the positive phase III “DELOS” trial. 12 June – Raxone filed for approval in LHON in South Korea Raxone was filed for approval in treating patients with LHON in South Korea, one of the major Asian markets. The compound was granted ODD (orphan drug designation) in South Korea, which provides up to 10 years market exclusivity from the date of approval. Approval of Raxone is expected to follow in approximately one year.

22 November 2018 Please see important research disclosures at the end of this document Page 6 of 60 VALUATIONLAB | info@valuationlab.com | Valuation Report | November 2018 5 April – Positive phase I “CALLISTO” trial results of omigapil in CMD Omigapil successfully completed the phase I “CALLISTO” trial in patients with two forms of CMD (congenital muscular dystrophy) conducted by the NIH. The ascending multiple dose cohort trial met its primary objective to establish a favorable pharmacokinetic profile of omigapil and was safe and well tolerated in children and adolescents with CMD. A total of 20 patients aged 5-16 years with either of two of the most common forms of CMD were enrolled in the trial.

Following further data analysis, Santhera will discuss the results with clinical experts and regulators to prepare for a pivotal trial in patients with CMD. 20 March – FY 2017 results in line; FY 2018 Raxone sales guidance of CHF 28-30 mn In FY 2017, product sales for Raxone in LHON were up 21% to CHF 22.9 mn (FY 2016; CHF 19.0 mn), with the roll-out progressing as planned with Raxone being sold in 20 European countries (fully reimbursed in 8 countries and covered by special reimbursement schemes in the remaining 12 countries). As of 31 December 2017, freely available liquid funds (cash and cash equivalents and short-term financial assets) amounted to CHF 58.2 mn.

In February 2017, Santhera strengthened its financial position through the successful placement of CHF 60 mn senior unsecured convertible bonds due 2022. For FY 2017, Santhera expects net sales of Raxone in LHON to reach CHF 28-30 mn, with a net loss ranging between CHF 50-55 mn.

5 March – “IPPoMS” trial results of Raxone in ppMS show no impact on disease The exploratory phase I/II “IPPoMS” (Idebenone in Patients with Primary Progressive Multiple Sclerosis) trial of Raxone in patients with ppMS (primary progressive Multiple Sclerosis), conducted as an investigator-initiated trial at the US NIH (National Institutes of Health), showed no difference between the Raxone treatment group (2,250 mg daily) and placebo on disease progression over a treatment period of two years. Raxone was well tolerated at higher doses than currently approved for treating LHON confirming the long- term safety.

The NINDS (National Institute of Neurological Disorders and Stroke), part of the NIH sponsored the trial. Primary progressive MS is the more aggressive of two main subtypes of MS and affects around 10-15% of all MS patients. Roche’s Ocrevus (ocrelizumab) is currently the only approved drug for treating ppMS. The “IPPoMS” trial results have no impact on our estimates as ppMS was considered a “wild card” and therefore excluded from our forecasts.

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