Nuevolution publ : REDEYE SEPTEMBER 2018

Equity Research

5 September 2018

Nuevolution

Sector: Biotech

Strengthening the foundation & Cytokine X unveiled

FAIR VALUE RANGE

Q2 largely in-line with expectations

BEAR

BASE

BULL

16.0

28.0

42.0

NUE's second quarter was characterized by preparatory work. The R&D efforts continue to lay a solid foundation for the future, and on the corporate side NUE completed a directed share issue and up-listing the shares on the Nasdaq Stockholm main market.

NUE.ST VERSUS OMXS30

Amgen: Collaboration moving ahead

The Amgen collaboration saw its first big step forward as the US biotech opted-in on the first program. A second program is moving toward the opt-in stage, and we estimate that this could occur as early as in 2018, with a third program being moved ahead as well. All-together this puts NUE in a good position to generate at least one upfront licensing payment of a minimum of USD 10 million.

IL-17A inhibitor (a.k.a. "Cytokine X"): Unveiling a high-potential project

In connection with the Q2 report, NUE unveiled the identity of the "Cytokine X" project: asmall molecule inhibitor of IL-17A, which has proven to be a highly attractive drug target for autoimmune diseases such as psoriasis, psoriatic arthritis, and ankylosing spondylitis. Many steps remain before the project could enter clinic, but the project has a good value potential. We have included the project in our valuation, which adds about SEK 2 per share.

REDEYE RATING

8

7

6.5

Almirall cautiously moving forward & new deal could come in 2018

No new material information has been released regarding the NUE/Almirall RORyt project. We continue to expect the program to enter clinic in 2018, but understand that the compounds need careful characterization before entering clinic. During 2018, we also expect the next partner deal for NUE, which could provide a catalyst to the stock in the near-term.

Management

1

0

Ownership

ProfitOutlook

Profitability

Financial Strength

KEY STATS

Valuation and the share

Ticker MarketNUE.STSmall cap

With this update we make some timing-changes to our cash flow estimates and, most notably, include the IL-17A project in our sum-of-the-parts valuation of NUE. In total, this results in a new Base Case at SEK 28 (27) per share, with a Bull and Bear Case at SEK 42 (40) and SEK 16 (16), respectively.

Share Price (SEK)

16.4

Market Cap (MSEK)

810

Net Debt 18E (MSEK)

-168

Free Float

28 %

Avg. daily volume ('000)

0

KEY FINANCIALS (MSEK)	2016	2017	2018E	2019E	2020E	2021E
Net sales	122	12	91	72	345	143	ANALYSTS
EBIT	-50	-123	-39	-65	206	22	Mathias Spinnars
EBITDA	-52	-121	-38	-63	208	24	[e-mail]
EPS (adj.)(SEK)	-210.516	-220.417	-20.188E	-210.319E	42.0220E	020.421E	Klas Palin
EV/Sales	-1.2	-8.9	7.0	9.9	1.5	3.4	[e-mail]
EV/EBIT	2.8	0.9	-16.3	-10.9	2.5	22.8
EV/EBITDA	2.8	0.9	-17.1	-11.2	2.5	20.2
P/E	0.0	0.0	-20.5	-12.4	3.9	37.4
Source: Redeye Research

Important information:All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report

Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. [phone], E-post:[e-mail]

Q2 financials show higher burn rate due to one-off costs

The second quarter was characterized by preparatory R&D work and corporate events, building for the longer term. In May, NUE completed a directed share issue of SEK 110 million (gross) at SEK 16.50 per share, and following this in June, the company's share wasapproved for up-listing on the Nasdaq Stockholm main market. The capital raise have theimmediate effect of strengthening both NUE's shareholder base with institutional investorsas well as its business, and the up-listing could improve the trading metrics in the NUE share going forward, as well as potentially give a more high-profile platform where important news and developments are seen by more investors. The capital will be used to advance the pipeline broadly and could show potential partners that NUE can go their own way if the right deal does not materialize. Thus, it increases the optionality in the short term, and potentially also the value in the long-term.

The net results for the quarter was SEK -32.1 (-27.3) million, with operating expenses of 35.1 (34.7) and income of 0.6 (5.9) million. The increase in costs were largely due to one-off costs in connection with the up-listing process and capital raise. The operating cash flow was -33.5 (-22.1) million and total cash flow was 70.2 (-22.5) million, including the roughly 110 million raised through a private placement in May. The company finished the quarter with about 160 million in cash, which should last at least 12 months, not including additional revenues.

Given the developments in the Amgen deal, where the US biotech company is funding all future R&D in the first program and potentially soon also the second program which seem to move forward nicely, we expect that future burn rate to come down a bit in the coming quarters. Further, the listing process is now completed, which burdened H1 costs slightly. As an offset, we expect increasing costs as the pipeline move forwards, giving an increased activity. However, we see good potential for deals in this time period that could bring a meaningful upfront and at the same time reduce the R&D costs.

Nuevolution: Costs

CFO change

On August 31st, NUE announced that Johnny Stilou has been appointed as Chief Financial Officer as the previous CFO, Henrik Simonsen, leaves the company to pursue other career opportunities. Johnny Stilou joined NUE in February as Director of Investor Relations & Corporate Communications, and has vast experience in various finance roles, for example an eight-year stint as CFO for Nasdaq-listed Veloxis Pharmaceuticals.

Update on the R&D programs

Amgen: Collaboration moving ahead

Recent disclosures about the deal terms has improved our understanding of the deal, allowing for a better assessment of value. In sum, we see the Amgen collaboration, entered in October 2016, as a favorable deal to NUE. The terms specify that the companies will collaborate on a handful of mutually agreed upon targets, where NUE handles the screening and early research, after which Amgen can opt-in to each program depending on the data. If Amgen opts in, the companies will collaborate on late-stage research with Amgen bearing all future R&D costs. Amgen will have the opportunity to license the specific program up until the end of phase I. The licensing fee will be a minimum of USD 10 million, increasing with time. NUE will retain all rights and may be compensated if Amgen decides to discontinue development before end of phase I without good reason, e.g. given no program-ending compound characteristic such as toxicity is found. We assume the same deal structure is applicable to all programs.

During 2017, the first program (cancer) reached anin vivoproof-of-concept. Daily injections with the compound showed a dose-dependent reduction in tumor growth with good responses seen already at low doses. At the highest dose (25 mpk) the tumor was almost completely eliminated. Compared to a competitor compound (undisclosed) with a similar mechanism of action, the NUE compound showed superiority. While still very early in the process, the data is promising and we are not surprised that Amgen chose to opt-in for further development. The companies will now collaborate on late-stage research and pre-clinical work, with Amgen bearing all future development costs.

Source: Nuevolution 2017 YE report

A second program is moving toward the opt-in stage, and we estimate that this could occur as early as in 2018, with a third program being moved ahead as well. With each opt-in, NUE increases their chances to generateat leastone upfront licensing payment and clinical candidates. Having Amgen as a partner indicates that the programs are in very strong R&D hands, if a program reaches clinic.

All-in-all, we believe the deal is a good long-term value creator for NUE. The collaboration shows that big companies can work efficiently with the NUE team, and with continued positive developments, the partnership could drive more business going forward. However, as for the cash flow, we believe more patience is needed. The timing of the in-licensing will be a balancing act for Amgen as the price increases with each step. While we believe Amgen want to see some data before acting, it is unclear whether that will be at the candidate stageor in phase I. But if the program continues to progress according to plan, we estimate that this could result in an in-licensing around 2020-2022 for the first program.

IL-17A inhibitor (a.k.a. "Cytokine X"): Unveiling a high-potential project

Interleukin-17A (IL-17A) has, in the past few years, been realized as a one of the most commercially attractive drug targets for a range of autoimmune diseases such as psoriasis,psoriatic arthritis, and ankylosing spondylitis. Novartis' antibody Cosentyx (secukinumab)was the first IL-17A inhibitor to be approved and was also the first psoriasis drug to be labeled as changing the disease course. Since its approval in January 2015 (psoriasis) the commercial uptake has been strong and in 2017 the drug brought in over USD 2 billion inrevenues. Eli Lilly's Taltz (ixekizumab) was the second IL-17A antibody to reach the market and registered 2017 sales of about USD 560 million. With strong clinical data, the drugs, together with Siliq/Kyntheum (brodalumab), reached USD 2.6 billion in combined sales 2017. Given the strong efficacy, the revenue is estimated to reach about USD 7 billion by 2023.

Marketed IL-17 inhibitors

Generic name	secukinumab	ixekizumab	brodalumab
Brand name	Cosentyx	Taltz	Siliq/Kyntheum
Company	Novartis	Eli Lilly	Valeant/Leo Pharma
Mechanism	IL-17Ai	IL-17Ai	IL-17RAi
Structure	Fully human IgG1 mAb	Humanized IgG4 mAb	Fully human IgG2 mAb
Administration	SubQ inj.	SubQ inj.	SubQ inj.
Psoriasis	Approved Jan'15	Approved Mar'16	Approved Feb'17
Ankylosing spondylitis	Approved Jan'16
Psoriatic arthritis	Approved Jan'16
Atopic dermatitis	Phase I/II data H1'18
Dosing frequency	Q4W
Est. annual price (WAC, $)	61,000
2017 sales across indications ($m)	2,071

Positive Phase III data Feb'18 Phase III data Japan H2'18

Approved Dec'17	Filed
-	-
Q4W	Q2W
67,000	45,500
559	16

Source: company filings, Bloomberg, Redeye Research

All three approved IL-17A drugs are antibodies, which might be easier to develop for theparticular target. NUE is developing a small molecule drug, an approach that's historically notbeen successful for others due to a difficulty in finding small molecules that could bind the challenging IL-17A target. However, early data indicates that compounds generated with Chemetics has a good ability to bind IL-17A and inhibit the cytokine binding to the IL-17A receptor. The compounds tested also shows good ability to suppress cell signaling in human keratinocytes (skin cells).

NUE's IL-17A inhibitor shows a positive profile

Source: Nuevolution 2018 Q2 report

Data presented from a collagen-induced arthritis (CIA) mouse model helps to validate the mechanism of action and to compare the compound to a benchmark IL-17A antibody. Thedata shows a dose-dependent efficacy, where the highest dose of the NUE compound is on par with the benchmark anti-IL-17A antibody. Together with the earlier data, we believe this indicates a promising profile of the NUE compounds. The company is currently working on generating more data for a topical version of the compound, and will also work on developing a tablet-based formulation going forward.

Source: Nuevolution 2018 Q2 report

A topical medication with IL-17A-inhibiting capacity could, for example, be used for patients with mild-to-moderate psoriasis, where antibodies are not offered either due to safety or cost limitations. At a later stage, the tablet-based product could be used for the moderate-to-severe patients, potentially offering a competitive substitute to injectable IL-17A inhibitors. As an indication of the attractiveness of tablet-based medication in the immunology fields (chronic diseases often requiring life-long medication) we can look at the sales of Otezla (apremilast; Celgene). The drug was launched for psoriasis in Q3 2014, and despite a sub-par efficacy sold for USD 1.3 billion in 2017 across indications. The usage is likely to continue to grow in the coming years.

Against this background, we assess that a small molecule compound against IL-17A would be a highly attractive asset both as a topical and tablet-based medication, and we believe a deal could be entered with only limited data. However, given the commercial potential, the project could be worth much more at a later stage if additional data can be presented. Thus, there will be a balancing act for NUE, where an early deal will be beneficial in the near-term but where patience can set up a transformative deal. From a valuation-based approach (instead of focusing on the short-term share price move), we believe that shareholders will fare best if NUE choose to develop the drug as far as possible in-house before finding the right partner for an attractive price, which will likely be when the asset has been de-risked to the point where a potential partner will be less price-conscious. NUE stated in their Q2 report that the project is in such a stage of development where the target identity disclosure will support the start of external promotion. We estimate that the time-frame for a potential deal could be similar to the Almirall deal, which was in pre-clinical development (pre-IND).

With this update we have included the IL-17 project in our model. We assume the drug will have a similar indication exposure as the antibodies. As the potential launch would be multiple years from now, there is uncertainty around pricing and competition. Further, the drug can potentially first be launched as a topical treatment, with the oral tablet as a follow-on drug product. We believe the topical ointment would have a lower commercial potential than the oral drug. While Cosentyx reached USD 2 billion in its third full year on the market, weassume a USD 2 billion top sales potential for NUE's IL-17A project. Model-wise, we apply a 5% probability of reaching the market and assume 30% chance of a deal worth up to USD 500 million in 2020 with USD 20 million upfront and a relatively evenly distributed milestones. In total, the project contributes about SEK 2 per share to our valuation.