Probiodrug — Update 7 September 2016

Probiodrug is a German biopharmaceutical company developing therapies for the treatment of AD. The company is employing a differentiated approach targeting the toxic Abeta version of pyroglutamate-Abeta (pGlu-Abeta) with two strategic legs. Lead product candidate small molecule PQ912 prevents the formation of pGlu-Abeta by inhibiting QC, while pGlu-Abeta specific monoclonal antibody (PBD-C06) directly targets pGlu-Abeta leaving non-toxic forms of Abeta untouched. PQ912 is currently recruiting for a Phase IIa study with initial data expected end-2016. An earlier-stage, preclinical AD pipeline include another small molecule QC inhibitor with an optimised pharmacokinetic/pharmaco-dynamic profile.

Probiodrug was founded in 1997, pioneering a new class of anti-diabetics (gliptins) with multiple large pharma partnerships. The company has focused solely on AD since selling the diabetes franchise to OSI Pharmaceuticals for €28.7m (2004) and the Ingenium CDK9 research programme to AstraZeneca for $1m (2013). Probiodrug is based in Halle, Germany, and employs 16 people. Since 2007 it has raised c €114m from investors and management, including gross proceeds of €23.2m from the IPO in October 2014, listing on Euronext Amsterdam at €15.25/share.

Our Probiodrug valuation is €309m or €41.5/share, based on a risk-adjusted NPV analysis using a 12.5% discount rate. This includes €14.2m net cash reported at end H116 and PQ912 for use in mild AD. We assume PQ912 can achieve peak sales of c €6bn in 2028 (around six years post our forecast 2022 launch). This is based on the assumption that PQ912 will demonstrate disease-modifying benefits, which would be likely to lead to premium pricing, and would be achievable even with only modest penetration of mild AD patients.

Probiodrug reported cash of €14.2m at end H116. Our post-H116 model suggests that this should be sufficient to fund operations until around mid-2017 with the final Phase IIa results due in the beginning of 2017. Existing funding is sufficient to reach the readout, in our view; however, it is uncertain whether the company will be required to repay tax provisions of €2.6m; if it does, the cash reach is likely Q117. In either case, the readout will be imminent or past at that point, which in turn will drive the strategic pathway.

The main sensitivity for Probiodrug is the outcome of the Phase IIa trial of lead candidate PQ912, with first data expected by end-2016. Although PQ912 has shown efficacy in animal models and proved safe in the Phase I trial, whether this will translate into clinical benefit remains to be seen. Beyond Phase IIa, Probiodrug will need to partner PQ912 to continue its development. Drug development in AD is notoriously perilous, although this could well be justified by the significant size of the market and potential for considerable rewards.

Currently Probiodrug is running a Phase IIa SAPHIR trial to investigate PQ912 effects in AD patients, with the first patient enrolled on 9 March 2015 (Exhibit 2). Although primarily a safety and tolerability study, the effect on the pathology of the disease will be assessed by a set of exploratory readouts comprising:

The first data are expected by end-2016, with the full results due three to four months later.

Since the treatment duration in Phase IIa is relatively short at three months, the development strategy after Phase IIa will depend on the results of the trial. Probiodrug could go directly to a pivotal Phase III study if the Phase IIa trial shows clear positive signs of PQ912 clinically improving cognition and neuronal connectivity (measured by EEG, fMRI) or molecular biomarkers. A Phase IIb study to evaluate the efficacy over a longer treatment period is another option if the exploratory readout shows a less clear signal after the three-month treatment.

In April 2016, Probiodrug announced a completion of chronic toxicology studies in the chronic animal toxicology studies confirming a favourable therapeutic margin and further de-risking the lead asset PQ912. PQ912 was tested in rats and dogs for six and nine months, respectively. There were no new findings and no aggravation of the minimal to slight, non-adverse findings compared to the previous shorter one-month and three-month studies conducted in the same animal species. These study results are a regulatory prerequisite and, if approved by the health authorities, allow longer treatment trials with AD patients.

Probiodrug’s strategy is to establish a partnership to develop PQ912 through late stage studies. If the Phase IIa shows cognition improvements with such a short treatment time as three months, in our view, the company would be in an excellent position to negotiate an attractive partnership deal. Nevertheless, we believe that cognition improvement is not a prerequisite for a partnership, and that a partnership will depend on the detailed data readout.

Although the headline Phase I data had been published before, in December 2015 Probiodrug announced the publication of the full Phase I results in a peer reviewed journal.1 As a reminder, this was a first-in-man, single and multiple ascending dose study that tested PQ912 in over 200 young and elderly healthy volunteers and assessed the safety, pharmacokinetics (PK, “what the body does to a drug”) and pharmacodynamics (PD, “what a drug does to the body”) of PQ912. Eighty-three subjects received single doses of PQ912 up to 3,600mg and 80 subjects received multiple doses of PQ912 up to 800mg per day. Notably, this study was the first to quantify QC (enzyme that catalyses pGlu-Abeta formation) activity in human plasma and cerebrospinal fluid (CSF). The key findings include:

In addition to PQ912, Probiodrug has an earlier-stage pipeline focused on AD and targeting pGlu-Abeta. This includes PBD-C06, a monoclonal antibody, as well as PQ1565, a follow-on to PQ912. In addition to AD, Probiodrug intends to evaluate the potential of QC inhibitors in other conditions, such as Down’s syndrome and Huntington disease.

PBD-C06 is a preclinical pGlu-Abeta specific monoclonal antibody, which recognises pGlu-Abeta with very high selectivity and affinity to multiple forms. Preclinical AD animal studies have demonstrated the ability of PBD-C06 to reduce pGlu-Abeta and total Abeta, with consequent rescue of short-term memory deficits and significant improvement of learning and memory after chronic treatment. PBD-C06 has been successfully humanised and de-immunised, so as to avoid detection and attack by the patient’s own immune system. The manufacturing process was optimised in October 2015. Animal toxicology studies are planned for PBD-C06. Probiodrug is currently investigating its potential as a combination therapy with PQ912.

Eli Lilly is also developing a pGlu-Abeta antibody, LY3002813 (Lilly’s internal name is anti-N3pG monoclonal antibody), which is in Phase I. It has announced initial findings from 49 patients (total enrolment of 100 patients is planned according to clinicaltrials.gov) at the Alzheimer’s Association International Conference (AAIC) in July 2016. The patients were with mild cognitive impairment (MCI) due to AD or mild to moderate AD and received single ascending (SAD) and multiple ascending (MAD, monthly) doses. Follow up after the last dose was up to 84 days. Key findings include:

Eli Lilly commented that the half-life of antibodies was unexpectedly short, with four days using the 3mg dose and 10 days with the 10mg dose, while usually antibodies have a half-life of at least 20 days. Another surprising issue was high levels of anti-drug antibodies (patient’s own immune system neutralising the drug). This will need to be further clarified and could be overcome by adjusting the dose. Overall, we view these data as supportive to the concept and worth exploring further. Phase I trials even if performed with AD patients (and not with healthy volunteers) are not designed to capture cognitive effects, while good safety data and plaque-lowering effect in humans seem to support the QC inhibition concept and help Probiodrug guide development of PBD-C06. This also supports the rationale to combine QC inhibitors with anti-pGlu-Abeta antibodies.

PQ1565 is a second small molecule QC inhibitor in preclinical development with further optimised PK/PD characteristics. Probiodrug is currently planning toxicology studies, and is scaling up production.

The growing use, and success, of combination therapies with additive and synergistic actions or reducing the dose of the combined drugs for the treatment of cancer has led to the strong rationale that this approach is likely to be successful in AD. In 2014, Eli Lilly reported that a preclinical study of combination therapy with pGlu-Abeta antibody LY3002813, and BACE inhibitor LY2811376 cleared more than 80% of amyloid from the brain of AD mouse models, compared to c 50% clearance each for the respective monotherapies. Combined treatment of Roche’s anti-Abeta antibody, gantenerumab, and a BACE inhibitor also led to enhanced amyloid reduction in AD mouse models in a separate study.

As they act via a different approach, Probiodrug’s candidates would be well suited as part of a combination therapy approach targeting multiple steps in the Abeta cascade. Probiodrug is conducting pre-clinical proof of principle studies for PQ912 in combination with a BACE inhibitor and with PBD-C06. In addition to BACE inhibitors, which act upstream in the Abeta cascade, therapies targeting tau (a misfolded protein that is also a pathological hallmark of AD), acting on the downstream effects, could theoretically be another potential combination partner.

The traditional amyloid hypothesis postulates that insoluble plaques of Abeta (a small protein fragment) are the key neurotoxic culprit in AD. In recent years a modified amyloid hypothesis has emerged proposing that not all Abeta is toxic, nor are the plaques themselves toxic. Instead, misfolded soluble Abeta oligomers, or “pre-plaques”, are proposed to be the primary driver of the pathological pathway to AD. These toxic oligomers induce other Abeta molecules to take on the misfolded form and aggregate into plaques.

A specific form of Abeta, pGlu-Abeta, has been shown to trigger the formation of these hypertoxic Abeta oligomers, propagating in a chain reaction-like mechanism.2 This initiates a pathological cascade, with loss of connection between neurons (synaptic dysfunction), tau pathology, neuroinflammation and eventual neuronal death (neurodegeneration) with resultant cognitive decline. Unlike Abeta plaques, which are also seen in cognitively normal individuals, pGlu-Abeta is specific for AD and correlates with the progression of AD pathology.2

In 2004 Probiodrug’s scientists discovered the key enzyme that is essential for the formation of pGlu-Abeta from Abeta peptides, QC. QC expression has been found to be upregulated in the brains of people with AD correlating with the appearance of pGlu-Abeta and the decline in mini mental state examination (MMSE). Inhibition of QC in animal AD models effectively blocked the production of pGlu-Abeta, prevented the aggregation of all types of Abeta in the brain and demonstrated that QC inhibitors can reduce neurotoxicity, neuroinflammation and restore cognitive function.3 While most new therapies have focused on Abeta formation or the clearance of Abeta plaques, Probiodrug is taking a differentiated approach, focusing on the formation and clearance of pGlu-Abeta specifically.

Probiodrug has an extensive patent portfolio, which it believes sufficiently protects its product candidates and the QC target by composition of matter and medical use claims in AD, including combination claims, and also in inflammatory diseases and other indications, such as Down’s syndrome.

Translating preclinical promise into clinical improvement in humans has proved challenging for several therapies targeting Abeta, with a number of pivotal trial failures. It has been proposed that the primary reasons for failure were that the target patient population was too far advanced and, simultaneously, some patients did not have the neuropathology of AD.4 Exhibit 4 illustrates that AD pathology emerges years before onset of clinical symptoms, offering a significant window for interventions that could either delay or prevent symptom onset. Current consensus is that therapies should target the earliest stages of the Abeta pathogenic sequence; in pathological terms ideally before plaques are established, and in clinical terms when there remains a potential for a sufficient cognitive reserve.5 It is also interesting to note that in AD patient brain biopsies pGlu-Abeta emerges at the brink between preclinical and clinical AD stages.6

Pursuant to this, Probiodrug aims to halt the pathological cascade at its source by preventing toxic oligomer formation. The Phase IIa study of PQ912 is in patients with mild cognitive impairment (MCI) or mild dementia due to AD. The strict screening criteria include three of the four biomarkers recently supported by the FDA to help select early-stage AD patients for clinical trials. Biomarkers and functional assessments will provide the basis for quantitative, objective measures of treatment effect, in addition to the potentially more subjective measures of cognitive function (eg the MMSE).

As QC is essential for pGlu-Abeta formation, it represents an important therapeutic target. In AD animal models, preventive long-term and early therapeutic treatment with PQ912 reduced soluble and insoluble pGlu-Abeta and resulted in improved behaviour (Exhibit 5).

Probiodrug believes its differentiated approach will not only prove successful, but potentially also reduce the risk of side effects associated with generic Abeta approaches. Probiodrug is targeting pGlu-Abeta via two modes of action, which it believes are complementary:

According to EvaluatePharma there are around 80 companies developing in total c 75 unique compounds with c 40 different mechanisms action in Phase II and Phase III stages with AD patients. Many of these focus on steps in the Abeta cascade, rather than on any specific Abeta subtypes (Exhibit 6). Probiodrug is the only company developing a QC inhibitor as far as we are aware, with the QC target covered by its patent portfolio, which could be a differentiating factor. To our knowledge only Eli Lilly is developing an anti-QC antibody (peer to PBD-C06) with initial Phase I results as described above. Furthermore, given the size of the AD market and the potential for combination therapy, positive developments in the AD field should not preclude successful commercialisation of PQ912, in our view.

The number of people living with dementia worldwide is currently estimated at around 44 million, c 60% of whom have AD. Given the lack of a preventative or curative treatment this number is set to almost double by 2030 and more than triple by 2050 (World Alzheimer Report 2014). In 2015, the direct costs to American society of caring for those with AD will total an estimated $226bn, which is expected to increase to c $1.1trn by 2050 (2015 Alzheimer’s Disease Facts and Figures). Despite having no disease-modifying ability and limited symptomatic efficacy, the four FDA-approved AD treatments had combined 2015 sales of c $3.8bn globally (EvaluatePharma). Notably, generic donepezil commanded $780m of these sales (21% market share). The Namenda franchise (formerly of Forest Laboratories, now Actavis) had combined revenues of $1.8bn in 2015 (48% market share). Thus, AD not only represents a significant unmet clinical need, it also represents a substantial market opportunity for disease-modifying therapies. As a result, drug development for AD has become a major political, academic and industrial effort, as evidenced by initiatives such as the Global Dementia Discovery Fund and the big pharma collaborations between Biogen and Eisai, AstraZeneca and Eli Lilly. This illustrates the scope and willingness of the industry to support development of novel treatments in AD.

Probiodrug is subject to the usual risks associated with drug development, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. The biggest near-term sensitivity for Probiodrug is the success or failure of lead asset PQ912 for AD. PQ912 has already demonstrated in a Phase I trial that it can successfully inhibit QC; however, whether this has any cognitive benefits, as suggested by preclinical models, has yet to be established in humans. Initial Phase IIa data are expected end-2016. Any further delays to the trial as was the case in the beginning of 2016 would mean the need for additional funding. However, we see this as less likely given the unchanged guidance from the company on 30 August and the proximity of the readout data.

Data from this study will determine subsequent development, with positive data validating the pGlu-Abeta target, opening the doors for partnering and strengthening the case for the remainder of the pipeline. Partnering PQ912 will be key for advancing late-stage development, which can be very costly in AD. We have assumed a deal in our valuation. However, we have limited visibility on the timing and terms of any future deals, although we believe that positive Phase IIa data should help attract and secure a partner.

AD is a substantial market with a large unmet medical need, hence any disease-modifying therapy is likely to generate significant sales. However, development risk is high, with multiple failures in the past, and late-stage trials will be costly. Future pricing and market dynamics are hard to predict, especially if competitors are successful, biomarkers lead to improved diagnosis, and combination therapy emerges as the main focus of development. Our peak sales forecast assumes PQ912 can offer disease-modifying benefit. Our launch timeline assumes that SAPHIR will be positive and can move to Phase III development without the need for an additional Phase IIb.

We value Probiodrug at €309.1m or €41.5/share, slightly up from €303.2m or €40.7/share previously, due to rolling our model forward, which offset the lower cash position of €14.2m. The breakdown of our rNPV valuation, which uses a discount rate of 12.5%, is shown in Exhibit 7. Our valuation only includes PQ912, with no value assigned to the preclinical pipeline given its earlier stage of development.

We have forecast peak sales of c €6.2bn in 2028, assuming launch in 2022, for the treatment of mild AD only (c 30% of the total population). This should allow sufficient time to secure a partnership post the Phase IIa readout and conduct an extensive late stage programme. We assume that the partner will cover all development and marketing costs from this point. Our peak sales are based on the assumption that PQ912 proves to be disease-modifying, and therefore able to command a premium price (we assume $35k per year per patient and a 20% discount to that in Europe and RoW). Due to the significant size of the AD market, there is potential for a disease-modifying agent to take a considerable market share in the future.

Our partnering assumptions include a fairly typical deal structure, including an upfront payment, development and sales-related milestones, in addition to royalties on global sales. We conservatively assume a total deal value of €500m (which is below the $820m deal signed in 2011 between Evotec and Roche for EVT 302, a monoamine oxidase type B inhibitor), with 10% for the upfront payment, 50% for development-related milestones and the remainder as sales-related. We include a 15% royalty on global sales, commensurate with an asset out-licensed once proof-of-concept data are available. We risk-adjust the milestone income in line with our assumed probability of success for PQ912. Our success probability was upped from 20% to 25% after the long-term animal toxicity data and is commensurate with the risks associated with AD drug development.

R&D spend in H116 was €4.7m and in line with €4.5m expensed in H115. We keep our full year R&D cost estimate of €11.1m as Probiodrug guided that 2016 net loss may be greater than in 2015 due to increased development activities. G&A expenditure of €1.3m was lower compared to €1.9m in H115, thus indicating good cost management. We slightly lowered our G&A costs expectations for 2016 and 2017, although the positive effect on the 2016 bottom line was offset by lowered net interest income forecasts. Our other forecasts remain unchanged with slight increase in 2017 EPS.

Probiodrug reported cash of €14.2m at end H116. Our post-H116 model suggests that this should be sufficient to fund operations until around mid-2017. The final Phase IIa results should be released in the beginning of 2017. As per our current estimates, existing funding is sufficient to reach the readout. However, it is uncertain whether the company will be required to repay tax provisions of €2.6m; if it does, the cash reach is likely Q117. In either case, the readout will be imminent or past at that point, which, in our view, in turn will drive the strategic pathway.

We continue to expect that if the trial results are positive, a licensing deal in 2017 is likely given the high profile of Probiodrug’s R&D programme among the larger players in the AD field. Although our valuation includes risk-adjusted milestones from a partner for PQ912 that could be triggered by licensing and the start of Phase III in 2017 (more details in our initiation report), our financial forecasts do not include any such income. Our valuation currently includes risk-adjusted €25m in potential upfront payment in 2017 upon licensing, which could secure the company’s operations without the need for a near term fundraising. In line with our research principles, we do not include this in our financial forecasts, but show €5.9m of illustrative financing added as long-term debt on the balance sheet in 2017. This is based on the cash need that we estimate is required to run the business through to the end of 2017.