Potential strategy in COVID-19
The SARS-Cov-2 pandemic presents Sareum with an unexpected opportunity to test its lead TYK2 inhibitor, SDC-1801, in COVID-19. Such a move would require external funding, but could accelerate clinical development timelines and catalyse a substantial increase in value. Meanwhile, the recent £1m fundraising allows Sareum to advance SDC-1801 towards trials for mainstream autoimmune conditions.
Sareum intends to make grant applications to explore the activity of SDC-1801 in COVID-19, where the aim would be to reduce the immune system over-reaction that is seen in the later phase of the infection. If such grant applications are awarded, SDC-1801 could join a group of drugs – including a number of JAK inhibitors – that have been fast-tracked into trials for COVID-19 As a dual TYK2/JAK1 inhibitor, SDC-1801 could be more effective and/or better tolerated than these similar compounds in COVID-19.
Meanwhile, Sareum has raised £1m via an equity issue that allows it to advance SDC-1801 into clinical trials for autoimmune disease, consistent with its original business plan.
While we are not ascribing value to the COVID-19 opportunity at present, we have increased our estimate of the TYK2 assets’ current value to $30-50m. After modest assumptions for R&D spending, we are assigning a fair value for Sareum in the £25–45m range (0.76– 1.38p/share), with the interest in SRA-737 representing upside to the investment case that may be realised in a deal involving the licensee Sierra Oncology.
|wdt_ID||Year ended||Revenue (£m)||Profit before tax (£m)||Earnings per share (p)||Dividend per share (p)|
|1||30 Jun 2018||0.00||-1.70||-0.05||0.00|
|2||30 Jun 2019||0.00||-1.70||-0.05||0.00|
|3||30 Jun 2020||0.10||-1.30||-0.04||0.00|
|4||30 Jun 2021||0.00||-1.40||-0.04||0.00|
• Sareum’s investment proposition centres on the development and out-licensing of two preclinical-stage TYK2/JAK1 inhibitors for autoimmune disease and cancer. Sareum is also one of a small number of companies with a licensable TYK2 inhibitor programme. • Although SDC-1801 is behind the class leaders, it should nevertheless be attractive as a licensing opportunity, as the main autoimmune disorder markets it addresses are large and have historically supported multiple agents with similar mechanisms. Meanwhile, SDC-1802 could potentially be the first TYK2 inhibitor to enter clinical development for a cancer indication.
• Bristol Myers Squibb’s class leader BMS-986165 has been ranked as the pharma industry’s second most valuable R&D-stage asset. The compound has been calculated to have a (non-risk adjusted) net present value of $6.7bn, based on consensus sell-side analyst projections. Readouts from currently ongoing Phase III trials in psoriasis should further highlight both its own commercial potential and the opportunity for competitors with follow-on products.
• The SARS-Cov-2 pandemic has become a major healthcare priority and has led to a huge industry effort to develop a vaccine, anti-virals and other therapeutic interventions. Suppressing the immune system over-reaction or “cytokine storm” that occurs in some patients is a key target for drug intervention, as this appears to cause the lung damage that is responsible for much of the mortality.
• A large, randomised study of dexamethasone in COVID-19-related cytokine storm has shown the corticosteroid to reduce mortality in ventilated COVID-19 patients and those receiving oxygen. This supports the hypothesis that suppressing this undesirable inflammatory response can improve patient outcomes.
• JAK inhibitors are an obvious candidate for addressing this aspect of the COVID-19 infection as they target the signalling that causes the hyper-immune response. Two approved JAK inhibitors – Oluminant (bariticinib, Lilly) and Jakafi (ruxolotinib, Incyte/Novartis), as well as a developmental agent, pacritinib (CTI BioPharma), have been fast-tracked into Phase III trials for COVID-19 cytokine storm. In addition, Xeljanz (tofacitinib, Pfizer) is in Phase II studies and Theravance’s developmental pan-JAK inhibitor, TD-0903, is in early human safety studies and expected to move into COVID-19 patients in due course.
• As a dual TYK2/JAK1 inhibitor, SDC-1801 may be more effective if TYK2 is a better target. However, as SDC-1801 is at an earlier stage of development, it would have to offer advantages over the competing molecules for the programme to be commercially viable. SDC-1801 could nevertheless be the first TYK2 inhibitor to enter trials for this indication as neither Bristol Myers Squibb nor Pfizer have disclosed any plans yet to trial their TYK2 inhibitors in COVID-19.
• Sareum is looking for government or other funding to test its TYK2 assets in COVID-19. The UK government is, for example, providing funding to test both approved products and novel agents in COVID-19.
• Assuming such funding can be obtained, Marten & Co speculates that a clinical development programme for SDC-1801 in COVID-19 could be started in patients quickly, perhaps within months of first-in-person studies (single and multiple ascending dose in healthy volunteers). This would mirror the approach Theravance has taken with TD-0903.
• If successful, a programme in COVID-19 could accelerate development timelines for the compounds more generally without compromising their commercial potential in mainstream autoimmune disease, which remains the focus of the commercial value.
• Disruption caused to healthcare systems generally by the SARS-Cov-2 pandemic has made it difficult to conduct clinical trials (outside of COVID-19). Hence, the key competitors, Bristol Myers Squibb and Pfizer, may have or are likely to experience some slippage in the development timelines of their respective TYK2 compounds. This means that these agents’ relative lead over SDC-1801 may be reduced, compared with the pre-pandemic situation.
• Sareum has separately secured a licensing deal for its previously de-prioritised FLT-3/aurora kinase compound with an undisclosed Chinese speciality pharmaceutical company. The deal provided a modest upfront payment (~£50k), with a larger payment (£0.9m) due if certain formulation challenges can be overcome this year. If this is successful, this could contribute to Sareum’s longterm value.
• Development of the Sareum/ICR-originated Chk1 inhibitor, SRA-737, by Sierra Oncology is effectively suspended, while a new partnership or sub-licensing arrangement is sought. Sierra’s decision to terminate development reflected competing strategic priorities and was not a reflection on the compound per se.
• Sareum holds a 27.5% economic interest in the licensing deal covering SRA-737. If Sierra is unsuccessful in sub-licensing or otherwise partnering the compound, the rights revert to the licensor (CRT Pioneer Fund), possibly allowing it to be relicensed, on different terms. The uncertainty over SRA-737’s future means that it cannot be considered to contribute to Marten & Co’s indicative valuation of Sarem, but represents upside to the investment case that may arise if there is a partnership. Marten & Co has previously ascribed a value of c£20m to the interest in the compound.
• Sareum is exposed to risks normally associated with biotech company drug development, including the uncertain outcome of clinical trials, a reliance on partners and the success or failure of competing molecules. The ability to exploit the COVID-19 opportunity will be determined by whether sufficient grant funding can be sourced, as it does not have the resources to pursue this independently.
• Following its recent £1m equity issue, Sareum is relatively well financed, with funding to mid-2021. The company has not yet taken advantage of UK government funding schemes for small businesses related to the SARs-Cov-2 pandemic but may also be able to.
• Marten & Co is not yet ascribing value to Sareum for the COVID-19 opportunity, despite it having highlighted the attractiveness of the TYK/JAK1 assets. As a result, we have reviewed our estimate of the economic return that could be realised in a future partnership and consequently have raised our estimate of their notional value to $30-50m. It is important to recognise that a feature of the riskadjusted valuations is that they are expected to rise very rapidly as product(s) advance through clinical trials.
• After normal assumptions for R&D spending and overheads, we suggest a fair value of Sareum lies in the £25–45m range (0.76–1.38p/share). This is up to 160% above the current share price, with potential for further upside arising from any progress towards development in COVID-19 or from a resumption of development of SRA-737.
Update: Possible strategy in COVID-19
The SARS-Cov-2 pandemic presents Sareum with an unexpected opportunity to examine whether SDC-1801 can reduce the undesirable hyper-inflammatory response or “cytokine storm” that sometimes occurs in this infection. This would depend entirely on Sareum securing grant funding, as it does not have sufficient resources to pursue the opportunity independently. Nevertheless, if funding can be obtained, such a move could accelerate the clinical development timeline of SDC1801 and would, in our view, catalyse a substantial increase in value.
One of the main targets for therapeutic intervention in COVID-19 has been the immune system reaction that can occur in some patients late in the course of the infection. This can give rise to the pneumonia-like symptoms that progress to acute respiratory distress syndrome (ARDS), a key cause of mortality. The recent success in a large, randomised study of the corticosteroid dexamethasone, in treating patients on supplementary oxygen or mechanical ventilation, suggests that suppressing this inflammatory response can improve patient outcomes.
JAK inhibitors are an obvious candidate for this, as the JAK-dependent signalling is one way to restrain the excessive cytokine signalling. Several JAK inhibitors have already been advanced into trials by cooperative or academic groups and three – Olumiant (bariticinib, Lilly), Jakafi (ruxolotinib, Incyte/Novartis) and pacritinib (CTI Biopharma) – are in company-sponsored Phase III studies for COVID-19:
Lilly is conducting a 400-patient Phase III trial of Olumiant that is expected to render results in September, the outcome of which is being closely watched as the drug has been hypothesised to have a separate direct anti-viral effect based on artificial intelligence modelling. Novartis has a similar study underway with Jakafi that is due to render results in October. Two other JAK inhibitors are, or are expected to enter, studies for COVID-19: Xeljanz (tofacitinib, Pfizer) and Theravance’s TD-0903.
Sareum’s SDC-1801, as a dual TYK2/JAK1 inhibitor, may be more effective and/or be better tolerated than the JAK1 or pan-JAK inhibitors. TYK2 (tyrosine kinase 2) is the fourth member of the Janus family (which also includes JAK1, 2 & 3), all of which transduce cytokine-mediated signals via the JAK-STAT pathway.
Focus should remain on autoimmune disease
While COVID-19 has understandable attention at the moment, it remains autoimmune indications where the commercial value primarily lies. Sareum is one of five companies developing a TYK2 inhibitor in autoimmune disease and one of perhaps just two that have compounds available for licensing.
The class leaders– Bristol Myers Squibb’s BMS-986165 and Pfizer’s brepocitinib (PF06700841) – are in mid/late clinical stage trials (details shown in Figure 4). The key Phase III trials of BMS-986165 in psoriasis are due to render results this year. Multiple mid-stage studies are also underway in other indications including lupus, Crohn’s and ulcerative colitis (UC).
Both brepocitinib and Sareum’s SDC-1801 have activity on JAK1, which is also a validated target in autoimmune disease, with four JAK1 products approved for rheumatoid arthritis and other autoimmune indications. Sareum continues to evaluate a potential lead indication for SDC-1801, with the choice depending on competitive and other factors. One indication known to be under consideration is lupus or lupus nephritis, the kidney damage associated with later stages of this disease.
SAR-737 licensee still being sought
Sierra Oncology, the license holder for the Sareum-originated SRA-737 is seeking a sub-licensee for the Chk1 inhibitor, having decided last year to discontinue active development and focus resources exclusively on another agent. Sareum holds a 27.5% interest in the licensing deal that covers the compound, as a result of an earlier arrangement with the Institute of Cancer Research and Cancer Research UK. The licensing deal, which was executed by CRT Pioneer Fund (CPF), the investment arm of CR UK, has a headline value of $328.5m plus royalties.
SRA-737 has now effectively completed two Phase I/II trials, one as a monotherapy and the other in combination with low-dose gemcitabine (LDG). Initial findings showed anti-tumour activity, with the combination study highlighting an attractive fast-tomarket development opportunity in ano-genital cancer.
There is, however, little visibility on when or whether Sierra may be able to secure a licensing deal or other arrangement to allow development of SRA-737 to continue. If there is a protracted delay in finding a partner, CRT Pioneer Fund should be able to recover the rights allowing it to potentially re-license it itself. As a result of Sierra Oncology’s decision and the uncertainty over the sub-licensing deal, Marten & Co considers the asset’s value to be temporarily impaired.
Sareum’s investment proposition centres on the development and out-licensing of the two TYK2/JAK1 inhibitors for autoimmune disease (SDC-1801) and cancer (SDC1802). Licensing R&D stage programmes such as these to larger biotech or pharmaceutical companies is a well-established business model that would be expected to generate an economic return for Sareum in the form of an upfront payment, milestones (payments triggered by future events) and royalties on sales.
Sareum also holds an economic interest in SRA-737, which is currently licensed to Sierra Oncology pending a new licensing arrangement or other partnership. Sareum has also recently option/licensed its FLT-3/aurora kinase assets to an undisclosed Chinese partner that may generate a further payment of £0.9m if certain reformulation challenges can be overcome.
Marten & Co considers the TYK2/JAK1 compounds to form the core of the investment case, with upside possible from any positive development involving SRA-737 and aurora/FLT-3. Furthermore, we are not ascribing value to the COVID-19 opportunity, given this is currently at the conceptual stage.
Nevertheless, Marten & Co considers SDC-1801 to be an attractive licensing opportunity, given the scarcity of such assets and the fact that it addresses large markets that have historically supported multiple agents with similar mechanisms. We note that the value attached to the later stage competitor, BMS-986165, which has been ranked as the pharma industry’s second most valuable R&D-stage asset with a non-risk adjusted net present value of $6.7bn. This was based on a review of the main pharma industry R&D programmes, based on consensus sell-side analyst projections.
Marten & Co has made a conservative estimate of the TYK2 assets’ current value, based on common industry benchmarks. It is not realistic to calculate an explicit value (based on a risk-adjusted NPV, for example), as these are highly sensitive to unknowns (such as targeted indications, timelines, probabilities of success etc). Preclinical compounds of this type typically have values in the industry upwards of $25m, based on the upfront values licensing/M&A transactions, and often much more if there are exceptional circumstances.
We have raised our current estimate of the assets’ notional value to $30-50m and note that the value would be expected to rise rapidly as the product(s) advance through clinical trials and the assumed probability of success improves.
After modest assumptions for R&D spending, we assign a fair value to Sareum in the £25–45m range (0.76–1.38p/share). This suggests there is up to 160% upside at the current share price with potential for upside from any potential progress towards development in COVID-19 or from a resumption of development of SRA-737 or FLT-3 aurora.
Sareum is exposed to the risks typically associated with biotech company drug development, including the uncertain outcome of clinical trials and reliance on third parties to advance the development of licensed assets and own internal compounds. At present, a key sensitivity is the outcome of Sierra Oncology’s efforts to license SRA-737 and of Sareum’s grant applications for development of SDC-1801 in COVID-19.
Sareum has, in our opinion strong licensing candidates, but we note that for commercial reasons potential partner(s) may seek to license both compounds at the same time in order to maintain greater control. Thus it may not be possible to license the two compounds separately.
The value of the TYK2 assets that may be realised in a licensing deal may be affected by the success or failure of competitors, both within the TYK2/JAK class and, to a lesser extent, for other oral molecules addressing autoimmune/inflammatory indications. In order to be commercially successful, new oral agents will likely have to show levels of efficacy that approach or match those of biological agents while offering side-effect advantages.
It is difficult to assess the level of interest on the part of potential licensees as well as the timing and outcome of licensing negotiation (disclosed terms of licensing deals in the TYK2/JAK space are summarised in the Appendix later).
Sareum reported cash at the half year end (30 December) of £1.0m, and with expenditure running at about £1.4k per year, we estimate its cash position at the financial year-end will be c£1.5m, which should provide funding to mid-2021. We do not consider the financial results to be a major factor in the investment thesis, except in relation to the ability to fund planned future development activities. Sareum has 3.27bn shares in issue and there are no substantial or disclosable (>3%) shareholdings.
Appendix – JAK licensing deals
Readers interested in further information about Sareum may wish to read our previous notes by clicking on the links.
Tyking the boxes, initiation note, published November 2018
Key ‘737 data coming up, update note, published March 2019
Tyking over…nicely, annual overview, published December 2019
The legal bit
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