Nuevolution publ : EDISON SEPTEMBER 2018

Nuevolution

Pipeline and partnerships continue to strengthen

H118 results

With the completion of the up-listing to the Nasdaq Stockholm main market and the successful gross SEK110m capital raise, Nuevolution continues to strengthen both its investor base and financial position. Amgen's opt-in on the first programme in its multi-target collaboration and the identification of much sought-after small-molecule IL-17A inhibitors continue to validate Nuevolution's Chemetics technology. Its transition to a clinical asset-focused company continues with the Almirall RORγt inhibitor programme likely to enter the clinic in 2019 and additional internal programmes (RORγt and BET-BD1) nearing clinical readiness. In addition to current partnerships, the company forecasts that a new deal is possible by year end. We value Nuevolution at SEK1,127m or SEK22.8/share.

Amgen opt-in highlights potential of Chemetics

Amgen has exercised its opt-in right for the first programme in its multi-target relationship. This is the first of two programmes focused on undisclosed oncology targets that have been 'fast tracked' through development. Amgen is now responsible for all further costs incurred by both parties and will work collaboratively on late-stage research. It will be fully responsible for preclinical and clinical development. Should Amgen exercise its option to license a candidate before the end of Phase I, Nuevolution will receive an initial licensing fee of at least $10m and potential milestone payments of up to $410m.

Cytokine X programme focused on interleukin-17A

Identifying small molecule inhibitors for interleukins is notoriously difficult. Nuevolution announced that it has several lead interleukin-17A (IL-17A) candidates in development for use in either topical or oral forms. IL-17A is a well-known pathway in many autoimmune and inflammatory disorders and patients are currently treated with expensive intravenous IL-17A antibodies (eg Cosentyx: HY18 sales of $1.3bn).

Financials: H118 results

SG&A rose to SEK16.5m (H117: SEK11.5m), primarily as a result of up-listing to the Nasdaq Stockholm main market, while R&D costs fell to SEK49.9m (H117: SEK54.6m). Net loss reduced to SEK53.5m in H118 compared with SEK56.3m in H117. Net cash was SEK158.0m at 30 June2018 (30 June 2017: SEK173.7m).

Valuation: SEK22.8/share (SEK1,127m)

We value Nuevolution at SEK22.8/share (SEK1,127m) vs SEK21.0/share (SEK901m) previously. We have rolled forward our model, updated for end-June cash and foreign exchange rates.

Price SEK15.80 Market cap SEK782m

25 September 2018

SEK8.86/US$; US$1.70/€; SEK10.37/€

Primary exchange Secondary exchangeNasdaq Stockholm

N/A

Nuevolution is a Copenhagen-based biopharmaceutical company. Its patent-protected Chemetics drug discovery platform enables the selection of drugs to an array of tough-to-drug disease targets. To date it has entered into 17 agreements with major pharmaceutical companies.

Sign new out-licence/risk-sharing collaboration

Start of Almirall's RORγt Phase I trialH218/H119

2019

Edison profile page

Nuevolution is a research client of Edison Investment Research Limited

H118: Cementing a position for growth

Nuevolution's business model embodies continuous revenue generation and risk mitigation, executed through a 'multiple shots on goal' approach to drug development. Underpinning this is the internally developed DNA-encoded drug discovery platform, Chemetics, which comprises compound libraries (of up to 40 trillion molecules) that have been designed to rapidly select drugs for an array of 'tough-to-drug' targets. The ability to attract Almirall and Amgen into signing deals has acted as validation of Chemetics and a mark of quality for Nuevolution's pipeline. Transitioning its pipeline assets into the clinic will be further validation of this approach and Nuevolution is currently well positioned to achieve this.

Fuelled by Nuevolution's Chemetics technology, the company has a number of late-stage preclinical assets, alongside more than 10 earlier-stage programmes (varying from hit identification to hit optimisation). Exhibit 1 highlights Nuevolution's pipeline, which is set to deliver multiple inflection points over the coming 12-18 months.

TargetRORγt (inverse agonist)

Chronic inflammatory diseases

StagePreclinical

Ownership Notes

Partnered with Almirall in RORγt plays an important part in the generation of pro-inflammatory cytokines, dermatology and psoriatic notably IL-17A, which is implicated in multiple inflammatory and autoimmune arthritis. conditions. Inverse agonists of RORγt inhibit this pathway and Nuevolution's product candidates (under Almirall's stewardship) could provide oral based treatments for psoriasis (PsO) and psoriatic arthritis (PsA).We expect Almirall to initiate a Phase I trial in 2019.

PreclinicalOther indications 100% Nuevolution retains the rights to pursue other indications, primarily focusing on ownership NUE ankylosing spondylitis (AS), with inflammatory bowel disease (IBD) as a secondary indication. Scale-up of its internal lead candidate in Q118 has enabled further preclinical work to commence-Nuevolution forecasts that its program has the potential to be clinically ready in 2019.

BET-BD1

Inflammatory diseasesPreclinical

100% ownership NUE BET-BD1 is a novel target class offering a new mode of action for treating cancer and inflammatory diseases. With numerous BET inhibitors in clinical development for oncology, Nuevolution has chosen to pursue atopic dermatitis (AD) and/or psoriasis as the primary indication, with secondary indications in fibrosis (scleroderma) and lupus. Two compounds have been selected as pre-candidates before progressing to candidate nomination-Nuevolution forecasts that its program has the potential to be clinically ready in 2019.

Undisclosed target(s)

Cancer & CNS diseasesPreclinicalPartnered with Amgen Amgen has exercised its right to opt in on the first of at least three undisclosed targets (multi-target collaboration). With the programme moving into preclinical development, Amgen has also initiated preclinical proof-of-concept work for a second oncology target and a third programme is in earlier stages of hit optimisation.

IL-17A

Inflammatory diseasesDiscovery: lead optimisation

100% ownership NUE IL-17A inhibitors work downstream of RORγt in the pro-inflammatory cascade.

Small molecule inhibitors of this target are much sought after in drug discovery, as they are likely to offer more favourable dosing and cost than the antibody-based therapies currently on the market for PsO, PsA and AS.

GRP78

CancerDiscovery: hit-to-lead

50% ownership* GRP78 is a member of the chaperone family of proteins; it is over-expressed in many tumour types including breast cancer and brain tumours. Selected compounds are now in the control of CRT/ICR and further progression is reliant on them

RORγt (agonist)CancerDiscovery: hit optimisation

100% ownership NUE In conjunction with the RORγt inverse agonist (inhibitor) programmes,

Nuevolution's Chemetics platform has also enabled the identification of agonists (activators) which have potential applications in (immun)oncology. Currently hits are being optimised and tested in vivo (mouse breast tumour model).

Undisclosed targets Undisclosed targetsVariousDiscovery: various

100% ownership NUE 10+ discovery programmes in a range of undisclosed indications including oncology, inflammatory diseases and immunoncology.

VariousDiscovery: various

Drug discovery Ongoing technology access agreement signed in October 2015 for Janssen to collaboration with Janssen use Nuevolution's Chemetics platform. Generated SEK8.8m in deferred revenuein H118.

Amgen, Almirall and future partnerships

In July 2018, Amgen exercised its right to opt in on the first of at least three undisclosed programmes (multi-target collaboration across oncology and neuroscience) and has assumed

responsibility for all further costs incurred by both parties. Should Amgen exercise its option to license a candidate from this programme before the end of Phase I, Nuevolution will receive an initial licensing fee of at least $10m, clinical and commercial milestone payments (of up to $410m in total depending on project success) and subsequent royalties on sales if commercialised. In the second oncology programme, Nuevolution is testing compounds to determine target engagement and mechanisms of action, while the third programme (undisclosed disease focus) is in hit optimisation and expected to reach cellular proof-of-concept by year end.

The Almirall RORγt inhibitor programme is likely to enter the clinic in 2019 and will trigger the start of payments to Nuevolution, which could increase to €172m in development and regulatory milestones (€270m in tiered commercial sales milestones will also be available if the product is commercialised). The timing and design of any clinical trial is ultimately Almirall's decision and we await further information on these elements.

Apart from the Almirall and Amgen partnerships, Nuevolution forecasts that it will be able to enter into another partnership before year end. This could take the form of either out-licensing a pipeline asset (similar to the Almirall out-licensing of the RORγt inhibitor) or a research collaboration (similar to the Amgen deal). In addition to the Almirall and Amgen partnerships, Nuevolution has already formed partnerships with other mid-and large-cap industry peers (including Novartis, Janssen, GSK, Boehringer Ingelheim and Merck & Co), and we are confident that Nuevolution can achieve another deal. However, this could be finalised outside Nuevolution's stated time period.

RORγt: Programmes progress cautiously

RORγt plays a role in the maturation of T helper 17 cells (TH17) leading to the secretion of the pro-inflammatory cytokines including interleukin-17A (IL-17A), which mediates for the production of additional pro-inflammatory components and, ultimately, tissue inflammation. Inhibiting RORγt has been a strategy employed by Nuevolution and others to develop drugs that counteract the dysregulation underlying a range of autoimmune disorders, with significant interest focusing on developing agents capable of treating psoriasis (PsO) and psoriatic arthritis (PsA).

As per the out-licensing agreement signed in December 2016, progression of Nuevolution's asset into Phase I trials is subject to Almirall's discretion. With thePhase II failureof Allergan's RORγt inverse agonist AGN-242428 (due to undisclosed safety reasons and written off in Q118), along with thePhase I suspensionof AstraZeneca's asset AZD0284 (due to preclinical findings), the delays in reaching this milestone are presumably due to Almirall ensuring that it has identified any liabilities and that the attrition of competitor compounds is not endemic to the mechanism of action (ie RORγt inhibitor). We expect Phase I initiation to occur in 2019, which should trigger a milestone payment to Nuevolution. In the long term,the deal couldprovide up to €172m in development and regulatory milestones, and €270m in commercial sales milestones, in addition to tiered royalties on future net sales.

Nuevolution retains the rights to pursue other indications, primarily focusing on ankylosing spondylitis (AS) with inflammatory bowel disease (IBD) as a secondary indication. Scaling up its internal lead candidate in Q118 has enabled further preclinical work to commence (formulation and regulatory safety). Several back-up compounds have also been identified and are currently being investigated to compare efficacy and toxicity profiles. The programme is expected to be clinically ready in 2019 and further clinical development will depend on funding or potential partnerships. While separate in its development, the programme is likely to be heavily influenced by the outcome of the Almirall RORγt programme.

In conjunction with the RORγt inverse agonist (inhibitor) programmes, Nuevolution's Chemetics platform has also enabled the identification of agonists (activators) that have potential applications in (immun)oncology, where the same mechanisms underlying autoimmune conditions can be amplified to bolster the immune response to tumours. Lycera is currently running aPhase I/IIa trial

investigating a RORγt agonist LYC-55716 in patients with solid tumours and aPhase Ib trialinvestigating a combination with Keytruda (pembrolizumab) in patients with non-small cell lung cancer (NSCLC). Nuevolution is still in a discovery phase, optimising compounds that are being tested in a mouse breast tumour model to demonstrate proof of concept. To our knowledge, fewRORγt agonists exist in preclinical or clinical development. We expect interest in the space to pick up if clinical data from Lycera are positive.

BET-BD1: Candidate selection in 2019

Nuevolution's second lead internal programme is focused on the first bromodomain (BD1) of the bromodomain and extra-terminal domain (BET) family of proteins, which play an important role regulating genes involved in both cancer and inflammation. The company has prioritised atopic dermatitis and/or psoriasis as its lead indication, while fibrosis (IPF and scleroderma) and systemic lupus erythematosus are secondary indications. In H217, Nuevolution demonstrated in vivo efficacy for some of these compounds in multiple inflammatory mouse models, including a psoriasis/atopic dermatitis model (IL-23 induced ear edema), a collagen-induced arthritis model (IL-17) and a fibrosis model. In H118, Nuevolution reported selecting two compounds as pre-candidates, which are undergoing final studies before progressing to candidate nomination, which we would expect to occur in 2019.

IL-17A: A proven target in autoimmune diseases

Working downstream of RORγt and targeting IL-17A directly is a proven strategy for treating moderate to severe psoriasis (PsO), psoriatic arthritis (PsA) and AS, with anti-IL-17A monoclonal antibody therapies approved across all these indications including Novartis's Cosentyx and Eli Lily's Taltz. Several other antibody therapies acting against other pro-inflammatory cytokines (IL-23 and TNFα) are also approved as treatments. Although costly, injectable biologic agents have revolutionised the treatment of these chronic inflammatory conditions and generate significant revenue streams, as highlighted in Exhibit 2.

Antibody

IL-17A

Cosentyx (secukinumab)NovartisPsO, PsA & AS

$2.1bn

$5.3bn

Marketed

Taltz (ixekizumab)

Eli Lilly

PsO & PsA

$0.6bn

$2.3bn

(2015) MarketedIL-23

Tremfya (guselkumab)J&J

PsO

$0.07bn

$3.1bnIL-23 (& IL-12)Stelara (ustekinumab)J&J

PsO & PsA*

$2.7bn*

$3.5bn*

(2016) Marketed (Jul 2017) Marketed

TNFα

Humira (adalimumab)AbbViePsO, PsA & AS*

$5.8bn*

$4.8bn*

(2009) Marketed

Small molecule

PDE4

Otezla (apremilast)Celgene

PsO & PsA

$1.3bn

$2.5bn

(2008) Marketed

(2014)

Source: EvaluatePharma, forecasts based on consensus analyst estimates. Note: *Excluding sales for indications other than PsO, PsAand AS.

Small molecules generally have four key advantages over biologics: the ability to target intracellular components (potential to reach novel targets), cheaper cost of production (lower pricing), oral or topical dosing (improved compliance vs injectable) and shorter half-life (important if side effects need to be controlled). While offering important practical advantages, novel small molecule drug candidates have high efficacy hurdles to meet, while ensuring low toxicity profiles. Oral, small molecule PDE4 inhibitors (which indirectly reduce pro-inflammatory cytokine levels) do to some extent address this, with Celgene's Otezla (apremilast) approved to treat moderate to severe PsO and PsA since 2014, generating $1.3bn from global sales in 2017. Favourable dosing means Otezla

is currently positioned as a prior therapy to antibody-based treatments. However, a low to moderate efficacy of Otezla means patients invariably progress to antibody-based therapies.

IL-17A

Primary endpoint (efficacy)

Patients

ERASURE

300mg subcutaneous*

81.6% (12w) 245

Placebo

4.5% (12w) 246

Small molecule

PDE4

Otezla (apremilast)

ESTEEM1

30mg oral twice daily

33.1% (16w) 562

Placebo

5.3% (16w) 282

We note that comparisons of trial data should be made with caution, as variability in patient demographics, disease states, treatment regimens and mechanisms of action could all skew any observations. However, studying the registration clinical trials for Cosentyx and Otezla highlights a difference in efficacy for treating patients with moderate to severe psoriasis. The number of patients achieving PASI-75 (75% reduction in the Psoriasis Area and Severity Index score) is significantly greater with Cosentyx (81.6% after 12 weeks) compared to Otezla (33.1% after 16 weeks). Small molecule IL-17A inhibitors, topical or orally dosed, will aim to bridge this efficacy gap.

Directly targeting the IL-17A protein/protein interaction (PPI) with a small molecule is no easy feat because of the large flat protein structures involved. Enabled by Nuevolution's Chemetics platform, hit identification utilised one of Nuevolution's 40 trillion compound collections to identify three series amenable to lead optimisation based on their synthetic tractability and good lead-like properties (MW <500, IC50<100nM, LLE >5). Structural elucidation of these inhibitors bound to IL-17A protein has highlighted distinct mechanisms of binding across series, which increases Nuevolution's chances of developing small molecule candidates. Furthermore, in vivo proof-of-concept work has demonstrated efficacy comparable to an anti-IL-17A antibody for one of the lead assets (NUE), when dosed subcutaneously in a collagen-induced arthritis mouse model (Exhibit 4).

A look at the small molecule IL-17A inhibitor competitor space (Exhibit 5) shows that Nuevolution's programme is well positioned to deliver first-in-class clinical candidates. We would anticipate clinical readiness for a topical-based therapy in 2020/21 and an oral-based therapy in 2021/22 due to the tiered complexity of ensuring the safe and efficacious systemic free exposure required for an oral drug. Bearing in mind Nuevolution's current strategy to mitigate its risk through a 'multiple shots on goal' approach, we forecast that an agreement akin to the Almirall deal could be possible for the IL-17A programme.