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Medigene’s decision to expand its clinical programme for RhuDex in primary biliary cirrhosis (PBC) should result in a more meaningful outcome than would have been possible under previous plans. Although the revised Phase II study wil now not start until H114 (previously a Phase IIa was to start in Q113), we believe the delay should be worth it in the long run, making RhuDex a more valuable and attractive asset to support partnering and/or financing. We have pushed back our estimated launch for RhuDex in PBC by two years to 2019 and reduce our valuation by €4m to €83m. Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items. Seeking a more meaningful outcome Plans to develop RhuDex for PBC, an autoimmune disorder of the liver, were announced six months ago as a shrewd move to fast track development of a drug previously being developed for rheumatoid arthritis. The original proposal was to conduct a 60-patient, three-arm (dose-ranging), open-label, three-month treatment study in PBC. Medigene now plans to switch to a double-blinded study, add a fourth (placebo control) arm, making 80 patients in total, and dose patients for six months. Medigene needs to complete further preclinical work and wil seek regulatory approval of the revised trial protocol, meaning the Phase II study wil now start by H114. With a six-month treatment period and an estimated six-to-nine months to recruit all 80 Medigene is a German biotech company with a focus on cancer and autoimmune patients, headline results should be available in H215. A pivotal study of 150-200 diseases. It has brought two products to patients, dosed for 12 months, would likely be required for approval, suggesting a the market – Eligard for treating prostate potential launch by the end of 2018 or early-2019. cancer and Veregen for genital warts – and research efforts are currently focused on Costs deferred, but financing requirement remains Although the bulk of trial costs (estimated at €2.5m on the basis of c €30,000 per patient cost) are now deferred to 2014 and beyond, we stil see a funding requirement in H214. However, with a more robust clinical programme for RhuDex, targeting an attractive orphan drug market (estimated at $800m), Medigene should have a more compelling case to attract further investment in RhuDex. Medigene wil provide further trial details and the impact on its financial outlook at its FY12 results on 22 March. The delay to RhuDex’s timeline and a reduction in Medigene’s latest cash reserve (FY12 net cash estimated at €20m vs €26m at June 2012) reduces our overall valuation of Medigene by €4m to €83m. We have decreased R&D estimates for 2012 healthcare@edisoninvestmentresearch.co.uk and 2013, to €7m (vs €8m) and €7.5m (€8.8m), respectively. Medigene is a research client of Edison Investment Research Limited Update: Expansion of RhuDex’s clinical programme RhuDex is a smal -molecule CD80 inhibitor, under development as an orally available disease-modifying anti-rheumatic agent (DMARD). Although its biggest commercial potential may be in the rheumatoid arthritis (RA) setting – a Phase IIa trial in 2008 in 29 RA patients showed signs of activity – Medigene has made a shrewd move in targeting PBC to accelerate development in an attractive orphan drug market opportunity. While the revised plan for RhuDex extends the timeline to reaching the next data and therefore valuation inflection point, Medigene’s decision now presents a stronger and more compelling case to attract the financing required to complete the Phase II study. PBC is an autoimmune disease of the liver, a chronic disorder in which the bile ducts are progressively destroyed by inflammatory processes. Excess bile causes liver tissue damage, which leads to fibrosis and cirrhosis of the liver. The activation of T-cells – via a CD28-CD80 interaction between antigen-presenting cells and T-cells, the process specifically inhibited by RhuDex – is thought to be involved in the pathogenesis of PBC. PBC affects an estimated 200,000 to 300,000 people across the developed countries of North America, Europe and Japan. Diagnosis is relatively straightforward and well-defined, but few treatment options exist and those that are available (Ursodiol) are more symptomatic in nature. A disease-modifying agent for PBC would therefore be of huge benefit to patients, which presents RhuDex with an attractive opportunity. We previously estimated the PBC market opportunity at $800m and RhuDex peak potential sales of $200m. To il ustrate the potential of the PBC opportunity, we highlight Intercept Pharmaceuticals, a US company currently valued at $620m, having raised $85m through an IPO in October 2012. Intercept’s FXR agonist, obeticholic acid, is undergoing a 200-patient Phase II pivotal study (results in Q214) in PBC and is fundamental to its near-term investment case. Intercept’s candidate is the most advanced in development for PBC, initially targeting patients not responding to Ursodiol, and is followed by J&J’s ustekinumab and NovImmune’s NI-0801, both monoclonal antibodies in Phase II trials. A further attraction of PBC is the relatively clearly defined clinical trial end points, with primary targets of current trials measuring a reduction in alkaline phosphatase (AP) and bilirubin levels. In addition, most PBC patients do not receive immunomodulatory drugs, such as methotrexate, which is important as it could also provide evidence that RhuDex does not impair the body’s natural ability to mount a spontaneous inflammatory reaction, which would have read across to RhuDex’s future development for RA. The delay to RhuDex’s timeline and a reduction in Medigene’s latest cash reserve (FY12 net cash estimated at €20m vs €26m at June 2012) reduces our overal valuation of Medigene by €4m to €83m. This shows clear upside to Medigene’s €38m market capitalisation. A summary of our valuation inputs for RhuDex in RA and PBC, together with Medigene’s other products – marketed genital warts ointment Veregen and breast cancer agent EndoTAG-1 – is displayed in Exhibit 1. Exhibit 1: Medigene valuation model inputs Source: Edison Investment Research. Note: Assumes EndoTAG-1 use for triple-negative breast cancer only. RhuDex was acquired by Medigene in 2006 through the purchase of Avidex. In 2001, Avidex licensed Active Biotech’s CD80 antagonists for the potential treatment of autoimmune diseases, a deal that includes royalties (at an undisclosed rate) on product sales. Given the early stage of the deal between Avidex and Active Biotech, we have assumed that the original deal terms have not changed and Medigene wil pay just 1-2% royalties on RhuDex sales to Active Biotech. Our 12% estimated royalty rate for RhuDex is therefore net of the royalties owing to Active Biotech. Generating positive Phase II data in PBC would help to de-risk the programme and lead to increasing our probability of success and therefore valuation. Key sensitivities associated with this valuation centre on the progress of RhuDex, particularly the outcome of the Phase II trial in PBC. Clinical trial recruitment for orphan drug indications can be slower than larger indications. In comparison to RA, the underlying disease mechanisms behind PBC are not so extensively defined, particularly the extent to which the CD28-CD80 interaction is involved in PBC pathogenesis, which could affect the outcome of the Phase II study. A key sensitivity to Medigene’s investment case is its ability to raise the additional finance we estimate wil be required to complete the expanded Phase II study for RhuDex, although the returns on successful completion of the trial could be significant. The procurement of Veregen and currency exchange fluctuations are also important sensitivities. A failure to secure further development partners for EndoTAG-1 (SynCore is assuming 50% of pivotal trial costs in triple-negative breast cancer) would have a negative impact on our overall valuation of Medigene. As a result of the shift in RhuDex’s clinical timelines, we have reduced our R&D estimates for 2012 and 2013 to €7m (vs €8m previously) and €7.5m (vs €8.8m), respectively. We expect a jump in R&D expenses for 2014 to €9m. With cash reserves estimated at €11m by the end of 2013, Medigene is funded through to the end of 2014, but in reality is likely to require fresh funds during 2014. A financing initiative ahead of the start of the Phase II RhuDex study cannot be ruled out. A summary of our financial model is displayed in Exhibit 2. Selling, general & administrative spending Operating profit (before GW and except.) Profit/(loss) from discontinued operations Average number of shares outstanding (m) Source: Edison Investment Research. Notes: Excludes potential licensing deals yet to be signed. €14.1m from Cowen Royalty in 2012 for 2% EU Eligard royalties is accounted for as a financial liability (deferred revenue), which wil be amortised, pro rata, over 10 years. EBITDA does not include €5m profit from discontinued operations in 2012 (company’s EBITDA guidance of mid-single digit €m loss in 2012 includes the €5m discontinued profit). Edison Investment Research Limited (Edison) is a leading international investment research company. Edison and its subsidiaries (Edison Group) have won industry recognition, with awards both in Europe and internationally. The team of 95 includes over 60 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 400 companies across every sector and works directly with corporates, fund managers, investment banks, brokers and other advisers. 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