Nuevolution publ : EDISON MARCH 2019

Nuevolution

Small molecules, big ambitions

FY18 results

Pharma & biotech

Positive progress in Nuevolution's RORγt partnership with Almirall has triggered a €1m milestone payment (SEK10.5m) and we continue to forecast that it will enter the clinic in 2019. FY18 was defined by the progress in the Amgen partnership as it opted in for two oncology programmes, further validating Nuevolution's Chemetics technology.InNuevolution'sBET-BD1 programme, a development candidate (NUE20798) has been nominated; data in animal cancer models highlight that it may have synergistic effects in combination with immunotherapies. TheFY18 net loss was down year-on-year to SEK99.7m (from SEK117.5m) as a result of lower R&D costs. Net cash of SEK108m (FY17: SEK110.6m) should fund operations into 2020. We value Nuevolution at SEK20.7/share.

Year end

Revenue (SEKm)

PBT* (SEKm)

EPS* (SEK)

DPS (SEK)

P/E (x)

Yield (%)

12/17**	12.2	(123.8)	(2.7)	0.0	N/A	N/A
12/18**	11.0	(107.3)	(2.2)	0.0	N/A	N/A
12/19e	202.4	87.2	1.1	0.0	12.5	N/A
12/20e	336.6	220.9	2.9	0.0	4.8	N/A

Note: *PBT and EPS are normalised,excluding amortisation of acquired intangibles,exceptional items and share-based payments. **Restated following change of year.

Almirall milestone achieved with positive CD data

Almirall and Nuevolution have completed significant characterisation of its candidate drug (CD) leading them to believe the program could have potential best-in-class attributes; Almirall will now press forward with its plans to start a clinical trial programme in moderate to severe psoriasis patients. The partnership includes €172m in development milestones and €270m in regulatory milestones, in addition to tiered royalties on future net sales. The timing and design of any clinical trial is ultimately Almirall's decision and we await further information on these elements.

Amgen opt-ins proving the worth of NUEV technology

Nuevolution continues to demonstrate that it has the in-house ability to execute and deliver on its partnerships. In 2018, Amgen opted-in on two programmes and is now covering development costs. If Amgen exercises its option to license a candidate, Nuevolution will receive an initial licensing fee of at least $10m and potential milestone payments of up to $400m per candidate. With the collaboration spanning multiple undisclosed targets, significant financial potential exists.

Internal pipeline continues to add value

Nuevolution continues to build and strengthen its pipeline of preclinical assets and aims to monetise some of those in the near term via out-licensing. We have no visibility on the timelines for potential new deals for Nuevolution, but believe the BET-BD1 programme, which is the most advanced internal candidate, is well positioned and most likely to be out-licensed or partnered.

Valuation: SEK20.7/share (SEK1,026m)

We value Nuevolution at SEK20.7/share (SEK1,026m), vs SEK19.7/share (SEK974m) previously. The increase in value is driven by the rolling forward of our model, and we have updated net cash and FX rates.

Price SEK13.8 Market cap SEK683m

19 March 2019

SEK9.33/US$; US$1.13/€; SEK10.56/€

Net cash (SEKm) at 31 December 2018	108.0
Shares in issue	49.5m
Free float	55%
Code	NUEV

Primary exchange Secondary exchangeNasdaq Stockholm

N/A

Share price performance

%	1m	3m	12m
Abs	3.5	(11.8)	(20.0)
Rel (local)	1.8	(20.9)	(23.3)
52-week high/low	SEK20.1	SEK10.7

Business description

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.

Next events

Sign new out-licence/risk-sharing collaboration

Start of Almirall's RORγtPhase I trial

Analysts

Dr Daniel Wilkinson	[phone]
Dr Susie Jana	[phone]
Dr Sean Conroy	[phone]

[e-mail]

Edison profile page

Nuevolution is a research client of Edison Investment Research Limited

2019/20

2019

Investment summary

Company description: DNA-encoded drug discovery

Nuevolution is a Copenhagen-based leader in small molecule drug discovery, co-founded in 2001 by CEO Alex Haahr Gouliaev. The company's internally innovated DNA-encoded drug discovery platform, Chemetics, has been designed to rapidly select drugs for an array of tough-to-drug disease targets; the technology has been validated by multiple collaborative deals, notably the deals in 2016 with Amgen and Almirall. In addition to out-licensing deals, Nuevolution is developing a portfolio of preclinical drugs (10+ programmes); it intends to move some into the clinic itself or partner. The near-term goal remains the creation of a stable revenue stream through partnerships that can support the long-term development of Nuevolution's wholly owned assets. To date, the company has generated approximately SEK530m in revenues through collaborations. It raised net proceeds of SEK230.1m from its IPO on Nasdaq First North Premier in Stockholm, Sweden, and in 2018 it raised net proceeds of SEK104.0m from a directed issue.

Valuation: Amgen, Almirall and Janssen form basis of our rNPV

We value Nuevolution at SEK20.7/share (SEK1,026m), compared with SEK19.7/share (SEK974m) previously. This increase is predominately due to rolling forward the model; additionally, we have updated net cash and FX rates. Our valuation of SEK1,026m including net cash of SEK108.0m is based exclusively on a risk-adjusted model of the future milestones we expect from the Almirall (SEK9.7 per share), Amgen (SEK8.4 per share) and Janssen (SEK0.5 per share) deals, using a 12.5% discount rate. We note near-term milestones are a core driver of our valuation; any change in the timing or size of these from our assumptions would have a material effect on our valuation. We have not ascribed value at this point to the unique platform and multiple early stage candidates.

Sensitivities: Clinical validation is the long-term focus

Nuevolution is subject to drug development risks, including clinical development delays or failures; however, the company's 15+ compounds in parallel development helps to reduce the risk typically associated with pure-play biotechs. Additional sensitivities exist around IP protection, regulatory risks, competitor successes, partnering setbacks and financing and commercial risks. While Nuevolution's strategy minimises the business risk associated with drug development by partnering early on in development, general risk remains in the partner's willingness to progress these partnerships. One of the key sensitivities for Nuevolution is the successful transition of molecules discovered by its Chemetics programme into clinical-stage development, which would enable further validation of its technological capabilities. Financing needs depend on milestone revenues from existing partners and potential new partnering activities; delay or failure to receive future milestones would generate a funding gap during FY20.

Financials: Funded into 2020

For the full year 2018, revenues were SEK11.0m, a slight reduction on the previous period (FY17: SEK12.2m). R&D costs decreased slightly on the previous year to SEK91.0m (FY17: SEK107.3m), while SG&A remained essentially flat at SEK28.5m (FY17: SEK28.3m). Net cash as of 31 December 2018 of SEK108.0m (gross cash: SEK111.1m) should be sufficient for Nuevolution to operate in FY19 without the need for additional revenue or funds. We forecast significant near-term revenues from the Amgen and Almirall deals, with our model forecasting that Amgen will exercise its option on one of the programmes and Almirall will start a Phase I trial (triggering a milestones to Nuevolution), both before the end of FY19. These payments make up the majority of our revenue forecast in this financial year (FY19) and either failure to achieve this or changes to the timing/size of the payment would have a material effect on our forecasts and valuation. We will continue to monitor both Almirall and Amgen and may look to readdress these assumptions in H219 if no

external announcements have been forthcoming. We note we have updated our historical financials to reflect the new December year end (from June previously) and the restated accounts.

Partnerships: On solid ground

Nuevolution continues to successfully advance its partnered programmes with Almirall, Amgen and Janssen (Exhibit 1) to value inflection points. In both July 2018 and November 2018, Amgen exercised its right to opt in on two separate undisclosed programmes (multi-target collaboration across oncology and neuroscience), and has assumed responsibility for all further costs incurred by both parties. Amgen is eligible to exercise its option to license one of these programmes; if it does, Nuevolution would receive an initial licensing fee of at least $10m per programme.

In February 2019, Nuevolution announced Almirall had paid the first milestone (€1m, SEK10.5m) in its (RORγt) collaboration following successful completion of significant preclinical research studies. 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 recent failures in the space (Allergan's AGN-242428 and AstraZeneca's AZD0284) the delays in reaching this milestone are due to Almirall and Nuevolution ensuring that they have identified any liabilities and that the attrition of competitor compounds is not endemic to the mechanism of action (ie RORγt inhibitor).

The confidential nature of the collaborations mean little material information has been forthcoming, although we expect this to change as assets enter the clinic. We predict that in 2019 Almirall moves the RORγt inhibitor into the clinic (in dermatology and psoriatic arthritis indications), and Amgen takes up the licence option on the first product candidate to emerge from the Nuevolution collaboration. We forecast that both could generate significant revenues in the form of milestone payments; however, in the near term, two key sensitivities remain in the timing and size of expected milestones from both the initiation of Almirall's Phase I trial and Amgen's research project option.

Exhibit 1: Nuevolution's partnered pipeline

Target/ IndicationRORγt(inverse agonist)

Deal terms

Notes

Preclinical

Out licensed toNuevolution received €11.2m (SEK109m)

Chronic inflammatory diseasesAlmirall in dermatology and psoriatic arthritisgross as an upfront licence payment for the cytokines, notably IL-17A, which is implicated in multiple inflammatoryRORγt inverse agonist programme (in dermatology and psoriatic arthritis indications). The deal could provideNuevolution with up to €172m indevelopment and regulatory milestones, aswell as €270m in commercial salesmilestones and tiered royalties on future net remaining development is now being undertaken by Almirall. sales.

RORγt plays an important part in the generation of pro-inflammatory

and autoimmune conditions. Inverse agonists of RORγt inhibit thispathway and Nuevolution's product candidates (under Almirall'sstewardship) could provide oral-based treatments for psoriasis (PsO) and psoriatic arthritis (PsA).

Feb 2019: Nuevolution received €1m (SEK10.5m) milestone paymentfor successful completion of significant preclinical research studies. AllUndisclosed target(s)PreclinicalDrug discovery Multi-target research programme withcollaboration with AmgenCancer & CNS diseases

$410m in research, development and commercial milestones plus royalties for each programme. Nuevolution isAmgen has exercised its right to opt in on the two undisclosed"fast-tracked" cancertargets (multi-target collaboration) and has assumed responsibility for all further costs incurred by both parties.

In the first fast-track cancer programme, Amgen and Nuevolution areresponsible for the early research, while the jointly optimising programme compounds for target selectivity andpreclinical development, clinical development and commercialisation of theproduct are Amgen's responsibility. If Amgen exercises its option to license a candidate, Nuevolution will receive an initial licensing fee of at least $10m.

subsequent further in vivo efficacy studies.

The second programme is completing its small molecule compound optimisation with extensive activity profiling, mechanism-of-action validation and x-ray crystallisation studies.

A third programme is in earlier stages of hit optimisation.

Undisclosed targetsDiscovery: variousDrug discovery Technology access agreement. Agreementcollaboration with JanssenVariouswas signed in October 2015 (undisclosed upfront) and to date Nuevolution has thrice publicly announced an expansion of thePayment (January 2018) of $0.75m was a result of J&J exercising its option to license one of its research programmes. The disease target is in the area of anti-infectives. Nuevolution is entitled to further research, development and commercialisation milestones, in addition to royaltiesagreement, receiving payments of $0.6m in on net sales. June 2016, March 2017 and January 2018.

GRP78

CancerDiscovery: hit-to-lead

50% ownership*N/A

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

Source: Nuevolution, Edison Investment Research. Note: *Collaboration with CRT and ICR.

Pipeline progresses; two programmes nearing the clinic

The wholly owned pipeline continues to progress well, with clinical readiness of its two lead programmes (RORγt and BET-BD1 inhibitors) the focus. In the BET-BD1 programme, NUE20798 has been selected as the lead programme candidate following positive data on its bioavailability and its mechanism of action (animal model data demonstrated it has an anti-fibrotic effect and it may be synergistic with immunotherapies).

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 2 highlights Nuevolution's pipeline, which is set to deliver multiple inflection points over the coming 12-18 months.

Exhibit 2: Nuevolution's non-partnered pipeline

TargetRORγt(inverse agonist)

Indication

Chronic inflammatory diseases

StagePreclinical

Ownership

Notes

Other indications outside of dermatology and psoriatic arthritis. 100% ownership NuevolutionRORγt plays an important part in the generation of pro-inflammatory cytokines, notably IL-17A, which is implicated in multiple inflammatory and autoimmune conditions. Nuevolution retains the rights to pursue other indications, primarily focusing on ankylosing spondylitis (AS), with inflammatory bowel disease (IBD) as a secondary indication.

BET-BD1

Cancer, fibrosis (IPF, NASH) and inflammatory diseasesPreclinical

100% ownership NuevolutionBET-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.

IL-17AInflammatory diseasesDiscovery: lead optimisation

100% ownership NuevolutionIL-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.

TYK2

Discovery: lead optimisation

100% ownership NuevolutionTyrosine kinase 2 (TYK2) is a member of the Janus kinase (JAK) family, which sits downstream of cytokine receptors and mediates inflammatory signalling. To date, there are no marketed TYK2 inhibitors.

RIPK1

Discovery: lead optimisation

100% ownership NuevolutionReceptor-interacting serine/threonine-protein kinase 1 (RIPK1) is a signalling kinase in the tumour necrosis factor receptor (TNF) pathway, and acts to regulate inflammation and cell death in tissues throughout the body. It plays a role in a range of inflammatory diseases and is of particular interest in the neuroinflammatory processes thought to drive some neurodegenerative disorders.

RORγt(agonist)Cancer

Discovery:

100% ownershiphit optimisation Nuevolution

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 immunoncology. Currently hits are being optimised and tested in vivo (mouse breast tumour model).

Undisclosed Various targets

Discovery: various

100% ownership Nuevolution

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

Source: Nuevolution, Edison Investment Research

BET-BD1: The potential of epigenetics

One of Nuevolution's most advanced programmes is focused on developing inhibitors of the first binding domain (BD1) of the bromodomain and extra-terminal domain (BET) family of proteins. Bromodomains act as epigenetic regulators of multiple genes in the immune system and are novel targets for both immunology and oncology; no drugs of this class have been approved to date. FY18 results highlight Nuevolution's BET-BD1 project transition through a key milestone, nominating NUE20798 as primary candidate (and NUE23530 as a backup compound). With NUE20798 now progressing through to the final stages of preclinical development (regulatory safety studies), serendipitously, scale up of NUE20798 has yielded a new formulation that demonstrates a significantly improved oral-drug profile, with 80% of the compound taken up into systemic circulation after oral dosing (vs 20% previously). We expect the project could be ready for investigatory new drug (IND) filing in FY19 and although transitioning a compound into the clinic would most likely be through a new partner, this could also facilitated by Nuevolution.

Through various preclinical models, Nuevolution had shown its BET-BD1 inhibitors have scope in the treatment of auto immune disorders, such as atopic dermatitis (eczema) and systemic lupus erythematosus (SLE); it has also identified its inhibitors can regulate the transcription of genes (and biomarkers) responsible for a range of fibrotic diseases, such as scleroderma, idiopathic pulmonary fibrosis (IPF) and non-alcoholic steatohepatitis (NASH). Recently Nuevolution has demonstrated (in vivo, mice) that its candidate molecule NUE20798 could have a synergistic effect in combination with PD-1 immune checkpoint inhibitors, broadening the scope for how it could be utilised in the treatment of cancers (particularly fibrotic tumours).