Bionor Pharma. Budding biomarker. A Vacc-4x biomarker to potentially drive success. Three clinical data readouts in next 12 months

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1 Bionor Pharma Budding biomarker Q413 and pipeline update Pharma & biotech The discovery of a potential biomarker that could predict responders to Vacc-4x could help pave the way towards a potential functional HIV cure. This will need to be confirmed in future studies, in addition to success in ongoing trials as part of the Kick, Kill and Boost strategy. Kill and Kill & Boost data are anticipated in Q1 and Q414. Bionor has cash to mid-2015, beyond readout from these studies. A Kill & Kick trial could start in Q214. Year end Revenue (NOKm) PBT* (NOKm) EPS* (NOK) DPS (NOK) 12/ (55.2) (0.29) 0.0 N/A N/A 12/ (75.0) (0.36) 0.0 N/A N/A 12/14e 1.7 (76.5) (0.34) 0.0 N/A N/A 12/15e 1.7 (62.6) (0.28) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. P/E (x) Yield (%) 7 February 2014 Price NOK2.45 Market cap NOK553m NOK7.8/ Net cash (NOKm) at end Dec Shares in issue 225.8m Free float 62% Code BIONOR Primary exchange Oslo Secondary exchange N/A Share price performance A Vacc-4x biomarker to potentially drive success A subset analysis of the previous Phase IIb Vacc-4x trial has revealed that HIV patients with high levels of anti-c5, an antibody implicated in HIV morbidity and mortality, had a clinically meaningful HIV viral load reduction of log 0.94 or 88%, compared to only 37% in patients with low anti-c5 and 60% in the original trial. This biomarker, if confirmed in future studies, could help identify responders to Vacc-4x. Three clinical data readouts in next 12 months The next trial readout should be from Vacc-C5, Bionor s second HIV vaccine candidate; data from the first-in-man Phase I/II safety study should become available during Q114. In terms of Vacc-4x, data from the ongoing Phase II reboost study to examine additional HIV viral load reduction is expected by end Q114, and a Vacc-4x trial with Revlimid to determine if this combination can enhance the effects of Vacc-4x is anticipated in Q414. Plans for a histone deacetylase inhibitor (HDACi) combination trial have been submitted and this could start in Q214. Vacc-4x could be the first functional cure for HIV Bionor is developing Vacc-4x as a potential functional cure for HIV. Vacc-4x is one of the furthest advanced therapeutic vaccines in development and has already demonstrated efficacy against HIV. Bionor s Kick, Kill and Boost development strategy encompasses all the elements required to achieve a functional cure for HIV. These include releasing dormant HIV reservoirs (Kick), encouraging HIV destruction via an immune response elicited by Vacc-4x (Kill) and strengthening the immune system to maximise its attack on HIV (Boost). Valuation: Risk-adjusted NPV of NOK882m Our underlying Vacc-4x assumptions are essentially unchanged, with our rnpv increasing slightly to NOK882m (from NOK868m) owing to updated net cash and rolling our valuation forwards one year. This is diluted to NOK3.9/share (from NOK4.0/share), with the increased share count following the October repair issue. % 1m 3m 12m Abs (9.3) (16.7) 19.2 Rel (local) (7.5) (15.3) week high/low NOK3.7 NOK1.9 Business description Bionor Pharma is a Norwegian biotechnology company focused on developing peptide vaccines for infectious diseases. The lead product, Vacc-4x, is currently in Phase II development as a potential cure for HIV. Next events Vacc-C5 top-line Phase I/II data Vacc-4x reboost Phase II data Start of HDACi Phase II combo trial Vacc-4x Revlimid combo Phase II data Analysts Q114 End Q114 Q214 Q414 Dr Philippa Gardner +44 (0) Dr Mick Cooper +44 (0) Robin Davison +44 (0) healthcare@edisongroup.com Edison profile page Bionor Pharma is a research client of Edison Investment Research Limited

2 Biomarker breakthrough? Bionor has completed a retrospective subset analysis of the previously reported Phase IIb Vacc-4x trial to investigate the variability observed in viral load reduction, where some patients had a better response (increased viral load reduction) than others. This has led to the discovery of a potential biomarker that could predict response to Vacc-4x vaccination, determined as anti-c5 antibodies. Background to C5 and its role in HIV The presence of C5 antibodies has been linked to slower HIV progression and low viral loads (a measure of the amount of HIV virus in the blood). Less than 5% of HIV patients are natural viral suppressors (also referred to as long-term non-progressors, LTNPs or elite controllers) who can control HIV without the need for medication; LTNPs have been found to have antibodies to C5. It is thought that C5 can prevent hyperimmune activation, which is associated with increased morbidity and mortality. As part of the development of Vacc-C5, Bionor s Phase I/II HIV vaccine candidate, designed to elicit antibodies to C5, Bionor developed a test to measure C5 antibodies. This test was used to measure anti-c5 levels in the Vacc-4x Phase IIb trial. Subset analysis suggests high C5 patients could respond better to Vacc-4x In the previous Vacc-4x Phase IIb trial in 136 patients, HIV viral load was investigated as a secondary endpoint, with pre-art viral loads available for a subset of patients. Vacc-4x was found to reduce viral load by 60% (log 0.4), with pre-art levels going from 60,470 copies/ml to 24,150 copies/ml at study completion (p=0.0001). There was no difference in viral load in placebo patients with pre-art levels of 52,731 copies/ml and 50,400 copies/ml at study completion (p=0.98). When these data were re-analysed and stratified according to baseline anti-c5 levels, patients with higher C5 (defined in this analysis as >4µg/ml) had a median viral load reduction of 88% (log 0.94, p=0.005) compared to pre-art levels. In patients with low C5 (<4µg/ml), the viral load reduction from pre-art levels was only 37% (log 0.2, p=0.019). A >0.5 log reduction is considered clinically meaningful by regulators. These data are summarised in Exhibit 1. Exhibit 1: Viral load reduction compared to pre-art levels Overall analysis Subset analysis Placebo Vacc-4x Low C5 High C5 n Pre-ART HIV viral load (copies/ml) Wk 52 HIV viral load (copies/ml) % reduction 4% 60% 37% 88% log reduction NA p Source: Bionor Pharma, Edison Investment Research Biomarker benefits The availability of a biomarker to determine potential responders to Vacc-4x could help increase the chance of future trial successes, as potential non-responders could be identified. Furthermore, a predictive biomarker could facilitate reimbursement discussions and would likely be viewed favourably by payers. However, until additional biomarker validation and comprehension of the potential implications, we make no changes to our underlying Vacc-4x forecasts, which assume <2% penetration of the overall HIV market, based on Vacc-4x only treating those patients who receive ART but are not virally suppressed; in the US only 25% of HIV patients are virally suppressed, despite 33% receiving ART treatment. Bionor Pharma 7 February

3 This potential biomarker will need to be validated in further prospectively defined trials. Bionor does intend to include anti-c5 measurements in the planned REDUC study (HDACi/Vacc-4x combination trial) and will try to include anti-c5 measurements in the ongoing reboost study (both studies discussed later). Broader implications If baseline anti-c5 levels can be correlated with Vacc-4x mediated HIV viral load reduction, it opens up the intriguing prospect of potentially boosting anti-c5 levels with Vacc-C5 before Vacc-4x vaccination, to improve response to Vacc-4x. This remains to be confirmed in further studies, but in our view adds further weight to the possibility and potential of Bionor s Vacc-C5/Vacc-4x combination vaccine, currently in preclinical development supported by a NOK7.7m GLOBVAC grant. Pipeline update Bionor is conducting and planning a number of trials as part of its Kick, Kill and Boost strategy to develop a functional cure for HIV. An overview of the current clinical-stage pipeline and status is shown in Exhibit 2. Data from these trials in the next 12 months will help shape and determine future development plans. Exhibit 2: Clinical stage pipeline Product Indication Stage Strategy Comments Vacc-4x HIV therapeutic vaccine Phase II Kill Reboost study ongoing; data end Q114 Phase II Kill & Boost Revlimid combo; data Q414 Phase II planning Kill & Kick HDACi (romidepsin) combo being planned; start Q214e; data H215 Vacc-C5 HIV therapeutic vaccine Phase I/II Data Q114 Source: Edison Investment Research Initial Vacc-C5 data expected during Q114 Vacc-C5 is currently being investigated in a Phase I/II trial to investigate safety with data expected in Q114. The trial is examining three escalating doses and two different adjuvants on anti-c5 antibody induction, with the trial aiming to establish the dose and adjuvant for further trials. These will be the first-in-man data from Vacc-C5 and will include antibody and T cell responses in HIV patients on ART. We do not include Vacc-C5 in our valuation owing to the lack of proof-of-concept data. Hence, Vacc-C5 represents pure upside to our current estimates and forecasts. Kill: Vacc-4x reboost data at end Q114 Data from the ongoing Vacc-4x reboost study are anticipated towards the end of Q114. This trial is investigating additional vaccination with Vacc-4x in previously treated Vacc-4x patients (patients from the Phase IIb 135-patient trial) to see if this can further lower the viral load. Previous trials have already demonstrated viral load reduction with Vacc-4x, suggesting Vacc-4x is able to induce HIV destruction via T-cell mediated immunity, ie Kill. In addition, Vacc-4x has already demonstrated the potential to enhance the immune response after revaccination in a previous Phase IIa trial where patients from a previous trial were revaccinated after seven years. Kill & Boost: Revlimid combination data anticipated in Q414 As part of a research collaboration with Celgene, a trial combining Vacc-4x with Revlimid (lenalidomide, Celgene s immune modulator) is ongoing, with data now anticipated in Q414 following slower than anticipated recruitment. Vacc-4x relies on a functioning immune system, Bionor Pharma 7 February

4 hence the trial is aiming to investigate if the immune system s ability to fight HIV can be improved by lenalidomide ( Boost ), potentially improving Vacc-4x s efficacy. Kill & Kick: HDACi combination trial in planning; start Q214 The planned Vacc-4x/romidepsin (an HDACi) combination trial to investigate the possibility to reactivate latent HIV reservoirs has been submitted to regulators for approval, with the trial expected to start recruitment in Q214. Bionor is collaborating with the Aarhus University in Denmark, which has produced research that suggests HDACis can kick awake latent HIV reservoirs formed in the early stages of HIV infection. These do not actively produce HIV and are effectively invisible to ART. However, if ART treatment is stopped, these reservoirs are reactivated, producing HIV; hence, ART cannot cure HIV. Valuation We have made no significant adjustments to our valuation, with our underlying assumptions for Vacc-4x essentially unchanged. However, there are a number of small changes in our valuation with a decrease in last reported net cash to NOK107.5m owing to ongoing cash burn more than offset by rolling our valuation forward one year. Our updated risk-adjusted NPV-based valuation is therefore NOK882m (from NOK868m), which is diluted to NOK3.9/share (from NOK4.0/share) owing to the increased share count following the 7.5m October repair issue, which raised NOK20.6m gross at NOK2.75 per share. The breakdown of our rnpv valuation, which uses a 12.5% discount rate, is shown in Exhibit 3. Exhibit 3: Bionor Pharma rnpv valuation Product Indication Launch Peak Sales ( m) Value (NOKm) Probability rnpv (NOKm) NPV/Share (NOK/share) Vacc-4x Therapeutic HIV vaccine ,300 2, % Net cash/(debt) % Valuation 2, Source: Edison Investment Research Our valuation only includes Vacc-4x, with no value assigned to Vacc-C5 or the preclinical pipeline, given their earlier stage of development and lack of proof-of-concept data. Our base-case Vacc-4x NPV assumes that Vacc-4x is positioned as an alternative to ART (antiretroviral therapy), rather than as a replacement or cure, conservatively only penetrating patients that despite receiving ART are not virally suppressed, arriving at peak sales of 1.3bn (across the US and Europe). However, if Vacc-4x is successfully developed as a functional cure for HIV, we estimate peak sales could be substantially higher, at around 6.5bn, owing to both higher pricing and penetration. Financials Bionor reported NOK107.5m net cash at end December 2013 with Q413 financial results. FY13 revenues were NOK4.2m and operating expenses were NOK91.5m, 19% above our forecast; Bionor s expenses are classified according to nature (including personnel spend of NOK27m and other expenses of NOK51m) rather than by function (R&D, SG&A). R&D-related expenses of NOK34.1m (net of NOK5.3m government grants) were disclosed, which were +20% higher than we anticipated. Following Q413 financial results, we have made only minor changes to our future revenue forecasts. Our 2014 revenue forecast does not include any nutraceutical sales (NOK2.4m in 2013) as management still plans to either dispose of or discontinue this business; discussions are continuing in this regard. Bionor Pharma 7 February

5 We have increased our operating expenses in 2014 by nearly 20% bringing it in line with 2013 spend. In 2015, our operating expense forecast is largely unchanged as we expect a decrease in R&D spend, with only the planned HDACi trial ongoing in 2015, and the majority of its cost in Together with our minor revenue forecast changes, EBITDA is widened +17% in 2014 but is slightly narrowed in A summary of the main changes to our forecasts is shown in Exhibit 4. Forecasting R&D spend is not straightforward as there are a number of moving parts, including completion of both the ongoing Vacc-4x reboost study and the Vacc-C5 trial, the ongoing Revlimid combo trial, start of the planned HDACi combo trial and work on the biomarker, with success in ongoing trials likely to lead to the initiation of further studies. For the time being and until further data are available, we assume a similar level of R&D spend in 2014 compared to 2013 but a reduction in 2015, with only the HDACi trial ongoing under current development plans. Exhibit 4: Key changes to financial forecasts NOK millions e 2014e % change 2015e 2015e % change Reported Old New Old New Revenue % % Gross Profit % % EBITDA (75.787) (63.527) (76.763) +21% (65.365) (62.109) -5% Operating Profit (87.311) (75.261) (88.314) +17% (77.113) (73.690) -4% Profit Before Tax (reported) (85.434) (74.079) (87.245) +18% (77.036) (73.351) -5% Profit After Tax (reported) (85.434) (74.079) (87.245) +18% (77.036) (73.351) -5% Source: Edison Investment Research According to our updated model (shown in Exhibit 5), current cash should be sufficient to fund operations to mid-2015, beyond key clinical data in Our forecasts include illustrative financing of NOK35m in 2015, which we class as a long-term liability for the purposes of our model. Our model does include a certain amount of discretionary spend each year (eg on preclinical and earlier stage assets), hence if Bionor only funds the ongoing and planned Vacc-4x trials, the cash runway could potentially be extended to allow for availability of the HDACi combination data, anticipated in H215. Bionor Pharma 7 February

6 Exhibit 5: Financial summary NOK'000s e 2015e December IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 20,668 12, ,499 4,224 4,200 1,653 1,670 Cost of Sales (9,300) (762) (1,605) (1,864) (1,706) 0 0 Gross Profit 11,368 11, ,894 2,360 2,494 1,653 1,670 Research and development (389) (18,900) (29,500) (18,700) (34,100) (33,000) (17,000) EBITDA 2,675 (35,247) 57,357 (58,221) (75,787) (76,763) (62,109) Operating Profit (before amort. and except.) 2,579 (35,654) 56,833 (58,903) (76,535) (77,538) (62,914) Intangible Amortisation (257) (8,817) (10,776) (10,776) (10,776) (10,776) (10,776) Exceptionals Other 2,874 (3,692) (1,460) (792) Operating Profit 5,196 (48,163) 44,597 (70,471) (87,311) (88,314) (73,690) Net Interest ,423 3,706 1,877 1, Profit Before Tax (norm) 2,695 (34,943) 61,256 (55,197) (74,658) (76,469) (62,575) Profit Before Tax (FRS 3) 5,312 (47,452) 49,020 (66,765) (85,434) (87,245) (73,351) Tax 0 (3) Profit After Tax (norm) 2,587 (38,638) 59,796 (55,989) (74,658) (76,469) (62,575) Profit After Tax (FRS 3) 5,312 (47,455) 49,020 (66,765) (85,434) (87,245) (73,351) Average Number of Shares Outstanding (m) EPS - normalised (NOK) 0.03 (0.23) 0.33 (0.29) (0.36) (0.34) (0.28) EPS - normalised and fully diluted (NOK) 0.03 (0.23) 0.33 (0.29) (0.36) (0.34) (0.28) EPS - (IFRS) (NOK) 0.06 (0.28) 0.27 (0.35) (0.42) (0.39) (0.32) Dividend per share (NOK) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 4, , ,593 93,159 81,824 70,475 59,095 Intangible Assets 3, ,713 99,712 88,936 78,160 67,384 56,608 Tangible Assets 122 1,192 1,403 3,288 2,710 2,137 1,533 Investments Current Assets 15,634 64, , , ,960 42,597 17,450 Stocks Debtors 2,524 4, Cash 11,911 57, , , ,506 35,149 10,000 Other 1,199 2,756 7,620 6,353 7,221 7,221 7,221 Current Liabilities (1,264) (19,048) (47,210) (15,573) (16,782) (17,945) (16,926) Creditors (1,264) (13,228) (41,249) (12,708) (16,782) (17,945) (16,926) Short term borrowings 0 (5,820) (5,961) (2,865) Long Term Liabilities 0 (8,472) (2,865) (35,476) Long term borrowings 0 (8,472) (2,865) (35,476) Other long term liabilities Net Assets 18, , , , ,002 95,126 24,143 CASH FLOW Operating Cash Flow 6,651 (43,108) (41,069) (56,646) (68,565) (73,226) (60,763) Net Interest 1 (622) (3,975) 3,069 (136) 1, Tax Capex (17) (20) (735) (2,769) (171) (200) (200) Acquisitions/disposals , Financing 6,750 75,398 27,500 27,082 70, Dividends Net Cash Flow 13,385 31,648 91,721 (29,264) 1,490 (72,357) (60,625) Opening net debt/(cash) 1,474 (11,911) (43,559) (135,280) (106,016) (107,506) (35,149) HP finance leases initiated Other (0) Closing net debt/(cash) (11,911) (43,559) (135,280) (106,016) (107,506) (35,149) 25,476 Source: Bionor Pharma accounts, Edison Investment Research Bionor Pharma 7 February

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