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It is time to reconsider Index Pharma. Present share price is 1,50 sek/share while the Pfizer-Arena transaction indicates a value of between 23 and 53 sek/share, i.e. you may get 15-35x on your investment. The Stockholm market has not all realized the potential in Index Pharma. Index’ phase 3 substance Cobitolimod in Ulcerative Colitis (UC) is improving its competitive position. At the same time Pfizer places a bid on Arena for 6,7 busd a couple of months before a phase three readout. The larger part of the acquisition price is for the UC asset. Between 9-14 Big Pharma/Biotech could be as eager, as Pfizer, to make add-ons to their UC pipelines. Index is likely to be a M&A/partnering target in 2022/23.

Peter Zerhouni, CEO Index Pharmaceuticals​ says in the Q3-report​:

"Overall, the competitive landscape has clearly evolved in Cobitolimod’s favor …..”

Implicit in that statement is:

·      M&A or partnering is very likely for Index

·      Big Pharma’s positioning is very important

·      Our asset is becoming more and more ATTRACTIVE

Let us look at this and specifically the following:

• Present competitive position in the market

• Present pipeline of UC candidates

• Which Big Pharma have gaps to fill in UC?

However, let us first of all conclude the following:

  • Index' global phase 3 has now started
  • Earlier trails have shown very good combined efficacy & safety
  • Ulcerative Colitis patients dislike the disease, have pain and worry about side effects
  • Most market research point at an average growth rate of 5-7% yearly until next decade

- Cobitolimod has blockbuster potential in a growing market

  • At the time Cobitolimod is likely to enter the market, the market size has probably grown to at least 7-8 busd
  • Blockbuster thus means 11-12% market share. Considering favorable safety data and reasonable efficacy in phase 2, higher dose in phase 3, a market share up to 20% is clearly within reach

-An oral capsule is under investigation which could further expand the application of Cobitolimod in IBD

There continues to be a lot of news coming out of the field of UC. It was quite dramatic in early fall when the FDA updated their safety warnings for JAK inhibitors as a class. The FDA added serious heart-related events, cancer, blood clots, and death to the already boxed warnings of JAK inhibitors. They also limited all approved uses to patients who have failed TNF blockers. FDA’s decision firmly positions the JAK inhibitors as a last line treatment in ulcerative colitis. This is a reminder that a product’s safety profile is very important, and good news for cobitolimod that has demonstrated an excellent safety profile to date. Overall, the competitive landscape has clearly evolved in cobitolimod’s favor over the last 18 months.

Present competitive position

It is hard to get hold of correct data points but this is probably a fair guesstimate for moderate to severe Ulcerative Colitis annual sales presently;

Humira, Abbvie     TNF@         1.5 busd

Entyvio, Takeda    integrin        1.0 busd

Stelara, J&J            IL-23          0,8 busd

Remicade, J&J      TNF@         0.6 busd

Xeljanz, Pfizer       JAK             0.3 busd

Simponi, J&J         TNF@         0.1 busd

Zeposia, BMS         S1P            New 2021  

Jysleca,Galapagos  JAK            New 2021 (Only Europe)

Biosimilars                                 Some available in Europe (in the US from 2023)

Humira and Remicade sales are falling, partly replaced by biosimilars and Entyvio/Stelara. Xeljanz has enhanced Black Box warning (last line). The upcoming star seems to be intravenous Entyvio (maybe also coming as subcutaneous injection by patient). Also Stelara appears to be moving upwards.

Present pipeline

So which products can come to the market 2022-2025?

As seen in immunotherapy (cancer) there will probably be an increased focus in UC on combinations of drugs, with different MOA and safety profile, especially in the latter part of the period and onwards. This analogy is reasonable to extend to UC as too few patients get help from the standard medicine in both UC and Immunotherapy. The change in cancer immunotherapy was rather fast as it is considered life threatening while UC is a chronic debilitating disease where change unfortunately is somewhat slower. The medical need is very big in both areas.

We have analyzed the UC phase 1 pipeline which has the potential to come to market say in 2028 or later. Apart from studies with probiotics, fecal microbiota transplantation, vitamins and stem cells rather few studies (7) in small molecule/biologics are to be found. Among others both Amgen and Merck as well as J&J are studying new concepts.  

The number of phase 2 trials in the UC pipeline is 15 in total, whereof 8 belongs to Big Pharma/Biotech and remaining belongs to “smaller” biotech. The earliest that these can come to market is probably 2026-27. Judging from historic attrition only few (say 5) of these will enter phase 3. Such normal attrition has already, and will going forward create gaps in BigPharma/Biotech’s pipelines. Such gaps need to be filled through M&A or Partnering if the the BigPharma/Biotech desires a relevant position in UC.

In phase 3 there are presently six candidates

Rinvoq              Abbvie      H1-22       NDA-process BlackBox Probably last-line                    

Etrasimod         Arena       Feb22        Now acquired by Pfizer

Tremfya            J&J          Jun22

Mirikuzumab    EliLilly    Nov21/23  Met endpoint but no figures – probably so-so

Cobitolimod      Index        Aug 23

Skyrizi               Abbvie     Dec23/May24

Five of the six above are already in Big Pharma/Biotech’s hands. Only Index stands out here.

Which Big Pharma/Biotech have gaps to fill in UC?

There are at least sixteen (16) big pharma/biotech covering immunology with an interest of some sort in IBD (UC/Crohn’s). Nine (9) of these Big Pharma/Biotech’s are already today, due to present or recent engagement in UC, very likely contenders for interesting & attractive UC assets. Possibly some of these nine were also bidding/contemplating bidding on Arena?

Six (6) are not yet so likely as some of these are awaiting their own clinical development in phase 2 and 3, especially during the upcoming 8 months (December 21-July 22). One of those six were in our books Pfizer.

Of these16 Big Pharma/Biotech, Abbvie is the only one unlikely to acquire or take a license in UC as they have a solid pipeline themselves (despite that Rinvoq probably gets a Black Box warning in UC). One should however never say never. Abbvie will loose Humira sales over the years as biosimilars will rapidly eat into their sales in the US.

The below two paragraphs were written before Pfizer’s 6,7 busd bid on Arena on Monday the 13th of December.

Looking at the UC pipeline from the Big Pharma/Biotech perspective, Index is a likely target. In addition to Index, a further eight (8) “smaller” biotechs in phase 2/3 could, depending on their individual developments, become a target for partnering or acquisition. Most of their individual development/reporting will happen during q4-21 and q1/q2-22. The most important readout is the Arena Pharma phase 3 in q1 2022. Say that three (3) out of the remaining biotechs get such phase 2 results that will motivate them to start a phase 3.

Based on the above one can say that 9-15 big pharma/biotech will during 2022/23 be chasing Index, probably Arena (subject to results) plus say three (3) further biotechs that are in, or just starting phase 3.

Now, after the Pfizer bid on Arena, one can say that 9-14 Big Pharma/Biotech will during 2022/23 be chasing Index plus say 3 other biotech. An interesting question is also: What will Pfizer do if Arena fails to show reasonable results in their phase 3 reporting in q1-2022. Maybe they will look for further acquisitions.

It is therefore likely, as a result of all the above that several Big Pharma/Biotech will increase business development efforts drastically (after Pfizer-Arena) during first half of 2022 in respect of partnering or acquisitions. Most of them have both gaps in their UC franchises and in addition they also have a lot of cash!

As Cobitolimod (in UC) is the only clinical asset of Index so far, a global license is not that likely as a total company acquisition is usually more efficient. In some territories like Japan however, a license could very well happen. Strategically, it is likely that Index, in due time, will prepare for an own introduction of Cobitolimod in some markets, while from now on will positioning itself as a very obvious partnering/M&A target willing to listen to proposals.

When Index now is entering this dynamic M&A/Partnering era it is important to look at the ownership structure. Index' main owner Linc has a very important position of 13% (above 10%) and HBM can easily move above 10%. Considering that no M&A deal is likely to happen until it is acceptable for Linc AND that Linc is known to take a very long-term view, any bid probably have to be high. In whatever way this plays out, an M&A transaction of Index is very likely. With 9-14/15 Big Pharma/Biotech’s likely to be interested in improving their pipeline, a bid making Linc (and HBM) satisfied could very well happen. Negotiating skills are at hand but it is important for retail investors to be patient.

It is our belief that it is worthwhile to read the following story to understand the value of having a long term view on, and be patient with, an attractive share like Index.

What about the share price?

Redeye’s Research Report from January 2021(which they still stay with) says:

Base Case – SEK 4,5 per share

Our base scenario assumes that InDex’s phase III-study and NDA application's success rate will be in line with the history of phase III candidates in ulcerative colitis.

• LoA 55 percent

• Cobitolimod positioned as a third-line therapy competing with biologics, and in some cases, even before biologics

• Market share for Induction and Maintenance-treatment 15 percent in the US and 15 in EU-5 and Japan

• Peak sales USD 1,3bn

• Market launch in 2026

Bull Case – SEK 9 per share Our blue sky scenario assumes that InDex’s phase III study and NDA application’s success rate will be above the history of phase III candidates in ulcerative colitis.

 • LoA 65 percent

• Cobitolimod positioned as third-line therapy, and to a larger extent, positioned before biologics

 • Market share for Induction and Maintenance-treatment 20 percent in the US and 20 in EU-5 and Japan

• Peak sales USD 1,5bn

• Market launch in 2026

Considering the increase in the Dollar/SEK relation, Redeye’s base case is more like 5 sek and the bull case is more like 10 sek today.

Pfizer’s acquisition of Arena really puts a “price tag” on an advanced UC asset. During Pfizer’s investor call they confirmed that the larger part of the acquisition price, 6,7 busd represented Etrasimod and its application in UC. If we paint broadly with a broad paint brush one can maybe say that 85% represented Etrasimod and 80% of that UC. Converting to SEK the price tag would be roughly 40 billion SEK.

Now, way did Pfizer bid 6,7 busd (100% premium) very short before the main phase 3 read-out – first of all they have few cash restraints at the moment. Secondly, they probably wanted to block any other BP from having this asset. Thirdly, the asset as such complements the Pfizer inflammatory portfolio well, subject to good results and approval. The latter is obviously a relatively large risk Pfizer is willing to take. Furthermore, Etrasimod is delivered as a pill, can be applied in other indications than UC. Etrasimod has some side effect complications but Pfizer is on the other hand used to handle such in its marketing. Further to this, Arena has put a lot of effort into Etrasimod late stage clinical trials in UC. The main induction and maintenance phase 3 studies are reporting in q1-22 even though “induction” was meant to be reported earlier. Why this has not been the case is probably a change of strategy from Arena management & board, when noticing/feeling the interest of Pfizer or other Big Pharma. Furthermore, there are three other phase 3 studies in Japan, in China both reporting in 2022 and a long term study reporting in 2027 and finally a phase 2 study in moderate UC only.

Given all this, it is of course very hard to allocate those 40 billion to specific Pfizer desires and Arenas negotiation skills as well as to Etrasimod vs Cobitolimod specifics. Arena is at the end of the study, has several clinical phase 3 studies on-going, has a pill but has on the other hand, sometimes not so nice side effects. Pfizer is betting on that the phase 2 results will at least remain in phase 3 which is a tough bet. Index management have pointed out that the Arena phase 2 design was an “easier route” than most others including Index have chosen. The reality will show up in the Arena phase 3 reporting in q1-22. Cobitolimod is also covering only left sided UC while Etrasimod covers all Ulcerative Colitis. The development of an oral capsule is important to have an equal standing to Etrasimod in this specific respect.

Say that based on the above we allocate a value of 12, 20 or 28 billion SEK to Cobitolimod, i.e.30-50-70% of the estimated Etrasimod UC value to consider the differences. What is a fair valuation of Index then?

EV                      Cash               Proposed Market Cap      Per share

12.000 msek        463                            12,463                    23 sek

20.000 msek        463                            20,463                    38 sek

28.000 msek        463                            28,463                    53 sek

Maybe it is time for many Nordic health care analysts to take a closer look at what is at hand. Healthcare analysts in other market are not to blame. Index is small also with a 10x EV change. In the global market these kind of “arbitration opportunities” do not exist for long.

Another exercise is to look at it this way: if you last Friday had the view that both Arena and Index were correctly valued (which Index was not in our view). Considering the bid value of Arena had 100% premium just by valuing Index’ enterprise value with the same premium, the price of the Index share should mathematically be increased by 30-35%, i.e. to around 2 sek, all other things being equal (ceteris paribus). No reaction whatsoever in the market on Dec 14 and 15 – not even the company is informing the market!

Now Index is grossly undervalued – period! This can also be recognized when looking at some peer valuations in the Swedish market: (which traditionally is lower valued than the Norwegian market which often is lower than the US market – Biotech’s in Denmark are often smart and list themselves directly in the US which seldom Swedish biotech do)

Present Peer valuation (15 dec 2021)

              Mcap    Cash   EV

Synact     3245    44      3201       Phase 2     -One clinical object, claiming broad use

Isofol      1457   421     1036       Phase 3     -One clinical object

Egetis     1170   173       997       Phase 3      -Two clinical objects

Index        820   463       357       Phase 3      -One clinical object

One can really question why Index is valued so incredibly low in relation to peers. In relation to Synact the same applies to Egetis and Isofol. Does the valuation of Synact reflect Danish main owners and a Danish CEO?

When the valuation gap in Index close??? Our belief is that the market will correct this over time in the coming years, maybe in steps as follows;

Wave 1 - increase to 1.90 - 2.00 kr         Pretty soon

Wave 2 - increase to 3.40-3.50 kr           Around q2- 22

Wave 3 - increase to 8-20 kr                   During h1-23

M&A transaction in the range of 25+ kr  2023/24 if Phase 3, part 1 results are good              

In any case,

The share price today is 1,50 sek

The downside in the Index share is very low today

The upside within reach is way over 10x!!!

With such leverage even a small investment can grow very large in 1-3 years


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