Analyst Group Comments on PEG’s Year-End Report for 2023

Pharma Equity Group (“PEG” or “the Company”) published its Year-End report for 2023 on the 20th of March, 2024. The following are key events that we have chosen to highlight in the report:

  • Further Progress in the Clinical Development
  • Strengthened Patent Portfolio
  • New Experienced Board Members
  • Increased Cost Base Compared to Previous Quarter
  • Financial Position Bolstered by Convertible Loans and New Credit Facility Obtained in the Beginning of 2024

The Clinical Development Remains on Track

The advancement of clinical development continues, and during Q4-23, the Company announced positive preliminary results from the phase II clinical trial regarding the drug candidate RNX-051, thereby meeting the trial’s primary endpoints. PEG states that the study has shown a mechanism that gives reason to assume that the treatment can be incorporated into future treatments that can prevent the development of cancer from precursors and try combination treatments with other treatments such as immunotherapy or similar cancer therapies. The complete analysis of the study’s results is expected to be presented in early 2024, which serves as a near-term trigger.

Reinforced IP-Portfolio Covering RNX-051 and RNX-022

PEG has continued to make progress in strengthening the Company’s IP portfolio, both during Q4-24 as well as after the end of the period. In October 2023, PEG’s subsidiary, Reponex Pharmaceuticals A/S (“Reponex”), received a US patent grant for a method of treatment using its topical wound-healing composition.

Additionally, during the end of October, the Company received “Intention to Grant” from the European Patent Office (EPO) for both the wound healing candidate, RNX-022, and the candidate addressing colorectal cancer (RNX-051). In Q1-24, Reponex received notification from the EPO regarding the decision to grant the above-mentioned patents (RNX-051 and RNX-022), with validity extending until 2035 and 2039, respectively.

These milestones are critical in PEG’s IP and out-licensing strategy, as they provide legal protection for the Company’s drug candidates and serve as valuable assets in discussions with potential licensing partners. For a more in-depth comment on the granted patent regarding the drug compositions for promoting wound healing (RNX-022), please read our comment here.

Board Strengthened by Two Experienced Members

During the fourth quarter of 2023, the Company’s Board of Directors was supplemented by Omar S. Qandeel and Martin Engell-Rossen, two highly qualified members with extensive experience in, among other things, finance, international relations, and investor communication. Omar S. Qandeel’s focus will be on securing financing from investors and supporting the Company’s commercial expansion into new markets, including the Middle East and Asia, while Martin Engell-Rossen’s primary focus area will be to ensure positioning and investor communication. Both Omar and Martin are expected to contribute positively to the overall strategy and communication efforts, leveraging their experience and broad networks to open doors for potential licensing partners.

Sequential Increase in the Cost Base

In the past, PEG’s reports showed the Company’s standalone operations. However, since Reponex is recognized as the accounting acquirer, PEG’s past financial results won’t appear in consolidated figures before March 24, 2023. Hence, comparing the fourth quarter of 2023 with the corresponding period in 2022, or the full year numbers, would be misleading, primarily because Q2-23 marked the first full quarter in which both Reponex and PEG’s numbers were consolidated. Therefore, Analyst Group will emphasize the sequential development.

During Q4-23, the Company’s operating costs totaled approx. DKK 6.8m, representing an increase of 20% compared to the previous quarter (Q3-23) and approx. DKK 1.1m in absolute terms. The increase in OPEX is attributed to higher R&D and administrative costs, which increased by 26% and 15% Q-Q, respectively. As PEG’s clinical work progresses, the development costs increase, attributed to a strengthened development organization and intensified partnerships with hospitals and other external partners. The sequential increase in administrative costs during Q4-23 stems from reinforced management, administration, and investor relations communications.

A write-down of DKK 4.4m attributed to the Portinho S.A. receivable had a negative impact on the fourth-quarter results; however, it did not affect the cash flow. The earnings before tax (EBT) in Q4-23, adjusted for the Portinho write-down, amounted to approx. DKK -9.4m, and DKK -22.4m for the full year of 2023, slightly higher than the Company’s guidance range for 2023 of DKK –18-22m. PEG is guiding for an EBT within the range of DKK between -24 and -29m during the full year 2024 (excl. potential gains/losses related to the Portinho receivable).

Financial Position

The Company’s cash balance at the end of 2023 amounted to approx. DKK 4.2m, an increase compared to approx. DKK 1.5m at the end of Q3-23. After the end of Q4-23, PEG announced the decision to issue convertible loans, which were fully subscribed, thereby bolstering the Company’s balance sheet by a total of DKK 16m. Analyst Group views this positively as it enhances PEG’s financial position, which is critical for 1) sustaining day-to-day operations, 2) financing additional R&D investments, and 3) maintaining a stronger position in negotiations with potential licensing partners, which are often capital- and time-consuming.

PEG has shown an operational burn rate of approx. DKK -1.3m/month during Q4-23, marking an increase from the previous quarter’s monthly burn rate of DKK -0.9m. The increase in negative OCF during Q4-23 was mainly due to an increased loss, as well as a lower positive change in net working capital (NWC) compared to the previous quarter.

With the latest reported cash position (DKK 4.2m) and unused credit facilities (DKK 12.6m), coupled with the convertible loans of DKK 8m obtained in Q1-24, and an estimated monthly burn rate of DKK -2.0m, Analyst Group estimates that PEG’s financial position is sufficient to finance the Company until the end of Q4-24, all else being equal. The elevated burn rate considers PEG’s estimated rise in cost base during the forthcoming year, as a result of further clinical progression and higher personnel costs following the recruitment of key personnel.

According to the report, PEG anticipates continuously securing additional convertible loans throughout 2024, where the Company is currently engaged in ongoing discussions with several existing/new investors regarding additional funding in the short-term. Additionally, PEG’s management is strategically developing plans for a more extensive augmentation in the capital and share capital structure moving forward.

At the end of November, PEG provided an update regarding the receivable from Portinho S.A., in which the Company estimated that the receivable will be repaid no later than December 2023, which has not been the case. There is still a lot of uncertainty surrounding the potential redemption of the receivable and the work is still ongoing, with both Danish and Portuguese legal advice involved in the process.

In the Q4-report, PEG states that the Company cannot provide specific commentary on when the receivable could be repaid, but still regards it as realistic that the receivable will be redeemed at some point in the future. At the end of Q4-23, the receivable was valued at DKK 58m on the balance sheet, compared to approx. DKK 64.3m at the end of the previous quarter.

Analyst Group has not factored in the receivable when valuing PEG, and views this as an option which, if redeemed successfully, could be of significant importance to sustain the Company financially and provide additional upside to the valuation.

In conclusion, PEG continues to progress well in terms of clinical development and strengthened IP-portfolio. The cost base is gradually increasing as the Company progresses further into the development phase and recruits’ critical personnel with valuable experience, such as employing a CCO and CMO during 2023. Analyst Group anticipates that the trend of increased OPEX will continue during 2024, which is also evident in the Company’s guidance for the year ahead. However, the financial position requires monitoring going forward, as the current liquidity position is estimated to sustain the Company until the end of 2024. With a more robust balance sheet compared to Q3-24 due to the convertible loans, and enhanced organizational strength from the addition of two highly qualified board members, PEG is well-positioned to advance further along the path towards securing potential licensing agreements.

We will return with an updated equity research report of PEG.