Comment on PEG’s Q1 Report for 2024

Pharma Equity Group (“PEG” or “the Company”) published its Q1 report for 2024 on the 16^th of May, 2024. The following are key events that we have chosen to highlight in the report:

• Continued Progress in the Clinical Development
• Strengthened IP-Portfolio
• Cost Base in Line with Q4-23
• Legal Actions Have Been Taken to Redeem the Receivable from Portinho S.A.
• The Financial Position is Currently Strained

Further Progress of the Clinical Development

Following the end of the quarter, PEG announced that the Company’s subsidiary, Reponex Pharmaceuticals A/S (“Reponex”) has received positive final results from the Phase II clinical proof-of-concept trial of the drug candidate RNX-051, also referred to as the MEFO study. Reponex’s management concludes that its patented medicinal product RNX-051 is highly effective for its intended purpose. Just a single local application drastically reduces tumor-associated biofilm and can even totally eliminate the cancer-promoting Fusobacterium nucleatum in the tumor one week after the treatment. Analyst Group assess that the positive results obtained from the Phase II study are a further demonstration from Reponex that the clinical development is progressing according to plan.

Granted Patents RNX-051 and RNX-022

In Q1-24, Reponex received notification from the EPO regarding the decision to grant the patents for the indication colorectal cancer (RNX-051) as well as drug compositions for promoting the healing of wounds (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.

Cost Base in Line with Previous Quarter

Comparing the first quarter of 2024 with the corresponding period in 2023 would be misleading, since 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 Q1-24, the Company’s operating costs totaled approx. DKK 6.8m, which is in line with the previous quarter (Q4-23). Breaking down the OPEX more in detail, it’s evident that the R&D costs have decreased by 18% Q-Q, while the administrative costs have witnessed a sequential increase of 15%. Hence, PEG maintains a solid cost base Q-Q, and the increase in administrative costs was anticipated, given the reinforced management, administration, and investor relations communications activities. PEG maintains the Company’s guidance for the full year 2024, with EBT expected to be in the range of DKK -24 to -29m (excl. potential gains/losses related to the Portinho receivable).

Receivable from Portinho S.A.

At the end of Q1-24, the receivable from Portinho S.A. was valued at DKK 58m on the balance sheet, similar to the end of the previous quarter. Following the end of Q1-24, PEG filed a summons with the Maritime and Commercial High Court against Portinho S.A. for the recovery of the receivable of EUR 9.55m plus interest, equivalent to EUR 10.8m or DKK 80.5m. Analyst Group has not factored in the receivable in the valuation of PEG and views this as an option which, if redeemed successfully, could be of significant importance to sustaining the Company financially and providing additional upside to the valuation.

Financial Position

The Company’s cash balance at the end of March 2024 amounted to approx. DKK 2.2m, a decrease compared to approx. DKK 4.2m at the end of Q4-23. PEG has shown an operational burn rate of approx. DKK -7.8m during Q1-24, equivalent to DKK -2.6m/month, marking a substantial increase from the previous quarter’s monthly burn rate of DKK -1.3m. While the drastic increase in burn rate seems alarming at first glance, it’s worth mentioning that the changes in NWC amounted to DKK -0.3m during Q1-24, compared to a positive DKK 2m in Q4-23. Additionally, the Company received approx. DKK 1.9 in corporate tax refund during the previous quarter, which typically occurs in the final quarter each year. Hence, as the working capital cycle has a fluctuating pattern, the effect often smooths out over the year. The average monthly burn rate LTM amounts to DKK -1.7m, which, according to Analyst Group, gives a more representative picture of the underlying burn rate.

The Company has strengthened the balance sheet further with DKK 8.4m in convertible loans subscribed for and paid to the Company during Q1-24. This has resulted in an increased net debt position, amounting to DKK 36.6m at the end of March, compared to a net debt of DKK 25.5m at the end of Q4-23, marking an increase of DKK 11.1m in absolute terms. PEG has an unused credit facility amounting to DKK 10m, which could further strengthen the Company’s liquidity position. While revenues are expected at the earliest in 2025, and hence a negative cash flow until break-even is reached, it’s crucial to have a sufficient liquidity position to be able to act opportunistic, when necessary, for example, regarding clinical development and examining options for licensing agreements. Thus, following the end of the quarter, the Company announced that PEG is exploring the possibilities of strengthening the Company’s working capital through a capital increase to market price, which could occur following the extraordinary general meeting scheduled for June 3^rd, 2024.

With the latest reported cash position (DKK 2.2m), unused credit facilities (DKK 10m), and an estimated monthly burn rate of DKK -2m, Analyst Group estimates that PEG’s financial position is sufficient to finance the Company until the end of Q3-24, all else being equal. The elevated burn rate, compared to the average burn rate LTM of DKK -1.7m, takes into account PEG’s estimated rise in costs during the forthcoming year due to further clinical progression and higher personnel costs following the recruitment of key personnel. Given the aforementioned, Analyst Group deems it likely that PEG will pursue some form of capital increase in the coming quarters to further strengthen the liquidity position.

In conclusion, PEG shows continued progression in its clinical development, with positive final results from the clinical Phase II proof-of-concept trial of the drug candidate RNX-051 marking an important milestone. Additionally, the quarter is characterized by a further strengthened IP portfolio, with crucial patents obtained in key markets. The operational cost base was in line with the previous quarter, and Analyst Group expects to see a slight increase in OPEX going forward, as the company takes further steps in clinical development and recruits critical personnel to accelerate the journey towards lucrative licensing agreements. The convertible loans obtained during the last few quarters have been crucial in sustaining the Company financially, but the loans have also increased the net debt position quite substantially, thereby contributing to increased financial risk. Hence, the financial position is currently strained, and the possibility that the company must pursue some form of external capital raise to strengthen the financial position further cannot be ruled out. Looking ahead, we will monitor the progress of further results in regards to the Company’s drug candidates, as well as the upcoming decision from the European Medicines Agency (EMA) on approving PEG’s pouchitis treatment (RNX-041) for orphan drug designation. Additionally, hiring key personnel with valuable experience could accelerate the path toward licensing agreements, which serves as a near term trigger.

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