In the second quarter, Amniotics obtained the approval to start a phase I/IIa trial in Covid-19 in the UK and Sweden. We commented on this in a research note. Amniotics also published results from an earlier pre-clinical trial in lung transplantation in pigs, which we commented. The results were very strong, as no transplanted lungs treated with PulmoStem had injuries (n=6), while all non-treated (n=6) lungs were injured, most (n=5) of them highly so with primary graft dysfunction grade 3. The company entered into a short-term loan arrangement of SEK 15m to finance this years activities, which we also commented. The company came out of Q2 with a cash position of SEK 29m. Furthermore, pre-clinical results demonstrated that CogniStem, Amniotics' second candidate, can reduce chemotherapy-induced hearing loss and neuropathic pain, which is a big problem with many cancer treatments. It can lead to dose reductions or even a cessation of treatment. Consequently, there is a large unmeet need for new treatments that can reduce or prevent this.

Amniotics has announced a new focus on NK (natural killer) cells in cancer. Amniotics has a method to produce NK cells from hematopoietic stem cells. Most cell therapies in cancer focus on T-cells. NK cells are another type of important immune cell that is an integral part of the immune system's defence against cancer cells. They can kill cancer cells at an early stage before they develop into tumors. It represents a promising therapeutical area with less competition than T-cell therapies (primarily CAR-T therapy). This is a comparatively early stage project that will have to pass through pre-clinical development. We do not include it in our valuation yet. The company will also continue its focus on PulmoStem.

We have made some changes to our forecasts of PulmoStem’s three indications. Firstly, we have changed our valuation methodology for Covid-19 and ARDS slightly. We now assume much lower sales for PulmoStem in Covid-19, as the latest types have had much lower death and hospitalization rates than the alpha variant. We have modelled a decreasing hospitalization rate that approaches that of influenza by 2030. We assume a similar regulatory pathway for Covid-19 and ARDS, as the pathological changes are similar. For valuation purposes, we now assume a licensing deal for both Covid-19 and ARDS and simply add sales in both indications. The indication of the license could potentially be ARDS due Covid-19 or any other cause. Now, we assume most sales will be in traditional ARDS, with some additional sales coming from Covid-19 treatments. The overall effect is a decrease is in the project valuation of around SEK 90m.

We have adjusted the pricing (higher) and patients treated (fewer) in lung transplantation on the basis of new market information. We have increased the LOA slightly, to 21% (19%), after having seen the strong data in transplantation of pig lungs. We have assumed a later launch date in 2029 (2027). We have lowered our price assumptions in IPF in the USD and raised them slightly in the EU. We have assumed a later launch date in 2030 (2029). The later launch dates lead to lower project valuations in both cases. We also reduced overhead costs slightly.

The above adjustments together lead to a decrease in our base case of around 23 percent, which mainly is due to our revaluation of the Covid-19/ARDS project and later assumed launch dates in lung transplantation and IPF. This delay is largely due to the poor situation in the capital markets, which means the company will likely have access to less funding to accelerate its pipeline than we assumed in our initiation of coverage. Another major factor in the reduction is that we now assume more dilution due to share issues, as the share price has decreased. This leads to an additional decrease of around 23 percent in our base case. Our new fully diluted Base Case is SEK 12.

The dilution effect is very large, as without an assumed equity issue, our Base Case would be SEK 25.

Our new fully diluted Bull Case is SEK 25. We have also updated our Bear Case to reflect a potential real-world worst-case scenario. We believe this would represent the failure of PulmoStem in Covid-19 and similar indications, like IPF, the value of which we consequently set to zero (previously we only set Covid-19 to zero). We only maintain lung transplantation, as the preclinical data are very convincing, and CogniStem. At the same time, we reduce overhead and shared costs with a third due to the decrease in programs. This leads to a new Bear Case of SEK 3.

We revisit our peer valuation table from our initiation of coverage, looking at changes in enterprise value (rather than market cap in order to account for different cash positions and loans). This comparison does not take into account changes in values due to clinical development successes or failures. We use a constant exchange rate, as of October 2021.

The average EV in 2021 was USD 108m. Now it is only USD 63m. This is a decrease of 38 percent. The median EV has decreased by 54 percent. As a comparison, Amniotic’s EV has decreased by 52 percent. This change is driven by a falling share price and decrease in cash position.

The perhaps closest peer in this list, Xintela, has seen a decrease in its share price from SEK 2 to around SEK 0.5 in the wake of a rights issue announced in May this year. Amniotics traded at around SEK 12 at the beginning of October last year, and now at around SEK 5. Amniotics trades at a depressed valuation, but the decrease has been in line with its peers. The decrease has clearly been driven by macroeconomic factors to a large degree.