Cantargia Q2’22: Low Downside Risk at Present Valuation

Research Update

2022-08-31

10:31

The two main events during and after the second quarter were the positive results from ASCO 2022 and the rights issue. We also discuss Canakinumab's failure in lung cancer and the share's record low market valuation.

Richard Ramanius

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Positive results at ASCO

Cantargia presented a positive update on nadunolimab at ASCO with new results from CANFOUR PDAC, CANFOUR NSCLC and CIRIFOUR, which lead us to increase our Base Case slightly.

Rights issue

The most important event after Q2 was the rights issue of SEK 250m, which was oversubscribed. The guarantor cost of SEK 8m is rather small, though it came at the disadvantage of a low subscription price. Total costs for the issue amount to around SEK 25m. So, the net cash obtained is around SEK 225m. The share has experienced a precipitous decline from the range SEK 15-17 the month before the rights issue, to around SEK 4-4.5 during the last days despite the issue being fully subscribed. However, the investment case has not changed. Now that the issue has been successfully completed, Cantargia is in a healthy financial position, with cash that should last two years. It is financed through several minor and major catalysts this and next year. Having a strong cash position is important, should we enter into a recession this winter, which seems likely.

Canakinumab

During the quarter, interesting new data from canakinumab’s CANOPY-1 trial were presented. After the end of the quarter, canakinumab presented negative topline results in CANOPY-A, which spells the demise of the drug in lung cancer.

Key Financials

SEKm	2021	2022e	2023e	2024e
Revenues	0.00	0.00	0.00	813.8
Revenue Growth	nm.	nm.	nm.	nm.
EBITDA	-370.0	-407.0	-295.0	601.0
EBIT	-370.0	-407.0	-295.0	601.0
EBIT Margin	nm.	nm.	nm.	73.9%
Net Income	-324.0	-400.0	-236.0	601.0
EV/Revenue	nm.	nm.	nm.	-0.1
EV/EBIT	-2.6	-0.8	-1.9	-0.1

Case

Cantargia is approaching a stage when finding a partner is logical

Cantargia is sponsoring several trials in various cancer indications to pinpoint the optimal indications to target and to document the breadth of nadunolimab. If the company can demonstrate good results across these indications—particularly in the upcoming or ongoing phase IIa arms in NSCLC (CANFOUR and CIRIFOUR)—it will reinforce its standing when negotiating a large licensing deal. Upcoming trial results set the company up for a potential large licensing deal in 2024. Cantargia may also choose to continue developing nadunolimab by itself, as two planned placebo-controlled phase II trials in PDAC (Precision Promise) and NSCLC will bring it closer towards the market. After the rights issue in mid-2022 that raised net SEK 225m, Cantargia has a respectable cash position that should last it to mid-2024 and past important catalysts.

Evidence

Cantargia has demonstrated excellent results in CANFOUR in pancreatic and lung cancer

Patients with non-small cell lung cancer (N=30) showed a response of 53 per cent, resulting in a median progression-free survival of 6.8 months and median OS of 13.7 months. In patients with pancreatic cancer (N=73), long-term responses or pseudoprogression have been observed, resulting in a median progression-free survival of 7.2 months and a median survival of 12.7 months. These are impressive results.

Supportive Analysis

Two phase II trials are already planned: • A pivotal phase II/III trial in PDAC in the US with up to 175 patients (plus a control group of comparable size) should be initiated in early 2023, due to conclude in 2027 at the latest. • A phase II trial with a control arm is planned in non-squamous NSCLC in 2023 (the details of which have not yet been communicated).

Challenge

The main risks for Cantargia are negative clinical outcomes...

...which we believe are somewhat unlikely in the short run thanks to the especially robust results already reported in PDAC and NSCLC. However, Cantargia has not conducted clinical trials with a placebo group. Patient conditions can vary substantially between the various trials, leading to widely differing outcomes. There is still a risk that the strong results obtained so far will prove less favorable in placebo-controlled conditions. We have seen other Swedish listed oncology companies that did not show a statistical improvement or had regulatory setbacks in phase II or III studies in 2021-2022 whose share prices collapsed by around 90 percent (e.g Oncopepties, Rhovac and Isofol). This is a risk in the upcoming phase II/III trial in PDAC and the phase IIb trial in NSCLC. Should one study fail, the risk would increase substantially in the other.

Challenge

Additional funding may be needed

Cantargia's planned phase IIb trial in lung cancer might need additional funding, depending on its size etc. Otherwise, the company should be funded to mid-2024. We believe that Cantargia will wait for results from several clinical trials to mature in 2023. Assuming outstanding results, negotiations with a partner might start in H2 2023 and lead to a deal in H1 2024. Additional funding might be needed if negotiation takes a longer period of time. It is also a good idea to have your future development plan funded when you enter into negotiations.

Valuation

Nadunolimab constitutes most of the value

The share price has collapsed following the rights issue of SEK 250m, even though it was fully subscribed, potentially catalyzed by Canakinumab's failure in lung cancer. At the same time, the world economy appears to approach a recession, with a deteriorating capital market. This may put a lid on a potential price recuperation. Still, the valuation is disconnected from fundamentals. You more or less pay for the cash position and get the company for free (though the cash will obviously be spent, eventually). Our Base Case of SEK 25 assumes a deal in 2024, with an upfront of USD 150m, milestones of USD 850m and royalties of 17.5 percent. The valuation is based on a sum-of-the-parts valuation of Cantargia’s indications. We expect nadunolimab to be an immunotherapy with broad application across various cancer types, with most sales in NSCLC and PDAC.

Discussion

For a discussion of the results presented at ASCO, read our note.

Disclosures and disclaimers

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