Lipum: Raises SEK 39m Through Directed Share Issue

Research Note

2022-09-23

07:30

Redeye leaves a comment following Lipum’s announcement yesterday evening of a directed share issue of approximately SEK 39m.

KS

Kevin Sule

In anticipation of the upcoming phase I study with lead candidate SOL-116, Lipum announced late yesterday that the Board of Directors had resolved on a directed share issue to anchor investor Flerie Invest AB and “certain other existing and new investors with pronounced long-term interests in the Company”. The directed issue comprises 2,601,732 new shares at a subscription price of SEK 14.99. Correspondingly, this will cause a dilution effect of approximately 34% for current shareholders not participating in the offering as the total number of shares will increase from 5,052,492 to 7,654,224.

The subscription price corresponds to the volume-weighted average price (“VWAP”) of the company’s share during the last 10 trading days preceding the Board of Directors’ resolution on the share issue. Accordingly, the offer does not entail any discount compared to the quoted value of the share. Instead, the price entails a 6.3% premium compared to yesterday’s close (14.10). Through the share issue, Lipum raises approximately SEK 39m before the deduction of transaction costs. The proceeds are primarily expected to be used to finance the phase I study and for extended pre-clinical studies of the SOL-116.

Given the stage the company is in and the current market conditions, we judge this capital raise as truly impressive. As we previously explained, the company was in need of some additional cash and we predicted that a capital raise would take place before the end of the year. However, doing so without imposing any rebated subscription prices is a true testament to the management’s executive abilities and the company’s solid ownership base. The continued support from Flerie Invest reiterates its long-term belief in Lipum as Flerie Invests has committed to subscribe for shares corresponding to approximately SEK 25m (64% of share issue) and will become the largest shareholder in Lipum (28.3% of outstanding shares).

Overall, we are pleased Lipum can proceed through upcoming key inflection points according to plan and believe that this proposed capital raise creates long-term value for its shareholders. Following the directed share issue, we slightly adjust some estimates in our valuation model. However, given that the conditions of the share issue were very much in line with our expectations (see our initiation coverage), it does not alter our fair value range.

Lipum - Valuation (New)

Source: Redeye Research

We reiterate our Base Case proposition of SEK 22 per share.

Case

Potential to satisfy market need

Lipum has its sight set for the multibillion dollar rheumatoid arthritis (RA) market with the aim of providing a new first-in-class treatment to a population in need of a paradigm shift. RA continues to be one of the largest pharmaceutical markets globally, yet, despite the vast number of approved drugs, the medical need remains high as no drug has been able to achieve disease-free remission. The demand for cost-effective and safe treatments is glaring as current standard of care entail multiple side-effects and lack efficacy in a significant part of the patient population. However, we believe that Lipum’s lead candidate, SOL-116, has the potential to eradicate this discrepancy and offer a resolution-based therapy. The candidate has a unique mechanism of action (MOA), targeting the previously-overlooked BSSL protein, suggested to play a central role in inflammation and inflammatory response. Should SOL-116 prove a good safety profile and repeat the efficacy shown in preclinical studies in the upcoming phase Ia/Ib clinical trials, we believe that it is well-positioned to attract interest from the public and catch the eye of large industry players.

Evidence

Establishing a platform to broaden pipeline

Lipum is simultaneously establishing a platform of preclinical data on the therapeutic effect of SOL-116 in several other diseases of interest, which could lead to the discovery of further potential indications. The list of viable chronic inflammatory diseases and proinflammatory conditions can be made long given the candidate’s potential in both autoimmune and autoinflammatory illness. The company continually evaluates the indications and carries out selections for in-depth preclinical studies.

Supportive Analysis

Preclinical studies performed by founders Prof. Olle Hernell, prof. Lennart Lundberg and prof. Susanne Lindqvist demonstrated strong support of BSSL being a key player in the inflammatory process and disease development of arthritis. The researchers used a Collagen-induced arthritis (CIA) model in rodents – a commonly used experimental model to reproduce the pathogenic features of human RA – to compare the response in BSSL wild type (BSSL-WT) mice with BSSL-deficient ‘knock-out’ (BSSL-KO) mice. In two consecutive trials, they found that BSSL-KO mice were significantly protected from developing arthritis, suggesting a direct correlation between BSSL levels and disease development. Moreover, they also found that injection with BSSL-neutralizing antibodies (similar to SOL-116) reduced both the incidence and severity of arthritis in rodents.

Challenge

Unproven target

SOL-116 targets the BSSL protein, which is an unproven target in previous biopharmaceuticals. While showing great promise in preclinical models, there is no guarantee that the enzyme is an effective target in humans as well. However, the fact that SOL-116 is developed as a monoclonal antibody, as are the current biological disease-modifying antirheumatic drugs (TNFα-inhibitors), could prove to be an advantage when it comes to clinical implementation in patients.

Challenge

Highly competitive market

The market for RA is one of the world’s most competitive markets within the pharmaceutical industry – with many drugs approved, or under development, and an established treatment protocol. Should SOL-116 fail to show substantial safety or efficacy benefits over today’s established treatments, it may struggle to gain meaningful market share even if it receives marketing authorization.

Valuation

Long-term value potential

Our Base Case fair valuation amounts to SEK 22 per share, suggesting some 30% upside from today's share price levels. Further, our Bull and Bear Cases equal SEK 35 and 5 per share, respectively. We argue that the share trades at a discount to its fundamental value and offers an attractive entry point at current levels. We foresee an exciting 2022 and beyond for Lipum as lead candidate SOL-116 enters clinical studies. Primarily, we judge that interim- and top-line data from the phase Ia/Ib studies and in-depth preclinical data on further indications could induce share price re-ratings.

People: 3

We view the company's management and board as competent, and we believe shareholders can be confident in its executive and strategic abilities. Despite being small, the management team is dynamic and experienced. CEO Einar Pontén has “done it before”, having been co-founder and CEO of chromatography company SeQuant AB for more than 10 years, as it was acquired by pharmaceutical giant Merck.

Business: 3

Lipum is a biotech company in research and development stage. Consequently, the company is yet to register any recurring revenue. Instead, the company is highly dependent on capital markets for near-term funding and potential licensing partners for future late-stage development. However, we argue that the future sales potential for SOL-116 is significant as our sales model estimates global annual peak sales of more than USD 600m.

Financials: 1

The company is in need of capital to carry on operations until completion of phase Ia/Ib trials with SOL-116. Accordingly, Lipum has stated that it intends on raising capital later on this year.  

Disclosures and disclaimers

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