Key figures from last weeks report:

-  The result for the period amounted to SEK 17.5m (-93.7m)

- Operating expenses amounted to SEK 19.5m (-90.5m)

-  Cash and cash equivalents at the end of the quarter amounted to SEK 117.5 (425.7m)

(The numbers in parenthesis refer to the corresponding quarter of last year)

Saniona’s share price development has been poor in recent times, also in comparison to Swedish and US biotech indexes. Initial explanations were outflows from investors following the directed issue in 2020, few major triggers, and increased awareness of the need for additional funding. In 2022, the company announced a restructuring – including two paused phase IIb studies with Tesomet – due to financial difficulties, which caused a very steep fall in the share price. A month later – a new management team was announced, including a new strategic direction, which was overall well received by the market. We note that the share price is getting closer to the levels from before the restructuring – although at this time with a more stable ownership structure as well as a sustainable burn rate. We still think that a licensing agreement is the most significant trigger in the mid-term that could close the gap to earlier levels.

Saniona has a propriety drug discovery engine based on the modulation of ion channels –a well-recognized and validated target, and a foundation for several successful drugs on the market today. Our impression is that Saniona has a strong in-house team with unique competencies and methods – and the result is a library of more than 20 000 proprietary molecules that target different types of ion channels.  Last year, an important milestone was met when Saniona’s first candidate from the platform was taken into the clinic: SAN711 and this year when the phase I trial was finalized. A second drug candidate that has the potential to inhibit inflammation and fibrosis, SAN903, is also phase I ready as of Q3 this year.

Ion channels constitute a unique type of protein that allow and control the passage of charged ions across the lipid membrane that surrounds all cells. These membrane proteins are expressed in all cell types including the central- and peripheral nerve systems. While recognized as a high potential target, ion channels are very heterogenous and thus often seen as difficult – and the result is that most remain unexplored. Saniona’s value proposition is that it has developed “highly selective, subtype-specific, state-dependent ion channel modulators and inhibitors” – including its “ionbase” database – which acts as a backbone for the drug discovery. This is important as the in-house expertise lets Saniona develop modulators selective for a particular ion channel – ie to get the desired effect without affecting other channels (and thus; potentially adverse effects). Furthermore, the company has a defined and at times unique methods that include for example imaging technology, assay design and electrophysiological approaches.

Ion channel drug discovery is complex – but we think that investors should see the platform as an increasingly important part of Saniona’s equity story, that over time will feed the company with additional drug candidates.

The compound is designed as a potential first-in-class positive allosteric modulator of the neurotransmitter GABAA and specifically the subunit α3. GABAA is a target for several drugs, including benzodiazepines such as Valium, which can lead to for example pain relief. Today’s treatments target GABAA more broadly (including subunits α1 and α5) which can lead to unwanted side effects such as sedation, risk of abuse and motoric instability).  The drug candidate was just tested in a phase I study (n=66):

The purpose of the study was to evaluate safety and tolerability, and the secondary objective was to study binding to target receptors (measures by PET).

The drug was deemed safe and tolerable, and most adverse events were mild with the exception of a few moderate events mainly unrelated to drug administration. The company further states that the side effect profile is significantly different from non-selective GABA modulators (which is a core part of the value proposition, we argue). As further indicated by the PET results, the company also reports that a therapeutic level of receptor occupancy (50-72%) may be achieved at tolerated multiple dose levels (0.8mg twice daily).

We mainly assume that SAN711 could be used to treat neuropathic pain, but smaller orphan indications such as trigeminal neuralgia could also be a good target. Given that Saniona’s business model revolves around out licensing – we conclude that the final lead indication will depend on the partner's interest. Saniona has also indicated that a possible next step could be a “basket study” – i.e. a small study aimed to test the compound in several indications. In our base case, we assume that 10-15 patients will be enrolled in this type of study.

Overall, we argue that Saniona’s management team has done the right things lately, and we are overall positive to the fact that the company both has managed to extend its runway somewhat while showed continued progress with its clinical pipeline (SAN711 and SAN903) and preclinical ion channel platform work (epilepsy KV7 program, collaboration with Boehringer Ingelheim, new candidate SAN XXX and joint venture company Cephagenix). We still think that the key value driver in the mid-term will be a licensing agreement, as it would again validate Saniona’s new business development-oriented business model. We think that this is feasible, and Saniona has a very strong track record in this regard, but we still note that licensing agreement are relatively rare in the Scandinavian sector and that timing for both parties must be correct (along with data, target indication etc). The prolonged cash runway, we believe, should give the company some room to finalize at least one licensing agreement.

In March this year, we drastically reduced our base case following a strategic reprioritization and thus pause of its two phase IIb studies with candidate Tesomet due to financial uncertainties. We removed Tesomet in both PWS and HO from our valuation as we did not see a path forward given the very costly clinical program and Saniona’s precarious financial situation. We have now decided to include Tesomet again in our valuation, as we think that the new management team's “back to basics” approach is increasingly credible.

We still think that the company's reputation remains affected, and we for example think that institutional investors may be cautious about investing significantly in the company still (which was an important part of the previous strategy to develop assets in-house). For now, we thus think that a licensing agreement is the most realistic way forward for Tesomet. We also note that there is plenty of additional technology value in the company beyond the assets included in our valuation, including the ion channel platform, SAN903 and the KV7 epilepsy program. We would like to see further steps towards the clinical and additional funding/a licensing agreement before we include these as well, which potentially could be relatively soon. Overall, additional execution on Saniona's business development strategy would likely lead us to raise our valuation further, as it would make us more confident that additional technology value can be realized. We also note that Tesofensine still could be approved in Mexico, but exclude the asset from our valuation at this stage as we have no insight into the regulatory process. We note that further information could be released relatively soon.

Tesomet in HO - Assumptions

Tesomet, we argue, is dependent on a licensing agreement and we choose to stay relatively conservative at this stage and assume that Saniona’s partner will primarily focus on hypothalamic obesity. We model a deal value of USD 120 million with an upfront payment of USD 5 million in 2024. We assume that Saniona will receive 10% in royalties and that Tesomet could be launched in 2028/2029. We keep our previous assumptions on market penetration (50%) and price (USD 250 000 annually in US).

SAN711 in Neuropathic pain – Assumptions

At this stage, we assume a relatively broad use of SAN711 within neuropathic pain and that the next trial likely will be a smaller” basket study”, where the company can look at early efficacy signals in a few different indications to add value to the compound further before out-licensing. We assume a price of USD 5000 initially, given the assumption of a relatively broad use (non-responders to first-line treatment). We assume that the compound will be out-licensed in late 2023 with an upfront payment of USD 8 million and a total deal value of USD 200 million, with a royalty rate of 14%. We will return with a deeper take once we know more about the potential application of SAN711.