Key figures from the Q4 report:

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

We conclude that the financial report came in as expected. IRLAB has displayed a relatively steady burn rate of SEK40m in OPEX, indicating that their operational costs are well-controlled. We also anticipate that their expenses will continue to maintain stability throughout 2023, primarily because the Pirepemat trial is fully underway, and the Mesdopetam trial has reached its final stages. Our assessment of IRLAB's financial standing leads us to affirm that their cash position remains stable and is sufficient to last at least 12 months, providing the organization some stability in the near- to midterm. Following the added uncertainty after missed primary endpoint with Mesdopetam, we now push a potential milestone payment into 2024.

In January, Irlab presented top-line data from its phase IIb trial with candidate mesdopetam in Parkinson’s disease levodopa-induced dyskinesia, a common side effect from today’s standard of care (Levodopa) that results in involuntary movements. The share price reaction was clearly very negative (down roughly 75% since) and the fate of Mesdopetam has since been in limbo. We participated during yesterday’s Q4 call and conclude that management maintains a positive outlook regarding the drug's efficacy signal and its future prospects, citing the strong outcome in secondary endpoint, namely the UDysRS scale, the good safety profile and the dose-dependent signal. More data will be released during medical conferences during H1. The management also cites the approval of Gocovri and that Mesdopetam would fulfill the same criteria. During the call, management stressed that the purpose of a phase IIb trial is to find an optimal dose and show continued safety, and thus that this was fulfilled. Despite this, due to the primary endpoint being missed, the company's internal perspective is that the trial should be classified mainly as a phase IIb study, rather than being regarded as one of the anticipated two pivotal trials. This shift in perspective may necessitate the need for two additional pivotal trials to secure full approval, potentially leading to increased development costs for partner Ipsen. Consequently, we assert that the efficacy signal within the complete data package needs to be robust to justify a favorable risk-reward ratio for further development. Currently, we have retained Mesdopetam within our valuation; however, we have revised our timelines based on our assumption that two pivotal trials will be required for approval. Additionally, we have postponed the (risk-adjusted) milestone payment until 2024, increased the risk-adjustment and removed the label expansion into PD-psychosis. We reiterate that there is a lot of variability in outcomes and that we will continuously revise our estimates once we know more about the full data.

Summary of the results:

The trial (n=156 randomized, n=125 treated) evaluated three doses of mesdopetam: 2.5mg, 5mg, and 7.5mg (twice a day) for 12 weeks. In the trial, mesdopetam failed to show a statistically significant treatment effect compared to the placebo group in the primary endpoint, which was the change in daily hours of ON-time without troublesome dyskinesia assessed with patient diaries. We do not know the effect size nor the p-value (ie statistical precision) at this stage, and the only information we have is that the numerical trend was in the right direction. We note that the study was quite well powered given a similar effect size as in the phase IIa trial of 2.7 hours of additional good on-time (90% power at 3 hours good on, 80% at 2 hours), which could indicate that the effect size was relatively small. Still, again, it could be out of chance as well.. We argue that until we see additional data, it will be difficult to assume too much about this endpoint.

In one of the secondary endpoints, the modified UDysRS scale (1,3 and 4), mesdopetam showed a statistically significant treatment effect from week 4 (p=0.045), week 8 (p=0.004) and week 12 (p=0.026) and forward in the 7.5mg dose. We think that it is positive that the effect was sustained throughout the study period, which increases the chances that the observed signal was not purely out of luck. As we previously noted, the modified UDysRS is an established endpoint containing objective and subjective measures and has also been used as a pivotal endpoint. Irlab also states that a numerical dose-dependent decrease in off time was shown that favored the 7.5mg dose and that mesdopetam did not change the normal motor function in the study, as measured by MDS-UPDRS part II, which was positive. Irlab also reports that mesdopetam is well tolerated and that the safety was overall good – a positive confirmation given the safety issues of competing drugs.

Recently, an announcement was made regarding the replacement of the former CEO, Richard Godfrey. Gunnar Olsson, who previously served as the chairman, has been appointed as the interim CEO, while Carola Lemne has taken over the role of chairperson. In the call held yesterday, it was disclosed that the board had arrived at this decision due to different views on leadership style and not because of the mesdopetam readout. Therefore, our comprehension is that the change was unrelated to strategic decision-making. We believe that the year ahead will be crucial for the company to regain investor confidence, share and explain the full mesdopetam data, and maintain the relationship with Ipsen and also potential future partners. Therefore, it is crucial to have a management team that can effectively prioritize these critical tasks. We find solace in the fact that the board has prioritized appointing a suitable CEO who can fulfill these responsibilities, as was we feel was affirmed during the call.

Earlier this month, Irlab updated the market on the timeline for its second clinical program, Pirepemat, that addresses falls and postural instability related to Parkinson’s disease. In the release, the company stated that recruitment had been slower than anticipated but that it was currently taking actions to address this. 28 of 39 clinical sites are active in 5 European countries, and the company expects recruitment to be finalized by the end of 2023, leading to top-line data in H1 2024. We will return later on with a more thorough view of our expectations. We want to reiterate that pirepemat is a standalone asset, and that our view has not been affected following the missed primary endpoint with mesdopetam. Given today’s valuation, we argue that investors have low expectations and only price in the company’s net cash and a 15% likelihood of approval for pirepemat, which we argue is too conservative. It appears that several institutions have sold shares in January. This may have exacerbated the negative reaction in the share price further, we argue. The company also guides that the preclinical candidate IRL757, targeting apathy, will be ready to start a phase I study by YE 2023 and that IRL942, targeting cognition, will be phase I ready by H1 2024. Furthermore, we are also interested to learn more about Irlab's P003 project, where a a drug candidate was nominated earlier this year, IRL1117. Irlab guides that the drug candidate will be tested further in the pre-clinical stage and that phase I-enabling studies will be commenced in 2024.

We largely reiterate our view of IRLAB from earlier this year (see here), where we lower our base case significantly, but do some housekeeping (adjust FX; adjust our WACC due to a change in our Redeye Rating) and push the pirepemat timeline somewhat due to the updated timeline. This leads to an updated base case of SEK45 per share. Following the CEO change, our quality rating is under review and we will return once we learn more about the new management team. We stress that there is a lot of variability in the outcome of Mesdopetam, which is further demonstrated using our bear- and bull case of SEK20 and SEK95, respectively. In our bear case, we remove the value of mesdopetam completely and base our valuation on Pirepemat. In our bull case, we assume that Ipsen will start a phase III trial in H2 2023 and include an initial PD-psychosis valuation again. We will return with a more extensive review of our estimates later this spring, hopefully after some additional mesdopetam data.