The Q1 2024 report came in mostly in line with our estimates, although the deviations are irrelevant in absolute amounts.

We have previously commented in detail on the cash position, which ended the quarter at SEK0.7m. However, with the announcement of the rights issue, which is guaranteed to bring in at least SEK14.3m in gross proceeds (guarantee commitments + subscription undertakings), these discussions are not especially interesting anymore. With an estimated cash position of SEK14.1m by the end of Q2 2024e (we will comment on our assumptions related to the rights issue in the next section of this update), the quarterly burn rate of SEK1.2m-SEK1.5m is likely to suffice for at least 24 months, providing the company with ample time to pursue a licensing deal.

The main event in conjunction with the report was naturally the rights issue, which amounted to SEK28.6m in gross proceeds. Assuming full subscription, the company will receive net proceeds of SEK25m, where the issue costs are SEK3.5m. In addition, the company will pay cSEK0.1m in fees and interest for the bridge loan of SEK2m that will be taken to cover the period until the capital from the rights issue reaches the company’s books. The bridge loan will be repaid immediately after receiving the proceeds.

The subscription price is SEK0.07 per share, which is a discount of approximately 67% compared to yesterday’s closing price. As mentioned, the dilution will be c58% in the case of full subscription.

We don’t assume that the rights issue will be fully subscribed, given the continuously challenging climate for Swedish biotech. For our valuation, we model net proceeds of SEK15m, which should cover the company’s burn rate for the coming 24 months. Our estimates correspond to a subscription rate of c60% (50% is guaranteed) and a dilution of c45%.

The rationale behind the rights issue is the progress made with regard to the US patent, where the company expects the patent application to be approved within the coming months. For a potential partner, patent protection is naturally a big deal, especially in the US. Consequently, prolonging the runway in order to explore these opportunities seems worthwhile. Furthermore, it was stated in the report that the company has had deepened discussions with a potential partner for the project during the first quarter of 2024. Although the initial plan didn’t end up working, the potential partner is still interested in co-financing a phase III study, which can be an important part of securing a deal.

Given the new information provided in the report, we argue that extending the cash runway is a sensible decision.

As Respiratorius has no ongoing studies and the primary focus is a licensing deal, the general sentiment on the biopharma deal market is a data point of primary interest. By taking a step back from the rights issue at hand and looking at the current state of venture totals, we can see that there seems to have been an uptick in activity during Q1 2024. The data is based on information from JP Morgan’s quarterly report covering the global biopharma deal market.

This uptick in activity is mirrored in the number and total deal value regarding IPOs. Both data points rebounded following a weak end to last year, and the total value surpassed the local high from the third quarter of last year. There is usually a lag between an uptick in activity in the US market spilling over into the Nordics, but there seems to be some activity picking up here as well. For example, Flerie Invest stated its intention to go public through a reverse merger just a couple of days ago, which seems to indicate that investors’ risk appetite is picking up somewhat.

All in all, we argue that the sentiment of the deal landscape seems to be picking up, although we are naturally far away from the highs of the go-go years.

It is worth clarifying that there is no direct causality between these statistics and the likelihood of Respiratorius securing a deal. The outcome in Respiratorius’ case is likely to be determined to a much higher extent by firm-specific factors. Nevertheless, it is always good to have a feel for general investor sentiment when evaluating these parameters.

We make no major estimate changes following the report, but our estimated burn rate is increased somewhat as we foresee costs will increase slightly from the exceptionally low levels seen in the most recent quarters. There is also the usual fluctuation from FX changes in the quarter. Note that our estimated FCF is risk-adjusted for 2025e and 2026e.

We value Respiratorius through a 2023e-2043e DCF model, with a WACC of 17.0% and a 40% estimated likelihood of a deal coming through. Our Base Case valuation is at SEK0.22 (0.40) per share. Our Bull Case assumes 100% deal probability while holding all other parameters constant and remains intact at SEK0.55 (1.00) per share. Our Bear Case assumes no deal and amounts to SEK0.03 (0.05) per share, valuing the company based on its net cash position and recoverable technology value. See the table below for a summary of key aspects of the base Case valuation as of Q1 2024:

The valuation changes are solely an effect of the increased dilution from the rights issue and FX, and we make no changes to our “operational” estimates.