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

The report in itself was no surprise as IRLAB continues to have a relatively stable cost base, with OPEX at SEK-37.6m, despite, in our view, a relatively significant program of activities. Most notably, the company has the ongoing Pirepemat phase IIb study, expected to be completed in Q3 2024, and preparations for the phase I trial with IRL757 (expected to be initiated this quarter). The company’s cash position amounted to SEK73m at the end of the quarter.

Looking forward, the company has a few different sources of income/funding: It has already received some SEK3m (out of USD2m) for the phase I IRL757 trial from the Michael J. Fox Foundation and can draw an additional SEK25m from its Formue Nord loan facility, contingent upon the company’s market cap exceeding SEK550m between the 22nd of May and 22nd of August (which we expect). Furthermore, most notably, IRLAB announced a development agreement with MSRD/Otsuka regarding IRL757. MSRD/Otsuka has previously evaluated IRL757 and IRL942, and this agreement confirms the company’s continued interest in the compound. The development collaboration with MSRD/Otsuka will cover the development cost for the duration of the agreement.  IRLAB will receive USD3m in an upfront payment and may receive up to USD5.5m in milestone payments, which we guess could come relatively fast (potentially partly/fully this year). In return, MSRD/Otsuka “has the opportunity to elect to expand the collaboration upon the occurrence of certain triggering events, subject to negotiations of a new agreement. MSRD might also, if the parties do not expand the collaboration, under certain circumstances receive low single-digit percentage royalty payments”. In other words, the company can still negotiate with other companies for a full licensing agreement.

In the report, IRLAB mentions that “"All in all, our assessment is that the deal with MSRD provides the conditions to run the business without additional capital injection, well past a potential licensing deal with mesdopetam and past the topline data in the Phase IIb study with repeat” and the company further confirms this potential during the conference call, saying that the combination of the additional Formue Nord loan and milestone payments (“if they click in”) should give the company a runway substantially into 2025. We estimate that the company should have a cash runway into/mostly through Q4 without additional milestone payments related to IRL757 or a licensing agreement related to Mesdopetam. However, we expect the company to secure additional cash before that either way. In other words, we think that the company’s actions and communication show confidence that it can avoid a significant and dilutive rights issue and, overall, secure a licensing agreement soon.

We are encouraged by the development as IRLAB has secured non-dilute funding to take IRL757 through clinical proof of concept/signal effect studies in apathy related to Parkinson’s and Alzheimer's (we assume it to be phase Ib/IIa). As we understand it, IRLAB thus has the program financed through proof-of-concept and received additional cash for its other programs while retaining the program in-house —in our view, clearly positive news and further validation of IRLAB’s pipeline—that now extends beyond Parkinson’s disease, which clearly shows the optionality in IRLAB with its ISP platform. Apathy is a significant issue in both diseases, with an occurrence of 20-70% in Parkinson's patients, and tends to increase as the disease progresses, and 34-59% of Alzheimer’s patients, according to the company. This aligns with some studies we have read (for example, on Alzheimer's and Parkinson's). Apathy is described as " a lack of interest, enthusiasm or motivation”. It has a significant negative effect on the patient's quality of life, and it could also interfere with the management of Parkinson's disease.

Still, despite its magnitude from a patient perspective, IRLAB's approach is new in its targeting and overall going specifically for apathy (according to our understanding). We have previously included an indicative valuation of IRL757 and IRL742. Following the announcement of the Otsuka/MSRD deal, we have made some adjustments, especially removing development costs until phase IIb and including the upfront payment and milestones. We currently treat apathy as one indication in our model. Still, once we know more about the timeline and the MSRD/Otsuka-funded trials, we will potentially separate it into Parkinson’s and Alzheimer’s-related apathy, as we would assume that the company would need separate labels. As apathy is relatively common, we take a relatively conservative approach to market share (15%) until we know more about the key addressable population. We also raise the likelihood of approval to 10% (7%) as the company is approved to start the phase I trial. We will revisit and dig deeper into the indication of apathy soon - we also hope to learn more about the company's strategy related to the indication. From the conference call, we learned that an effect study (phase IIa/IIb) would be relatively similar in length to the company's studies in PD-LIDs and PD-falls.

We will also separately include IRL942 (and IRL1117) in our valuation once the drug candidate is approved for clinical trials, likely later this year or early 2025. We expect the company to await additional funding or a deal before initiating this trial.

We are overall encouraged by IRLAB's progress and think that the management execution has been strong lately, successfully navigating Mesdopetam through the end-of-phase II meeting and securing non-dilutive funding through the Formue Nord loan and IRL757 collaborations, and thus extending the cash runway through important value inflection points. The most significant next step is a licensing agreement with Mesdopetam, which would be a significant relief and be the final step to take IRLAB into phase III. We risk adjust a licensing agreement related to Mesdopetam and a phase III start(60% likely) and will thus raise our valuation significantly if the company lands a licensing agreement on par with our assumptions (USD9/300m). Following the IRL757 deal, we have modified our assumptions (discussed earlier in the update) and reduced the assumed capital need (to SEK80m), as we still remain a bit conservative until we know more about the timing of the IRL757 milestones. We raise our base case to SEK40 (35) per share.