Lytix Q1 2024: Verrica Readout Imminent

Research Update

2024-05-31

14:16

Analyst Q&A

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Richard Ramanius answered 2 questions.

Redeye comments on the Q1 report 2024. The rest of 2024 is funded through the recent rights issue, including the readout of Verrica's phase II study that may change the investment case.

Richard Ramanius

Contents

Investment thesis

Quality Rating

Financial Results

Valuation

Financials

Rating definitions

The team

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Rights issue of gross NOK50m

Lytix raised gross NOK50m in an equity issue that will fund the rest of 2024. With a current pro-forma cash position of around NOK70m, this will fund the company into 2025, past the Verrica readout, the second readout from ATLAS-IT-05 and the start of NeoLIPA (in adjuvant melanoma).

Focusing on earlier stage melanoma

As an investigator-sponsored trial, costs will be very limited fror NeoLIPA. The Norwegian Medical Products Agency approved this study in April. It is a phase II study in neoadjuvant advanced resectable melanoma in combination with pembrolizumab. The first patient will be recruited in mid-2024. The study will take around 18 months with the first readout in H1 2025.

Base case NOK13 (NOK14)

We have removed LTX-315 in later-stage refractory melanoma patients from the base case while maintaining it in our bull case. This has a minor negative impact of around NOK1 per share since we maintain the assumed USD600m deal value and the potential neoadjuvant population is much larger. The readout from Verrica's phase II study in basal cell carcinoma is expected in June. It could change the investment case, potentially making this the most valuable programme. The readout will likely have a major impact on our base case, with an estimated immediate upside potential of around 50% on positive results.

Key financials

NOKm	2022	2023	2024e	2025e	2026e
Revenues	17.3	10.2	6.3	13.0	231.5
Revenue Growth	-33.1%	-40.7%	-38.5%	107%	1678%
EBITDA	-65.7	-96.8	-76.7	-46.8	173.8
EBIT	-65.7	-96.9	-76.7	-46.8	173.8
EBIT Margin	-380%	-2427%	nm.	-413%	75.1%
Net Income	-56.0	-87.9	-76.7	-46.8	173.8
EV/Sales	9.6	36.1	nm.	29.7	0.5
EV/EBIT	-2.5	-1.5	-3.8	-7.2	0.7

Investment thesis

Case

Basa cell carcinoma may become the most valuable project in 2024

Lytix is developing unique first-in-class oncolytic molecules with little competition in its class. An ongoing phase II of LTX-315 (ATLAS-IT-05) with melanoma patients who progressed after treatment with checkpoint inhibitors has recruited 20 patients who are given LTX-315 + pembrolizumab (a checkpoint inhibitor). A second investigator-sponsored trial in the neoadjuvant setting (ATLAS-IT-06, n=27), which is very cost-effective, with PD-1 starting in H1 2024 will significantly increase the market potential and be the way forward for LTX-315. The company’s second oncolytic molecule, LTX-401, soon phase I ready, is designed for deeper lesions and provides follow-up potential. Finally, Verrica will communicate topline data in their phase II study of LTX-315 in basal cell carcinoma by mid-2024. Strong results would make this the most valuable programme and likely lead to the start of a phase III trial in 2025 together with a milestone. This represents a large and differentiated market (dermatology).

Evidence

LTX-315 can shrink superficial and metastatic lesions

The main candidate LTX-315 demonstrated stable disease in nine patients and a partial response in one for a disease control rate of 45% (out of 20 patients) in the full readout (ATLAS-IT-05); this is encouraging considering patients failed on average two previous lines. Superficial lesions decreased more. Lytix has outlicensed LTX-315 to Verrica for dermatological cancers (except melanoma and Merkel cell carcinoma) in a deal worth up to USD114m plus royalties, which provides external validation. In Verrica's phase II study of basal cell carcinoma at the highest dose, full tumour clearance was reported in four patients, 95% in the fifth and 30% in the sixth, which is a strong result. The company has a class-leading international scientific advisory board including Nobel Laureate (2018) Jim Allison, which has helped Lytix design the phase II trial in refractory melanoma and provided clinical sites (MD Anderson).

Challenge

Success in ATLAS-IT-06

Although the results from ATLAS-IT-05 are compelling, they may not turn out strong enough to lead to a licensing deal. The next phase II trial in neoadjuvant melanoma (n=27) will have to generate strong enough data to warrant a subsequent phase III or phase IIb trial, and do it without substantial delays. Together with Verrica's phase II study and ATLAS-IT-05, Lytix may have a good data package by 2026 which will assist partnering discussions.

Challenge

Extending funding

Lytix is financed through 2024. Before the end of the year, it will have find a means to extend the runway.

Valuation

LTX-315, Verrica deal and LTX-401

We value LTX-315 in the main indication of neoadjvuant melanoma and in metastatic melanoma as a subindication. We include a licensing agreement worth USD600m (USD50m upfront and 13.5% in royalties) in 2026. For LTX-401, we include a licensing agreement worth USD300m (USD9m upfront and 12% in royalties). We value the deal with Verrica separately. Using a WACC of 15% and assuming some dilution due to NOK40m being raised in later 2024, our base case is NOK14. The cash position of cNOK100m should last into 2025.

Quality Rating

People: 3

Lytix has a management team that has been working together for a long time and a long experience of its technology platform. Inside ownership from management is limited, however. The shareholder structure provides solidity to operations, as two major shareholder are represented on the board (33%) and there is a sizeable group of long-term oriented owners.

Business: 3

Pharmaceuticals is a high-margin industry in which there is clear product protection for companies' projects through patents. It is generally a non-cyclical industry. For research companies like Lytix, the situation is different, with risks associated not just with clinical development but also with the (cyclical) stock market, where capital requirements are large and often handled via new issues.

Financials: 0

As of Q4 2023, Lytix had a cash position of cNOK50m, which finance operations into mid-2024, before which additional capital will have to be raised. Being a research company, it will likely take some time before becoming cash flow neutral.

Financial Results

Operating costs (our estimates), were NOK-20m, a decrease compared with the previous quarter (shown below). We have excluded the costs of producing LTX-315 for Verrica, which Lytix includes in operating costs. We classify them as cost of goods sold, which we estimate at around NOK9m. Lytix had income of NOK10.5m for sales of LTX-315 to Verrica. Together with financial income of NOK0.5m, this leads to a net result of NOK-18m. The cash flow in the period was NOK-24m. Positive cash flow came from the rights issue in Q2, which we include in our valuation. The cash and cash equivalents position increased to NOK72m (NOK51m in Q4) when including the net proceeds from the rights issue.

Operating expenses

Valuation

We have removed LTX-315 in later-stage refractory melanoma patients from the base case. We maintain it in our bull case. The focus will be on earlier-stage melanoma in the medium-term, which makes the sales potential in metastatic disease more uncertain. There will be no further development in the short term after ATLAS-IT-05 concludes with 20 patients. We have also increased the costs for developing LTX-315 in 2024. This has a minor impact of around NOK1 per share since we maintain the assumed USD600m deal value (all of it for neoadjuvant melanoma) and the potential neoadjuvant population is much larger.

Programme	Indication	LoA	Royalties	Peak Sales	Est. launch	Deal Size	rNPV
				(USDm)		(USDm)	(NOKm)
LTX-315 (neoadjuvant)	Melanoma	13%	13.5%	1550	2032	600	633

LTX-315 (refractory)	Melanoma	0%	13.5%	470	2032		0

Verrica	BCC	20%	12%	380	2028	113.5	260


LTX-401	HCC	4%	12%	780	2034	300	94

Project value (NOKm)							988
Net cash							73
Shared costs incl. tax (NOKm)							-362
Fair value (NOKm)							699
Shares outstanding							50
Value per share (NOK)							14
Fully diluted							13
Source: Redeye Research

Our bull case is NOK27 while our bear case is NOK7.

Financials

Income statement
NOKm	2023	2024e	2025e	2026e
Revenues	10.2	6.3	13.0	231.5
Cost of Revenue	-6.3	-6.3	-1.7	0.00
Operating Expenses	107.1	83.0	59.8	57.8
EBITDA	-96.8	-76.7	-46.8	173.8
Depreciation	0.00	0.00	0.00	0.00
Amortizations	0.00	0.00	0.00	0.00
EBIT	-96.9	-76.7	-46.8	173.8
Shares in Associates	0.00	0.00	0.00	0.00
Interest Expenses	0.00	0.00	0.00	0.00
Net Financial Items	8.9	0.00	0.00	0.00
EBT	-87.9	-76.7	-46.8	173.8
Income Tax Expenses	0.00	0.00	0.00	0.00
Net Income	-87.9	-76.7	-46.8	173.8
Balance sheet
Assets
Non-current assets
NOKm	2023	2024e	2025e	2026e
Property, Plant and Equipment (Net)	0.11	0.11	0.11	0.11
Goodwill	0.00	0.00	0.00	0.00
Intangible Assets	0.00	0.00	0.00	0.00
Right-of-Use Assets	0.44	0.44	0.44	0.44
Other Non-Current Assets	0.00	2.3	2.3	2.3
Total Non-Current Assets	0.55	2.8	2.8	2.8
Current assets
NOKm	2023	2024e	2025e	2026e
Inventories	0.00	0.00	0.00	0.00
Accounts Receivable	12.8	0.00	1.9	38.1
Other Current Assets	0.00	0.00	0.91	18.5
Cash Equivalents	50.5	55.8	11.1	225.5
Total Current Assets	63.3	55.8	13.9	282.1
Total Assets	63.9	58.7	16.8	284.9
Equity and Liabilities
Equity
NOKm	2023	2024e	2025e	2026e
Non Controlling Interest	0.00	0.00	0.00	0.00
Shareholder's Equity	51.3	54.6	7.8	181.6
Non-current liabilities
NOKm	2023	2024e	2025e	2026e
Long Term Debt	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	0.04	0.04	0.04	0.04
Other Non-Current Lease Liabilities	0.00	0.00	0.00	0.00
Total Non-Current Liabilities	0.04	0.04	0.04	0.04
Current liabilities
NOKm	2023	2024e	2025e	2026e
Short Term Debt	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	0.45	0.00	0.00	0.00
Accounts Payable	0.00	0.00	3.7	76.1
Other Current Liabilities	12.1	3.6	4.7	26.7
Total Current Liabilities	12.5	3.6	8.4	102.8
Total Liabilities and Equity	63.9	58.2	16.3	284.5
Cash flow
NOKm	2023	2024e	2025e	2026e
Operating Cash Flow	-96.9	-74.7	-44.7	214.4
Investing Cash Flow	2.3	0.00	0.00	0.00
Financing Cash Flow	-0.94	80.0	0.00	0.00

Rating definitions

The team

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Contents

Investment thesis

Quality Rating

Financial Results

Valuation

Financials

Rating definitions

The team

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