Circio: 35% subscription rate in the rights issue
Research Update
2024-07-10
11:15
Redeye provides an update on Circio and a new base case after the rights issue.
RR
Richard Ramanius
Contents
Investment thesis
Quality Rating
CircVec programme
TG01 vaccine
Financial results
Valuation
Financials
Rating definitions
The team
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A total of 7.2m shares out of a maximum of 20.7m were allocated. This is a 35% subscription rate, which is below average and a rather negative outcome. After deducting expenses of NOK5.6m, we estimate the net proceeds at NOK12.5. This will only support the company for around three months. Atlas has promised to support the company with monthly funding of NOK4m/month up to a total of NOK48m until June 2025. However, this means the share conversions will have to continue, while the plan with the rights issue was to avoid this.
Since our initiation coverage, Circio has made significant progress with its circular RNA platform CircVec. The 2.1 version produced almost 10 times more protein in vitro than straight mRNA. It produced 3-4 times more protein in mice after 150 days, with statistical models showing 20 times higher yield over two years. Further experiments are being conducted using an AAV carrier, which is the standard in gene therapy. This is the area where Circio hopes to negotiate its first licensing deal within the next 12 months. Further work with version 2.2 produced 2-4 times more protein than 2.1 in early testing.
While we have built a valuation model for Circio’s projects, it is challenging to assign a particular value to the share as we can only guess what that the number of shares will be within one year. We are also uncertain about the sustainability of the Atlas arrangement with the current share liquidity. The base case can therefore only be seen as indicative.
NOKm | 2023 | 2024e | 2025e | 2026e |
Revenues | 0.12 | 0.00 | 48.1 | 110.4 |
Revenue Growth | -98.8% | -100% | nm. | 130% |
EBITDA | -98.7 | -48.1 | 0.03 | 47.2 |
EBIT | -100.5 | -48.1 | 0.03 | 47.2 |
EBIT Margin | nm. | nm. | nm. | nm. |
Net Income | -110.7 | -48.1 | 0.03 | 47.2 |
EV/Sales | nm. | nm. | nm. | nm. |
EV/EBIT | -0.4 | -0.8 | 1,111 | 0.8 |
Case
mRNA platform for early out-licensing
Evidence
Long half-life
Challenge
Avoiding additional dilution
Challenge
Partnering
Valuation
SOTP indicates a diluted base case of NOK5
People: 2
The management team has a long experience in the company and of the sector. There is extensive knowledge of circRNA inside the company. Inside ownership among management is limited as is the lack of controlling owners, however. The decrease of board resources in October 2023 also has a negative impact on the rating.
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 Circio, the situation is different, though, 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. Circular RNA is up-and-coming and will likely supplant straight mRNA for many applications. Circio's DNA cassette is differentiated compared with LNP circular RNA, so it will likely not compete directly but will be able to carve out its own niche in the space.
Financials: 0
Circio is dependent on financing from convertible bonds issued by Atlas Special Opportunities until a potential deal with CircVec or TG01. It has a negative net cash position due to outstanding convertible loans to Atlas.
Version 2.1 of CircVec produces almost 10x more protein compared to mRNA after 8 days (in vitro). Circio has also demonstrated durable expression of proteins from its CircVec 2.1 platform in mouse studies. In the technical validation study, luciferase-expressing circular RNA and mRNA were injected into one leg each. The leg injected with circular RNA (CircVec) expressed the luminescent protein for the entire period of the experiment, while the mRNA version expressed it for around one month. CircVec expressed 3-4 times more protein after 150 days. Statistical models even show the yield over 2 years would be 20 times higher (which is relevant for gene therapy).
Circio is now doing a similar experiment using AAV loaded with CircVec to express luciferase. An early pilot trial with CircVec 2.0 demonstrated solid expression in mice 14 days after injection. The next step is to compare AAV using mRNA versus CircVec in a larger study population over a longer period of time. This will be a crucial experiment for partners in gene therapy who use AAV as the administration modality.
Later versions of CircVec will likely be even more efficient. The latest version, 2.2, produced 2-4 times more protein than version 2.1 in validation testing (in vitro).
Circio believes gene therapy is the technology where CircVec has the best possibility of being licensed in the short term. There are 8 approved gene therapies as of today, of which six use AAV. These could potentially be improved with CircVec. It is more likely, however, that new gene therapies under development would benefit more. The lowest hanging fruit for Circio are those gene therapies in pre-clinical development that have to be abandoned because of toxicity. Using CircVec might save these programmes and enable further development. This is one of the first areas where we would not be surprised to see collaborations in the future.
IOVaxis did not utilise its option to in-license TG01 because it lacks funding, which resulted in its removal from our valuation. Three investigator-sponsored programmes are ongoing: in metastatic pancreatic and lung cancer (collaboration with Janssen), in multiple myeloma and in resected pancreatic cancer. The collaboration with Janssen is the most interesting one with a good potential for a deal upon a successful outcome – TG01 could help drive further sales of their best-selling antibody Darzalex (sales of USD10bn in 2023) through expanding into new indications.
Total operating expenses in H2 2023 amounted to NOK-28m, a drastic reduction from the NOK-73m in the first half. The staff level has been reduced to 10 from 23, which significantly lower costs. The company has guided for a burn rate of around NOK4m per month going forward. The net proceeds of NOK46m from the rights issue (if fully subscribed) were calculated to fund the company for another year.
Around 20% of the budget for the next twelve months is planned to be invested in circVec AAV experiments, 20% in the AATD programme, 20% on developing circVec 3.0, 15% on TG01 and 25% on general and commercial operations.
The cash position was NOK8m as of 31 March 2023; around NOK12m should have been spent since then (3 months). This makes the pro-forma cash position NOK9m after the rights issue. In connection with the rights issue, Atlas will be converting bonds worth NOK15m into shares. The value of the convertible bonds as of December 31 was NOK44.5m, although some bonds have been converted since then. As less than net NOK30m was obtained from the rights issue and warrants, necessitating the use of further Atlas tranches, TG01 will be used as collateral.
Warrants are included in the rights issue in the ratio 1:1 (7.2m). We have included them in the shares outstanding. They can be exercised in December at a 30% discount from the share price, with a floor of NOK0.6.
CircVec has taken slightly longer to reach a deal than we anticipated. For this reason, we have changed the timing and weighting of the assumed USD1000m deal value, with somewhat smaller milestone payments in the medium term, which has a negative effect on the base case.
We have reviewed several of our assumptions for TG01’s indications. We have decreased the relative weight of Europe and Japan in the sales estimates, as the growth prospects of the US are superior. We expect TG01 to have significantly better sales potential in the US, represented in higher pricing and market shares. We have changed the milestone assumptions for TG01, dividing them among the candidates, as shown in the valuation summary below, keeping the total of USD400m. We assume an average royalty rate of 12%. We further estimate Circio will have to pay a 10% royalty rate on all income to Agenus for using their adjuvant (Stimulon QS-21). Finally, we have removed the IOVaxis deal. This leads to an equity value that is still higher than when we wrote our initiation coverage. This is because the loan from Business Finland has been written of and a new TG01 indication (NSCLC) has been added.
Asset | Indication | LoA | Royalties | Peak sales | Est. launch | Deal Size | rNPV | rNPV2 |
(USDm) | (USDm) | (NOKm) | (Per Share) | |||||
circVec | Various | 2.4% | 10% | 1780 | 2035 | 1000 | 199 | 2 |
TG01 Pancreatic Cancer | PDAC | 10% | 12.0% | 740 | 2031 | 150 | 131 | 1 |
TG01 Multiple Myeloma | MM | 11% | 12.0% | 320 | 2031 | 100 | 64 | 1 |
TG01 NSCLC | NSCLC | 11% | 12.0% | 920 | 2031 | 150 | 192 | 2 |
Technology value (NOKm) | 586 | |||||||
Net cash* (NOKm) | 9 | |||||||
Shared costs** (NOKm) | -146 | |||||||
Equity value (NOKm) | 449 | |||||||
Shares outstanding (million, including warrants) | 26 | |||||||
Fully diluted shares outstanding (million) | 88 | |||||||
Equity value per share (NOK) | 5 | |||||||
*Including expected capital injection | ||||||||
**Including investments and working capital |
We have included significant dilution in our base case as the convertible loans will eventually have to be converted into shares. However, it is challenging to predict the conversion price and the eventual number of shares. Our base case can therefore only be seen as a best estimate. The large loans from Atlas on the balance sheet have increased the risk significantly since our initiation coverage. This situation could necessitate a change in conditions allowing Atlas to freely dump shares on the market, or in a worst case scenario lead to bankruptcy. It is therefore important for the company to land a licensing deal so it can pay off as many convertibles as possible.
Our bull case of SEK15 assumes a positive outcome in CircVec's preclinical programme leading to a licensing deal and much less dilution. Our bear case of 0 represents the failure of CircVec or the inability to repay the loans to Atlas.
Income statement | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Revenues | 0.12 | 0.00 | 48.1 | 110.4 |
Cost of Revenue | 0.00 | 0.00 | 0.00 | 0.00 |
Operating Expenses | 98.9 | 48.1 | 48.1 | 63.1 |
EBITDA | -98.7 | -48.1 | 0.03 | 47.2 |
Depreciation | 1.8 | 0.00 | 0.00 | 0.00 |
Amortizations | 0.00 | 0.00 | 0.00 | 0.00 |
EBIT | -100.5 | -48.1 | 0.03 | 47.2 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | 11.8 | 0.00 | 0.00 | 0.00 |
Net Financial Items | -10.2 | 0.00 | 0.00 | 0.00 |
EBT | -110.7 | -48.1 | 0.03 | 47.2 |
Income Tax Expenses | 0.00 | 0.00 | 0.00 | 0.00 |
Net Income | -110.7 | -48.1 | 0.03 | 47.2 |
Balance sheet | ||||
Assets | ||||
Non-current assets | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Property, Plant and Equipment (Net) | 0.00 | 0.00 | 0.00 | 0.00 |
Goodwill | 0.00 | 0.00 | 0.00 | 0.00 |
Intangible Assets | 0.01 | 0.01 | 0.01 | 0.01 |
Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 |
Other Non-Current Assets | 0.00 | 0.00 | 0.00 | 0.00 |
Total Non-Current Assets | 0.01 | 0.01 | 0.01 | 0.01 |
Current assets | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Inventories | 0.00 | 0.00 | 0.00 | 0.00 |
Accounts Receivable | 5.9 | 0.00 | 0.00 | 0.00 |
Other Current Assets | 0.00 | 0.00 | 0.00 | 0.00 |
Cash Equivalents | 22.3 | -25.8 | -25.8 | 21.5 |
Total Current Assets | 28.1 | -25.8 | -25.8 | 21.5 |
Total Assets | 28.1 | -25.8 | -25.8 | 21.5 |
Equity and Liabilities | ||||
Equity | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | -96.3 | -144.4 | -144.4 | -97.1 |
Non-current liabilities | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Long Term Debt | 0.00 | 0.00 | 0.00 | 0.00 |
Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 |
Other Non-Current Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 |
Total Non-Current Liabilities | 0.00 | 0.00 | 0.00 | 0.00 |
Current liabilities | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Short Term Debt | 110.7 | 110.7 | 110.7 | 110.7 |
Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 |
Accounts Payable | 3.5 | 0.00 | 0.00 | 0.00 |
Other Current Liabilities | 10.4 | 1.7 | 1.7 | 1.7 |
Total Current Liabilities | 124.5 | 112.3 | 112.3 | 112.3 |
Total Liabilities and Equity | 28.1 | -32.1 | -32.0 | 15.2 |
Cash flow | ||||
NOKm | 2023 | 2024e | 2025e | 2026e |
Operating Cash Flow | -89.2 | -48.1 | 0.03 | 47.2 |
Investing Cash Flow | 2.9 | 0.00 | 0.00 | 0.00 |
Financing Cash Flow | 41.9 | 0.00 | 0.00 | 0.00 |
Disclosures and disclaimers
Contents
Investment thesis
Quality Rating
CircVec programme
TG01 vaccine
Financial results
Valuation
Financials
Rating definitions
The team
Download article