LYRA - Lyra Therapeutics: Negative EV With A Very Compelling Treatment For Chronic Rhinosinusitis In Phase 3

2023-04-05 09:04:39 ET

Summary

• Lyra Therapeutics is developing a drug-eluting elastomeric matrix for chronic rhinosinusitis (“CRS”) that can be placed in the sinus cavity by an ENT physician during an office visit.
• The product targets CRS patients who fail topical steroid therapy (usually a nasal spray), which occurs to approximately 4 million patients per year.
• By the end of 2023, the Company will have Phase 2 data on CRS post-surgical patients, and they will have Phase 3 data on CRS surgically naïve patients in mid-2024.
• The Company’s market capitalization is approximately $60 million while holding over $100 million in cash at year-end 2022 but will need to raise money to turn over all the cards.

Lyra Therapeutics - Overview

Lyra Therapeutics ( LYRA ) (the Company), a Massachusetts drug/device combination company trading on the NASDAQ, is developed two forms of a proprietary elastomeric drug-eluting matrix for chronic rhinosinusitis ((CRS)) patients who fail normal medical management of their condition. The Company's product can be inserted into the sinus cavity by an otolaryngologists (ear, nose and throat, or ENT) during an office visit, as an option for patients who are unable to manage the conditions with medications prior to surgery, or as a post-surgical support option for those patients who have decided to undergo surgery to treat their condition.

The Company was founded in 2005 and completed its IPO in May 2020 at a $16 stock price with a post-money market cap of $206M. Following the quarter after the IPO, the Company had over $35M in cash. The Company filed a $50M ATM with Jefferies in May 2021, which the Company had not touched as of December 31, 2022. In April 2022, the Company closed a $100MPIPE at $4.22 per share with a few blue chip investors, including the Executive Chairman who purchased $1M himself.

As of December 31, 2022, the Company had $100M in cash, which funds the Company until mid-2024 at the current burn rate.

Chronic Rhinosinusitis

From Mayo Clinic Website :

Chronic sinusitis occurs when the spaces inside your nose and head (sinuses) are swollen and inflamed for three months or longer, despite treatment. This common condition interferes with the way mucus normally drains, and makes your nose stuffy. Breathing through your nose may be difficult, and the area around your eyes might feel swollen or tender. Chronic sinusitis can be brought on by an infection, by growths in the sinuses (nasal polyps) or by swelling of the lining of your sinuses. Also called chronic rhinosinusitis, the condition can affect both adults and children.

Figure 1: Healthy Sinuses Versus Chronic Sinusitis (or CRS) Source - Mayo Clinic .

Common signs and symptoms of chronic sinusitis include:

• Nasal inflammation
• Thick, discolored discharge from the nose (runny nose)
• Drainage down the back of the throat (postnasal drainage)
• Blocked or stuffy (congested) nose causing difficulty breathing through your nose
• Pain, tenderness and swelling around your eyes, cheeks, nose or forehead
• Reduced sense of smell and taste

Treatments for chronic sinusitis include:

• Saline nasal irrigation, with nasal sprays or solutions.
• Nasal corticosteroid spray to help prevent and treat inflammation. Examples include fluticasone, triamcinolone, budesonide, mometasone and beclomethasone.
• Oral or injected corticosteroids are used to relieve inflammation from severe sinusitis, but can cause serious side effects when used long-term.
• If allergies are causing sinusitis, then allergy medications may be prescribed.
• If a fungal infection is causing the sinusitis, then an antifungal treatment may be prescribed.
• If there are nasal polyps causing the chronic sinusitis, then an injection of dupilumab or omalizumab may be prescribed to reduce the size of the nasal polyps and lessen congestion.
• Chronic rhinosinusitis not treated by medication, or caused by caused by structural problems with the nose and sinuses, like a deviated septum or persistent nasal polyps, may require surgical correction. Doctors typically recommend surgery as a last resort."

Figure 2: Diagram of Endoscopic Ethmoidectomy Surgery. Source - Mayo Clinic .

Lyra's Drug-Eluting, Elastomeric Mesh

The Company's core technology, XTreo, is designed to locally and continuously deliver small molecule drugs to the affected tissue over a sustained period of time from a single administration. The platform is comprised of three interrelated technology components:

• a biocompatible mesh scaffold, which is designed to maximize surface area for drug release while maintaining underlying tissue function;
• an engineered elastomeric matrix, which means a polymeric matrix composed of polymers having elastic characteristics, which has advanced physical properties resulting in implants with "shape memory" that dynamically adapt to nasal anatomy; and
• a versatile polymer-drug complex, which can be customized for the treatment of various chronic diseases treatable with ENT delivery to achieve the desired drug dose and drug elution rate.

Figure 3: Lyra's Drug-Eluting, Elastomeric Mesh Source - Company Presentation

Both the LYR-210 and LYR-220 products in development elute mometasone furoate, a drug first approved in 1997. The drug is generic, and available in many forms. In the nasal spray formulation, the labeled indication is as follows:

• Prophylaxis of Nasal Symptoms of Seasonal Allergic Rhinitis in adult and pediatric patients 12 years of age and older.
• Treatment of Chronic Rhinosinusitis with Nasal Polyps in adult patients 18 years of age and older.

Each spray contains 50 micrograms of mometasone furoate. Patients are recommended to take two sprays in each nostril, twice per day.

The LYR-210 product being dosed in the ENLIGHTEN I Phase 3 study contains 7,500 micrograms of mometasone furoate designed to enable 6 month dosing. The mesh is placed by an ENT in the office with an applicator in patients who have failed medical management, but who have not had surgery. Once on the market, an ENT would remove the mesh in the office after 6 months, and could replace the mesh as needed. The Company said that they discussed the 505(b)(2) pathway in their press release following their end of phase 2 meeting with the FDA.

Figure 4: ((A)) LYR-210 self-expanding when deployed from the applicator. ((B)) LYR-210 placed in the middle meatus. Source - American Journal of Rhinology & Allergy 2022, Vol. 36(6) 733-740

In a Phase 1 study, two different doses of the mesh were studies. The pharmacokinetics of the doses showed a consistent, low plasma level of mometasone furoate ((MF)). Over 56 days, a steady state of 12 picograms/ml of MF was achieved with the mesh loaded with 2,500 micrograms of MF, and a stead state of 41 picograms/ml was achieved with the mesh loaded with 7,500 micrograms of MF.

Figure 5: Plasma MF concentration-time profiles for LYR-210 (2500 µg) and LYR-210 (7500 µg) through 56 days. Data are represented as mean and standard deviation. Css=steady-state concentration. Source - American Journal of Rhinology & Allergy 2022, Vol. 36(6) 733-740 .

In a Phase 2 study, LANTERN, the Company was able to show a statistically significant improvement versus control at the 8, 16, 20 and 24 week time points, with cohorts of 24 patients. The primary efficacy was measured by the Sinonasal Outcome Test (SNOT-22) , a 22 element, validated, disease-specific health related quality of life instrument for use in chronic rhinosinusitis (and best test name ever). In the publication of the LANTERN results , the high dose group was statistically better than controls in all other CRS symptom metrics as well, including Nasal Blockage (p=0.005), Facial Pain/Pressure (p=0.007), Nasal Discharge (p=0.007), and time to first rescue treatment (p=0.048).

Figure 6: Primary efficacy measurement in LATERN, a Phase 2 study of LYR-210. Source - Company Presentation.

For the two planned Phase 3 studies, ENLIGHTEN I (currently enrolling) and ENLIGHTEN II (scheduled to initiate in 2023), the Company worked with the FDA to set the endpoint to be the mean change from baseline (CFBL) composite of measurement of three different CRS symptoms: nasal blockage, facial pain/pressure, and nasal discharge (anterior/posterior). The "3CS" composite score will be measured over 7 days at baseline at week 24. The 3CS score from the LATERN Phase 2 study showed a highly statistically significant improvement at 24 weeks with p=0.003.

Figure 7: Mean changes from baseline (CFBL) in 7-day average score in 3CS include nasal blockage, facial pain/pressure, nasal discharge (anterior/posterior). Source - Int Forum Allergy Rhinol. 2022;12:147-159

The LATERN study recruited patients from 14 sites in Poland, the Czech Republic, Australia, and New Zealand. The ENLIGHTEN I study is recruiting patients from 56 sites across the US, the Czech Republic, Poland, Austria and Spain. The FDA accepts data from all of these countries. Having this kind of recruitment spread will be helpful in securing EU approval.

LYR-220 is the same formulation as LYR-210, but larger to cover more sinus surface area and designed to be used in patients following an ethmoidectomy procedure, where a surgeon removes infected tissue and bone in the ethmoid sinuses that blocks natural drainage (see Figure 2 above). In the BEACON Phase 2 design, LYR-220 was placed on both sides on patients who have had an ethmoidectomy and whose SNOT-22 score was greater than 20. The BEACON phase 2 study is fully enrolled and the Company should report top-line data in Q4 2023.

CRS Market

According to the CDC, in 2018 over 11% of Americans over 18 in the US have been diagnosed with Sinusitis, almost 29 million people. Also from a 2018 government data set, over 7 million office visits had a primary diagnosis of acute or chronic sinusitis with another over 500 thousand emergency room visits with the primary diagnosis of acute or chronic sinusitis.

A drug prescription data base, ClinCalc, suggests that over 8 million patients are taking a corticosteroid, but the data does not break out usage by indication.

Source - ClinCalc DrugStats Database

Sales of dupilumab (DUPIXENT®for the CRS indication) exceeded $4 billion in 2020, at a cost of over $40,000 per treatment, suggests over 100,000 prescriptions per year. The drug is indicated for Atopic Dermatitis, Asthma, Chronic Rhinosinusitis with Nasal Polyposis and Eosinophilic Esophagitis. According to the DUPIXENT website, it has been prescribed 45,000 times to patients with CRS with polyps.

There are an estimated 350,000 functional endoscopic sinus surgeries per year in the US.

According to the Company, over 4 million CRS patients fail medical management every year. Of those, 40% have had surgery and 60% are surgically naïve.

First line treatment consists of nasal flushing and corticosteroid sprays, which are covered by generic medications. Depending on the etiology, second line medications include oral steroids and antibody injections. Surgery is seen as a final treatment option.

Management Team

The Company has a very experienced management team, with a history of acquisitions.

Stock Price Story

Figure 8: LYRA Stock Chart May 2020 to Present. Source - Yahoo Finance.

• LYRA went public in May 2020 at$16.
• On December 7, 2020, the stock gapped down 20% on strong volume after the Company released top-line data from the LANTERN Phase 2.
• On February 11, 2021, the stock gapped up over 20%. The only new information in that timeframe was Form 13G filings from Intersouth and Polaris.
• Over the course of 2021, the stock drifted down, even after announcing a geographic license to LianBio for multiple countries in Asia, and positive top line data in a PK study.
• On April 8, 2022, the Company announced a $100M PIPE transaction with a few blue chip biotech investors, which drove a 50% gain in the stock.
• Late in 2022, the Company was hit by two events. First on November 2, 2022, the Company had to amend their Q1 and Q2 2022 10-Q filings. Then on November 8, 2022, the Company announced that it needed to pause the initiation of the ENLIGHTEN II trial because of manufacturing issues at their 3rd party manufacturer.

As of December 31, 2022, the Company had a market capitalization of $60 M, with a cash balance of approximately $100 M (adjusting for probable burn in Q1 2023).

Proforma Model

When modeling the Company, I have made the following assumptions:

• Consistent R&D and G&A expenses until mid-2025, when Sales and Marketing expenses ramp up in preparation for the launch of LYR-210.
• Mid 2025 launch of LYR-210 for surgically naïve patients with CRS patients who have failed medical management - hitting 5% penetration by 2030.
• Mid 2026 launch of LYR-220 for post-surgical CRS patients - hitting 0.5% penetration by 2031.
• $2,500 gross revenue from LYR-210, $5,000 gross revenue from LYR-220, and 30% COGS/rebates/etc. for both products.
• $60 M raise in late 2023, and a $100M raise in late 2025.

While the Company has a large cash balance, it also burns around $15M per quarter. To get to being cash flow positive from commercial sales, assuming both products obtain FDA approval and LYRA does the commercial launch themselves, the Company will need to raise ~$160M by the end of 2025. The Company has two products with good supporting biological mechanism of action and a novel delivery mechanism that supports a high probability of approval after completing the requisite phase 3 studies.

By the end of 2023, I ascribe a NPV of approximately $550M, which converts to a stock price of approximately $10, when one adds the cash balance to the valuation, depending on the stock price of the financing I expect to happen before the end of the year.

The Company will have top-line BEACON data for LYR-220 in Q4 2023. That might provide the Company with an opportunity to raise money at a stock price equal to, or greater, than today's price (~$2.00).

Analyst Coverage

The Company is covered by BTIG, William Blair, Bank of America, Canter Fitzgerald, and Jefferies. The price targets all suggest a 5-10x return from today's stock price.

Insider Buying Activity

In the 2022 PIPE, Harlan Waksal, the Executive Chairman of the Company, purchased $1M of the offering. Many of the other Directors have purchased stock in the open market over the last 12 months.

Major Holders

LYRAs major holders are top tier biotech investors. The top institutional holders are well known in the industry.

Perceptive is led by Joseph Edelman. Two Directors from Perceptive are on the Board. Edward Anderson, the founder of Northbridge Ventures is also on the Board. Venrock holds 9.99% in common, plus another 5,000,000 shares as prefunded warrants, which would put Venrock at approximately 22.5% ownership. Nantahala and Pure Vida both were involved with two different recent financings, SLNO and UNCY, which provided the companies with pre-programed tranches of capital based on achieving certain milestones. Both financings cause the stocks to double, once the financing risk was fully removed for years to come. Samsara BioCapital is a brain trust lead by Srini Akkaraju (from Soffinova and Panorama) and Mike Dybbs (from New Leaf). Moving deeper into the capitalization table, other funds of high regard exist. Either they are all missing something, or they are playing the long game with a solid program and solid management team - I would lean toward the latter.

Potential Risks and Potential Surprises

1) CMC: The manufacturing issue that occurred at the end of last year highlights a common risk in many biotechs. FENC, PTLA, and many others have had CRLs issued by the FDA based on manufacturing issues. The Company attempted to outsource the manufacturing of its products and was unsuccessful in transferring the methods and controls. Performing the manufacturing in-house creates an infrastructure that is usually not cost effective while in the development phase, but great for commercialization at scale and acquisition. According to management, LYRA's manufacturing site has not yet been inspected by the FDA, but dry runs from outside consultants are part of GMP. This risk is mitigated after the site passes its first FDA inspection without being issued a Form 483, the FDA's way to notify a manufacturer of a major deficiency.

2) Financing: The Company burns approximately $15M per quarter, and that may rise as the Company initiates ENLIGHTEN II and LYR-220's Phase 3 program. Given the expectation of data from BEACON, LYR-220's Phase 2 study is expected in Q4 2023, the stock price may rise by the end of the year. The Company may, however, raise cash before having only one year of cash left, which could be as soon as mid-year 2023. Therefore, the Company may raise funds in July, prior to publishing their 10-Q for the second quarter - avoiding the potential for needing to include a going concern statement in the 10-Q. I would then expect that the Company would need another raise in the first half of 2024 to maintain more than a year of cash, depending on how much they raise in 2023. This risk may be why the Company has a negative enterprise value right now. A SLNO-type deal that provides a firm funding commitment through commercial launch could remove that risk and likely double the stock price ( SLNO December 19, 2022 press release ).

3) Valuation: Since the start of the pandemic, classical NPV valuation methodologies have been disconnected from public company market caps. This is especially true in the small cap space. In June 2022, 20% of biotech companies were trading for less than the cash on their balance sheet. This disconnect may persist for a long time. Therefore, the models used to generate the stock price estimates in this report should be seen as directional. Financing risk out-weighs biology risk right now.

Conclusion

LYRA has lost almost 90% of its value since its IPO in 2020. In the interim, the only negative news was the delay of the second Phase 3 for the lead indication and the 3rd party manufacturing issue, which is less of a negative, and more just part of the sausage making that all biotechs go through that most investors never see. It is my thesis that this Company has been caught by the general downturn in the biotech market because of their need for cash.

Assuming the Company raises $60M in 2023 at a stock price of around $2.00, a conservative DCF model suggests a share price of over $9.00. Given the catalysts of the BEACON Phase 2 data expected in Q4 2023 and the ENLIGHTEN I Phase 3 data expected mid 2024, I believe that the stock is worth starting to accumulate a partial position prior to the Q4 data reveal. Because of the heavy institutional ownership by top tier biotech funds, it is unlikely that the Company will need to scrounge the basement or the retail brokers for new investors, which is how many biotechs get killed in a financing. After the Company completes a sizable (>$50M) round, prior to the mid 2024 data reveal, it would likely be worth topping up to a full position.

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