HEPA - Why I Am Staying Away From Hepion Pharmaceuticals

2023-05-26 11:27:39 ET

Summary

• Shares of Hepion Pharmaceuticals more than doubled in value after reporting positive data from their phase 2 data evaluating rencofilstat as a NASH therapy.
• Since then, the stock has fallen greatly as the market has digested the results.
• Hepion’s cash position is getting quite low, raising the risk of shareholder dilution.
• Moreover, I am concerned with some aspects of the trial design and Rencofilstat’s potential when compared with other therapies that are much farther down the regulatory process.
• For those reasons, I would assign a strong sell rating to Hepion.

Introduction

Hepion Pharmaceuticals ( HEPA ) reported positive data from their phase two 'ALTITUDE NASH' trial earlier this week, causing the stock to surge from ~$8.80 per share to ~$19.30 in the following trading day. Today, as of the time of writing, shares of Hepion trade at ~$12. The rapid fall in the stock price prompts two important questions: how should we interpret the data, and what does the future look like for Hepion?

Investors who engage in clinical stage biotech companies like Hepion naturally have a higher risk tolerance, but this level of volatility raises concerns. In my view, there are two principal reasons why the stock has fallen significantly. On one hand, Hepion's financial position makes the path forward more challenging at best, as there is a real risk of current shareholders facing dilution. On the other hand, the data generated by ALTITUDE-NASH is not as impressive as it initially appears. Many questions remain unanswered after the readout.

Due to these aforementioned reasons, I would assign Hepion a strong sell rating.

ALTITUDE-NASH Generated Seemingly Stellar Data

ALTITUDE-NASH was a phase two trial assessing the efficacy and safety of Rencofilstat as a treatment for nonalcoholic steatohepatitis ((NASH)). 70 participants were enrolled in total, with 67 completing the entire process (120 days of dosage following by a two week safety follow-up.) Both the primary endpoint — along with secondary endpoints — were hit in the study. Rencofilstat was well-tolerated throughout the duration of the study, and no serious adverse events were observed.

The main endpoint was liver function, which was measured through the minimally invasive HepQuant SHUNT Test. This test assess liver health through four key measurements: a disease severity index score ((DSI)), the SHUNT score (measures liver changes), hepatic reserve (quality and quantity of remaining liver cells), and RISK-ACE (measures negative liver event risk per 100 years.) Secondary endpoints examined safety by measuring several liver-health related bio markers.

Chart Outlining Top-Line Efficacy Data For All Patients (n=61)

Above is a table outlining the top-line measurements from the trial. Those dosed at 225 milligrams exhibited significant improvements in liver function, as measured by HepQuant's SHUNT test. The most important biomarker measurement — in my view — is RISK ACE. This measurement actually reflects the annualized chance of a patient developing an adverse liver-related outcome. At both 150 and 225 milligrams, Rencofilstat's benefit in this area was statistically significant. Further sub-group analysis of the most "functionally impaired" subjects (n=34) conducted by Hepion also showed statistically significant improvements in DSI scores and SHUNT percentage across all doses.

Safety Data (n=63)

With no explicit safety or tolerability issues expressed, coupled with strong improvements in biomarkers associated with liver health, the safety profile of Rencofilstat appears favorable. But there is far more than meets the eye.

Why I Am Skeptical

Put simply, I am doubtful that you can draw a line from this data to the claim that Rencofilstat would be an effective NASH treatment. Specifically, I believe that Hepion's endpoint choice and use of NIT in their screening should be scrutinized.

First, the usage of biopsy to screen patients and confirm clinical benefits is the gold-standard in NASH trials. Hepion decided to include only F3 stage NASH patients in their trial, which is good and conforms to FDA standards. But they assessed the stage of those trial participants through either their AGILE 3+ scores or a liver biopsy. Agile 3+ scores are determined through Fibroscans, which is a non-invasive diagnostic tool used to measure liver health. Contrast this with Madrigal Pharmaceuticals' ( MDGL ) phase two trial design, which only used liver biopsy as a determinant for the stage of disease of participants.

Non-invasive tests (NITs) lack the specificity needed to adequately identify this population (Patel and Sebastiani 2020). NITs cannot accurately identify NASH nor differentiate fibrosis stage 1 from 2 or stage 3 from 4. Therefore, liver biopsy is the only way to accurately identify patients qualifying for treatment.

Source: 2023 FDA Draft Document from Intercept Pharmaceutical's AdCom Meeting, Page 51

The FDA view on this matter has been articulated clearly and recently: non-invasive tests are needed to accurately distinguish between different stages of NASH. The data generated from this trial, which uses NITS to screen patients, cannot be used to predict the outcome of Hepion's phase 2b NASH trial (which exclusively uses biopsy confirmation.)

Equally as important is that the primary endpoint chosen for this trial is an experimental biomarker. The HepQuant SHUNT Test is not FDA approved, nor has it even been evaluated by the FDA for approval. An exemption was granted by the FDA in this trial for "investigational" use.

The company’s products are investigational combination drug / diagnostic devices and have not yet been evaluated or approved by the US Food and Drug Administration (FDA) for commercial sale. They are currently available for investigational use via the FDA IDE application process.

Source: HepQuant's Website

For this reason, I would caution against weighing the importance of this trial too greatly. Unless Hepion is able to produce data showing a clinical benefit through either of the FDA's two accepted surrogate endpoints, I am not convinced that Rencofilstat has value.

The Financials

Another glaring issue is Hepion's financial situation. At the moment, they have no real revenue stream with no established financial backer. (No partnership with any other larger biotech company.) Without a partner, it is difficult to imagine Hepion financing a phase three trial for Rencofilstat without either tapping the equity or debt markets.

As of the latest quarter, Hepion has ~$43 million in cash and cash equivalents on hand. That quarter, they burned through ~$13.2 million. The quarter before that, they lost ~7.9 million — and before that, they lost $8.5 million. For the entire fiscal year of 2022, their total net loss slightly exceeded $43.5 million. With no revenue stream or partner, Hepion's only option to raise funds is either to borrow money (which is quite expensive with current interest rates,) or they can dilute shareholders. Remember, Hepion is currently conducting a phase 2b trial for Rencofilstat, and they will have to then conduct a longer and larger phase 3 trial if that succeeds. The need for cash is paramount in light of this path forward, and both a secondary offering of shares and borrowing cash would impair the creation of shareholder value.

Since Hepion did not state their projected cash runway in their filing for last quarter, or hold a conference call to discuss it, it is difficult to fully grasp how long their existing cash pile can last them. This uncertainty only exacerbates the financial picture.

Conclusion

Hepion's decision to use NIT to screen patients and an experimental biomarker for their primary endpoint casts a long shadow over the seemingly positive outcome of ALTITUDE-NASH. Moreover, an examination of the balance sheet reveals an uncomfortable truth: Hepion's cash level is getting dangerously low — posing a serious risk of dangerous debt or equity raises. For these reasons, I would give Hepion a strong sell rating.

Risks to Thesis

There are several risks to my thesis. The first is that Hepion could report positive data from their phase 2b ' ASCEND-NASH ' trial. Initial data (six month evaluation for 1/3 of the patients) from that trial should be due in about a year from now. And the second risk is that Hepion finds a commercial partner prior to the readout of ASCEND-NASH. Although I believe that this outcome is unlikely, it is still possible. Given the small size of Hepion, a larger biotech company looking to simply acquire their own NASH program in that situation may just buy the company out entirely.

Another risk is that Hepion may decide to pursue their other clinical programs, which all could yield positive data. Rencofilstat is also being evaluated for hepatocellular carcinoma, and Hepion did find that Rencofilstat in combination with an immune checkpoint inhibitor demonstrated anti-tumor activity in a non-clinical trial. If Hepion loses their NASH bet, they may still have a slim out through oncology.

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