2023-06-20 04:53:07 ET
Summary
- PepGen Inc. recently faced a setback with the FDA's clinical hold notice on its PGN-EDODM1 compound.
- Despite this, the company has received approval to proceed with the CONNECT1-EDO51 study in Canada.
- With mixed prospects in the medium-term, reiterate hold.
Summary of investment updates
In FY'22 I uncovered an interesting name pursuing a medical breakthrough in Duchenne Muscular Dystrophy ("DMD"), a debilitating disease that affects young males. The company, PepGen Inc ( PEPG ), was rated a hold at the time, but I was constructive on its noble mission, and the potential economics of this, should it successfully convert its pipeline.
Since then, there have been some major updates. Chiefly, the FDA's clinical hold decision on PGN–EDODM1 in May, to which we are still yet to receive a full explanation.
As a reminder, changes in the equity value of clinical-stage biotech companies are typically event-driven. Specifically, trial updates, readouts, results, etc., and then conversion from pipeline to market. Naturally, any change in the outcome of the "event" in question changes the investment scope as well.
I'll provide a detailed overview of the investment changes and the ramifications for PEPG in the medium term in this note. Net-net, I reiterate the company as a hold, but wouldn't be counting it out completely just yet.
Figure 1. PEPG 12-month price evolution– trading in a range
Data: Updata
Critical investment factors
At this stage in the lifecycle, the contributing factors to the company's market rating are a function of its clinical programs and financial position. There have been several updates on both since December.
1. Clinical program updates
The clinical hold notice issued from the FDA is a setback to PEPG's investigational new drug application (" IND" ) for PGN-EDODM1 in patients with Myotonic Dystrophy Type 1 ("DM1").
If this weren't enough, the company withdrew its guidance for initiating the Phase 1 trial in full, which was set for H1 this year. T he investment implications from this are crucial. Much of the upside picture hinges on PEPG getting these trials underway and collating data for its clinical program. External capital will want to see the results from these early trials in order to ramp up the investment success of any later stages. Hence, this has put the kettle on pause for PEPG at the moment.
Investors were fairly quick to leave the scene, accepting lower bids on their PEPG stock and flowing money out of its equity for around 2-weeks, as seen below. The red bars show daily money flows into and out of the company's market equity from March '23 to date.
Figure 2.
Data: Updata
So weak hands have left the party, leaving stockholders in an interesting position. However, there are additional factors to consider:
- Despite the clinical hold on PGN-EDODM1, PEPG's had its clinical trial application (" CTA" ) approved in Canada . The company received a no objection letter ("NOL') from Health Canada confirming the same. This allows it to proceed with the phase 2 CONNECT1-EDO51 study, sampling patients with DMD amenable to an exon 51 skipping approach.
- The company is now set to conduct a multiple ascending dose (" MAD" ) trial of PGN-EDO51 in the Canadian market instead of the U.S., whilst it waits on the FDA.
- Notably, PGN-EDO51 has demonstrated promising results in a clinical study, exhibiting the highest levels of oligonucleotide delivery and exon 51 skipping compared to other exon 51 skipping approaches.
[For reference, I discussed exon 51 in extensive detail, in layman's terms in the last publication from December– see heading: "PGN-EDO51 readouts provide meaningful inflection point"].
The study's aims are to evaluate the safety, tolerability, dystrophin levels, and pharmacokinetics of the compound. 3 cohorts of ambulatory and non-ambulatory boys and young men will be enrolled. The study will commence at a dose of 5 mg/kg, and potentially escalate to 10 mg/kg, and even other potential doses based on Drug Safety Monitoring Board ("DSMB") review.
Even on a purely clinical level, it is reasonable to expect these studies will provide valuable insights into the potential of PGN-EDO51 as a treatment option for patients with DMD.
2. Financial position
Regarding financials, PEPG had cash and equivalents of $165.4mm as at Q1 up from $118mm the year prior. It expects a runway on this cash into 2025. I'd note this expectation includes 1) generating dystrophin production data for the EDO51 asset, and 2) correcting transcript misplacing data downstream for EDODM1. Both can come at large costs, based on comparable examples, so PEPG appears confident it will manage these. While the net loss for Q1, amounted to $16mm, this was a $2mm improvement on Q1 FY'22.
The firm looks adequately capitalized with $164mm in equity holding up $204mm in assets and $168mm in liquid assets covering $18mm in short-term liabilities. Hence, management's comments on the cash runway are well supported in the data in my view.
Investment implications
The investment thesis hasn't so much as evolved as it has been "put on pause" for PEPG in my eyes. Consider these thoughts, on the topics above:
- The clinical hold notice from the FDA regarding PGN-EDODM1 highlights the regulatory risks associated with investing in clinical-stage biotechnology companies, and/or speculating on clinical-stage assets like PEPG. The issue is in the concentration risk of being a DMD pure-play. This kind of setup can absolutely pay off if done right [Vertex Pharma ( VRTX ) with Trikafta and cystic fibrosis], but the risks are equal in the opposite direction. On that note, PEPG's approval to proceed with the CONNECT1-EDO51 study in Canada demonstrates the potential benefits of expanding its operations into the region, i.e., away from the U.S. and its extremely stringent regulatory system. Will be interesting to see where management push from here.
- The clinical advantage of the company's pipeline shouldn't be discounted either. The positive results of PGN-EDO51, with its high levels of oligonucleotide delivery and exon 51 skippings, indicate the clinical potential of PEPG's lead asset in providing a medical breakthrough for DMD. Provided it can keep the external capital flows high and keep producing the results, then all developments are promising. Any breakthrough in DMD would position the company as a frontrunner in the field of genetic medicines in my view– notwithstanding the potential competitive advantage over another exon 51 skipping approaches. In that vein, CONNECT1-EDO51 will be telling. Data on safety, tolerability, and dystrophin levels, could either further solidify or evaporate PEPG's position in the market. It is that simple, as related to point (1) above. I would absolutely urge investors to closely monitor the study's progress.
- PEPG's strong cash position, expected to fund operations into early 2025, is critical to the debate here. R&D investment, like any other risk-capital, has to unlock some value at some stage. Thus, cash, sacred as it is, is put at substantial risk when developing clinical programs. I'm not opposed to the company's decision to pull the U.S. arm of its DMD program for now, in order to keep it lean. I'd also suggest this was supported by the market in the same fashion, given the fairly mute price response following both updates.
Consequently, despite the recent clinical hold notice from the FDA, PEPG's approval to proceed with the CONNECT1-EDO51 study in Canada is something to stay very constructive on in my view.
I would also clearly state– the approval says absolutely nothing on the future results of the studies. This cannot be predicted with a degree of confidence. Nevertheless, I would urge investors to pay very close attention to the Canadian updates. It would have built some momentum there by the time any FDA decision arrives in the U.S., so it is a crucial pivot point for PEPG at the moment. If the FDA eventually approves the phase 1 program in the U.S., this could also be a tailwind to share price change as well. So you'd want to be ready to position when the time comes– only achievable if patiently watching the company's fundamentals and updates.
In short
Whilst the FDA's actions aren't the best for PEPG's immediate growth there is still plenty to be constructive on in my view. There are downside and upside targets on the point and figure studies shown below, indicating the breadth in sentiment– and thus a neutral view. These studies objectively show price action in a way that provides a detailed view of price visibility looking ahead. Based on the critical facts, there isn't supportive evidence of a buy at this stage on PEPG. Rather, it must be watched persistently to observe the event-driven changes in its share price. Looking forward, watch the updates on both the Canadian and U.S. sides with its lead DMD asset– each could attract investment if positive.
Net-net, I am reiterating PEPG a hold with the latest investment updates.
Figure 3.
Data: Updata
For further details see:
PepGen: FDA Setbacks Offset By Canadian Wins, Clinical Data