|Shares Out. (in M):||80||P/E||0||0|
|Market Cap (in $M):||233||P/FCF||0||0|
|Net Debt (in $M):||-56||EBIT||0||0|
|TEV (in $M):||177||TEV/EBIT||0||0|
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Soleno is a single-product, clinical-stage biotech company. Its drug, DCCR, is in development to treat hyperphagia (insatiable hunger) in a genetic form of obesity called PWS (Prader-Willi Syndrome). We believe that PWS hyperphagia represents an extremely attractive orphan disease market in that patients are well-characterized, already under the care of a small number of specialists, and that the tragic and debilitating nature of this hyperphagia create a grave unmet need. Soleno expects to file for DCCR approval in 2H2021, with the glaring weakness in the DCCR clinical package of a miss on the phase III primary endpoint. Notwithstanding this miss, we believe that DCCR meets the FDA risk benefit criteria for approval in orphan disease context. In the phase III trial, DCCR showed benefits on a long list of supporting endpoints including: behavioral components of PWS, biochemical markers of hunger, and body composition including fat mass. Approximately 80% of patients who completed the Phase III have remained on drug in a long term extension study, with strong open label results and impressive KOL buy-in / commentary.
Recently, the company further strengthened the approval argument by presenting an analysis suggesting that the COVID-19 lockdown led to data irregularities and was the cause of the primary endpoint miss. Exclusion of these "post COVID" data—using a March 1 cut-off specified prior to analysis-- leads to a statistically significant benefit from DCCR over placebo on the primary endpoint of hyperphagia symptoms. We believe this COVID analysis is persuasive and may have been requested by the FDA. Taken together, we believe that there is a regulatory path forward for DCCR. Using a 65% probability of approval for DCCR and assuming $400-450M in US & EU5 sales, which we believe to be very achievable and perhaps conservative, we get to a value of almost $11/share for SLNO.
Background & Lead Asset DCCR
Soleno began as a private rare disease company called Essentialis. Essentialis went public in March 2017 via a reverse merger with Capnia, a public company with a struggling set of medical devices, and the new entity was named Soleno. Capnia's CEO, Dr. Anish Bhatnagar, stayed on to lead Soleno and was joined by Dr. Neil Cowen from Essentialis, who took on the role of SVP of Drug Development at Soleno. Soleno's lead asset is Diazoxide Choline Controlled Release (DCCR), an oral drug in development to treat rare metabolic and central nervous system disorders. The active ingredient of DCCR, diazoxide choline, was approved in the US in 1973 as an IV drug for hypertensive emergency, and in 1976 as an immediate-release oral drug (Proglycem) for certain disorders of high insulin including insulinoma and congenital hyperinsulinism.
We believe that this history of chronic use, including in pediatric populations, establishes a known safety profile for DCCR. Additionally, diazoxide works by agonizing (stimulating) ATP-sensitive potassium channels. We believe that a once daily, extended release formulation may broaden the use case for this drug by creating consistent exposure levels, including in the central nervous system. It should also improve on the convenience for patients (once per day tablet versus 2-3x/day bitter solution) and on the known side effect profile, which can include hyperglycemia and peripheral edema. We do not believe other available forms of diazoxide choline are a credible substitute for DCCR.
DCCR in PWS
Prader-Willi Syndrome (PWS) is a genetic disorder impacting between 10-20K patients in the US. It is the most common genetic cause of life-threatening obesity in childhood and adolescence. The disorder involves a series of distinct nutritional phases, and by middle to late childhood is characterized by a feeling of insatiable hunger (hyperphagia). Patients also exhibit low muscle mass and metabolic rate, low to moderate intellectual disability, and a range of neuropsychiatric issues including obsessive behaviors, anxiety, and rigidity in thinking. Historically, the life expectancy for the disorder has been around 30 years of age.
Patients desire to eat and eat, and they will become morbidly obese if their food intake is not very strictly controlled. Refrigerators, pantries, and trash must be locked at all times. Public places are generally avoided because of food temptations. All this leads to an extremely high burden on caregivers and families. Siblings experience PTSD while parents experience elevated divorce rates.
The only FDA approved treatment for PWS is growth hormone, which improves body composition but has no impact on hyperphagia. We believe that there is a level of interest verging on desperation from caregivers and treating physicians, as well as two major US advocacy groups (PWRF and PWSA-USA) in finding effective treatments for the hyperphagia component of PWS.
DCCR in PWS
DCCR may work in two ways to treat PWS. First, by activation of ATP-sensitive potassium channels on NPY/AgRP neurons in the hypothalamus, it may reduce secretion of two neuropeptides that contribute to hyperphagia. In addition, PWS patients are observed to have higher than expected insulin spikes after meals (postprandial hyperinsulinemia) which can contribute to weight gain, decreased insulin sensitivity and a positive feedback loop supporting increased appetite. DCCR may work to control these spikes of insulin throughout the day in PWS patients.
DCCR was studied in a placebo-controlled pilot study at University of California Irvine. While modest in size (13 patients), this study identified a therapeutic dose of DCCR and suggested a promising impact on hyperphagia scores as well as body composition. It also suggested that the greatest clinical benefit from DCCR was seen in patients with moderate to severe hyperphagia, also known as PWS nutritional Phase 3.
Based on the pilot study results, Soleno designed and conducted the Phase III DESTINY study in 124 genetically confirmed and hyperphagic PWS patients down to 4 years of age. The study compared treatment with DCCR to placebo over a 3 month period and examined a primary endpoint of HC-QT, an accepted assessment of hyperphagia symptom severity conducted by the caregiver (usually mother). DCCR has Orphan Drug and Fast Track designations from the FDA, and the company believed this single study could, if positive, enable approval.
In June 2020, Soleno announced the DESTINY top-line results. DCCR demonstrated modest improvements on HC-QT but failed to achieve statistical significance on this primary endpoint. A range of secondary endpoints suggested benefit from DCCR, including on subjective measures such as clinician global impression of improvement, and also more quantitative measures such as fat mass, lean body mass, and levels of hunger hormones.
Positive Outlook on DCCR
Our initial reaction to these data were mixed. On the one hand, we saw a fairly well-tolerated drug with evidence of benefit across multiple endpoints (behavioral, biochemical, metabolic). Taken together, these appeared to contradict the natural course of the disorder. Furthermore, there appeared to be a subset of patients, including those with more severe symptoms at baseline, who responded very well to the drug.
On the other hand, the top-line analysis was somewhat discouraging. The placebo response was higher than expected. The company hypothesized that patients with less severe hyperphagia / those not yet truly in nutritional phase 2b or 3 may have been enrolled, leading to more noise in the dataset and a less consistent response to DCCR as a hyperphagia treatment.
However, in the last several months we have gained confidence in the DCCR program and its likelihood of approval for the following reasons.
1. Soleno has presented a compelling analysis of the DESTINY trial data that takes into account the COVID-19 pandemic and attempts to control for its significant impact on the PWS population. Specifically, when excluding hyperphagia scores that were collected after 3/1/20, the top-line analysis of the study was positive and statistically significant. While this is a post-hoc analysis, no one could have expected pandemic lockdowns to impact trial participants when designing the program. The new analysis intuitively makes sense to us given the impact of lockdown on these patients, their symptoms, and also their caregivers' abilities to objectively assess hyperphagia symptoms.
2. Soleno has presented further data from DESTINY, including from the extension study, at medical conferences. We believe there is a group of PWS patients with meaningful and durable responses to DCCR, which has in turn cultivated a group of advocates for the drug. These advocates include parents of those patients who remain on DCCR in extension studies, key opinion leaders in the PWS community, and patient advocacy groups. We believe approximately 100 total patients (approximately 80%) remain on DCCR in the extension study, with some out to 2 years. An interim look at the data from these patients demonstrated an impressive 50% average reduction in hyperphagia scores. One particularly vocal key opinion leader, Dr. Miller at the University of Florida, enrolled almost 30 patients into the DESTINY study. While initially skeptical of the drug mechanism, she now extols the benefits some of her patients have seen on treatment: not just on hyperphagia, but also on physical stamina, behavior, and overall functioning and well-being.
3. Soleno has met with the FDA and from that meeting outlined a set of analyses to include in a 2H21 New Drug Application (NDA). Importantly, we think the analyses exclusively involve existing data, either from previous/ongoing studies of DCCR, or from natural history cohorts of PWS. We believe these analyses may help to further demonstrate the benefits of DCCR, and to put DESTINY trial data in context, for the FDA as they consider whether to accept and review the NDA filing.
We strongly recommend watching the company's recent webcast which gives a succinct overview of: PWS; the impact of COVID-19 lockdown on PWS families; the new DESTINY trial analysis; Dr. Miller's experience with DCCR in her patients; and the commercial outlook for DCCR.
Link to the 2/4/21 webinar here: https://investors.soleno.life/events-and-presentations/event-calendar
These two slides capture the new analysis - but there is much more in the following deck: https://investors.soleno.life/static-files/c10a9a57-3fb3-4ec6-9322-90f4c889c7a7
There are approximately 9k diagnosed PWS patients in the US today. They are represented by two major advocacy groups-- PWRF and PWSA-USA—and their care is concentrated in ~150 pediatric endocrinologists. Thus, patients are relatively easy to reach. Given the unmet need, the fact that DCCR is taken once a day orally, has a good safety profile, and has demonstrated meaningful and durable hyperphagia benefits, we believe that, if approved, DCCR market penetration will be rapid and reimbursement adequate. We also believe the overall rate of diagnosis may improve with an approved treatment option. We believe that if approved in the US, in 5 years DCCR could generate $368M in revenues from treating approximately 5K US PWS patients with DCCR at net pricing of $75K/year.
There are a similar number of diagnosed PWS patients in the EU5 (UK, Germany, France, Italy, and Spain). We believe some of the favorable US market dynamics, for example the aggregation of many patients at centers of excellence, also apply to the EU5 market. That said, we also expect overall penetration and pricing to be somewhat lower in the EU5. We believe that if approved in the EU5, in 5 years DCCR could generate approximately $77M in revenues from treating approximately 3K US PWS patients with DCCR at net pricing of $25K /year.
We value Soleno based on present value of a probability adjusted, 5x peak revenue multiple for DCCR in the US and EU5 markets. We use what may prove to be a conservative 65% probability of success to account for regulatory risk, given the risk around the primary endpoint and Soleno’s limited resources as small company. In addition, we assume dilution of 9M shares in anticipation of a capital raise to fully fund the company through approval and launch.
Based on those assumptions, we value the stock at $10.75/share.
· The FDA could fail to accept the NDA for DCCR or fail to approve the drug without additional clinical studies.
· The company could face competitive challenges related to its intellectual property, as current IP is largely around the method of use and formulation for DCCR.
· While there are no treatments currently approved for hyperphagia in PWS, competitive mechanisms could emerge; Levo Therapeutics, Rhythm Pharma, and others may have viable programs.
· DCCR could face challenges around reimbursement for a product with orphan pricing.
· Complete analyses of PWS natural history cohorts and of DCCR clinical trials, including around patient outcomes in the long term extension study - 1H21
· Potential presentation of analyses at medical conferences - 2021
· Further FDA dialogue leading to US NDA submission - 2H21
· Acceptance of US NDA for review - 2H21
· Potential filing for approval in the EU - 1H22
· Potential DCCR approval & launch in the US - 2022
· Potential initiation of studies for DCCR in other rare obesity syndromes - 2022
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