Neuren 2014 07 29

29 July 2014

Neuren (NEU)

Concussion in focus with trial initiation imminent

Recommendation Buy (unchanged) Price $0.11 Valuation $0.19 (unchanged) Risk Speculative

Analyst Tanushree Jain 612 8224 2849

Authorisation John Hester 612 8224 2871

GICS Sector Pharmaceuticals & Biotechnology

Expected Return Capital growth 73.0%Dividend yield 0.0%Total expected return 73.0%Company Data & Ratios

Enterprise value $150.0mMarket cap $172.0mIssued capital 1563.59mFree float 100%Avg. daily val. (52wk) $490,72012 month price range $0.064- $0.145

Price Performance

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES: THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 14 THAT FORM PART OF IT INCLUDING THE FOLLOWING DISCLOSURE. DISCLOSURE: BELL POTTER SECURITIES ACTED AS LEAD MANAGER IN THE JULY 2011 AND OCTOBER 2013 PLACEMENT AND RECEIVED FEES FOR THAT SERVICE.

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(1m) (3m) (12m)Price (A$) 0.08 0.09 0.09Absolute (%) 45.57 30.68 27.78Rel market (%) 42.86 28.82 16.82

Speculative

Ethics approval received for Phase II Concussion Trial NEU has received ethics approval for its Phase II concussion (mild TBI) trial. Enrolment will commence on receiving approval from the Human Research Protection Office of the US Army (BPe before end of Aug 14). Top-line results from the trial are expected in CY4Q15. The focus on health impacts of concussion in sporting, military and civilian populations has heightened recently, especially in the US. Given the high unmet need, large market and no other approved treatments for concussion, positive results from the trial would increase the attractiveness of NNZ-2566 to a licensee.

INTREPID trial receives additional grant from US Army The US Army has committed an additional US$3m to the NNZ-2566 INTREPID trial for moderate-severe Traumatic Brain Injury (TBI). NEU plans to have 10 new sites actively enrolling patients in CY2H14, however has revised guidance on timeline for completion of enrolment into the trial (CY1H15 vs. previous end CY14).

Investment View Well placed in CNS orphan drug market Neuren is an attractive orphan drug play and is well placed to benefit from the heightened interest by big and specialty pharma in the space from a licensing and M&A perspective. Its lead product NNZ-2566 is initially targeting two attractive multi-billion dollar orphan disease markets - Rett Syndrome and Fragile X Syndrome. We also expect concussion and moderate-severe TBI to add value to a licensing package.

Maintain Buy rating and Valuation of A$0.19/sh We have revised our NPAT est. as follows +11.6% FY14; -30.4% FY15 and -6.8% FY16. This is due to revised assumptions stemming from timing differences in completion of both TBI trials. Our valuation of A$0.19/sh remains unchanged due to positive offsets in additional funding, revised risk weighting and DCF roll over. We retain our Buy recommendation. 2014 would be a watershed year for NEU, with the first of the Phase II results from the Rett Syndrome trial due to be released in CY4Q14. Positive results from this trial will be a crucial de-risking event for the company.

Absolute Price Earnings Forecast

Year end 31st December 2012A 2013A 2014E 2015E 2016E

Revenue (NZ$m) 5.3 5.7 2.9 110.5 50.1 EBITDA (NZ$m) -4.5 -6.5 -12.1 102.1 41.6 NPAT (reported) (NZ$m) -6.4 -12.3 -12.5 71.9 29.9 NPAT (adjusted) (NZ$m) -4.7 -8.4 -11.5 73.9 31.9 EPS (reported) (cps) -0.5 -1.0 -0.8 4.3 1.7 EPS (adjusted) (cps) -0.4 -0.7 -0.7 4.4 1.8 EPS growth (%) N/A N/A N/A NM NM PER (x) N/A N/A N/A 2.7 6.6 EV/EBITDA (x) -36.9 -25.2 -13.6 1.6 4.0 Dividend (ps) 0.0 0.0 0.0 0.0 0.0 Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% Franking (%) N/A N/A N/A N/A N/A ROE (%) -59.3% -31.4% -70.3% 81.4% 25.6%

SOURCE: IRESS

NOTE: FY15/16 REVENUE INCLUDES EST. UPFRONT AND MILESTONES FROM POTENTIAL PARTNERS. SOURCE: BELL POTTER SECURITIES ESTIMATES

$0.01

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$0.05

$0.07

$0.09

$0.11

$0.13

$0.15

Jul

12

Oct

12

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13

Jul

13

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14NEU S&P 300 Rebased

Neuren (NEU) 29 July 2014

Concussion in focus for NNZ-2566 Previously, we have focused more on oral NNZ-2566s opportunity in chronic neurodevelopmental disorders Rett Syndrome and Fragile X Syndrome, given that they represent attractive multibillion dollar orphan drug markets.

In this note, we highlight NNZ-2566s opportunity in the acute Concussion or Mild Traumatic Brain Injury (TBI) market. Neurens oral NNZ-2566 is also being developed as an acute treatment for concussion or mild-TBI. The company is in advanced stages of preparation for its planned Phase II concussion trial. Ethics approval from the Institutional Review Board at Womack Army Medical Centre has been received. The company is waiting to receive approval from the Human Research Protection Office (HRPO) of the US Army Medical Research and Materiel Command (USAMRMC), to commence enrolment into the trial. We expect this trial to start recruiting patients in the next 2-5 weeks.

The company expects to release Top-line results from the trial in CY2H15. The focus on health impacts of concussion in sporting, military and civilian populations has heightened recently, especially in the US. Given the high unmet need, large market and no other approved treatments for concussion; we believe that positive results from the trial will increase the attractiveness of NNZ-2566 to a licensee.

Overview of Concussion Concussion is the most common type of Traumatic Brain injury (TBI). It is caused by a bump, blow or jolt to the head which changes the way the brain normally works. Concussion can also occur from a fall or a blow to the body which causes the head and brain to move quickly back and forth. Concussion is referred to as mild TBI because it is usually not life threatening, however its effects are serious, especially if a person suffers repetitive concussions. Mild TBI leads to a brief change in mental status or consciousness.

Concussion is common in body contact sports such as football, rugby, hockey, soccer, boxing etc. as well as recreational activities where falls are common such as cycling, skiing, horse riding etc.

In US military, service members suffer from concussion in both combat and training. Concussion is considered as the signature wound among US military personnel involved in the Iraq and Afghanistan wars. The vast majority of concussion in military occurs outside deployment.

It is estimated that concussion costs the US ~US$17 billion each year. This cost estimate only takes into consideration hospitalization and deaths due to concussion and not the emergency department visits. Thus it probably underestimates the economic burden.

Figure 1 - Concussion Anatomy

SOURCE: WIKIMEDIA


Disease Incidence: According to the US Centers for Disease Control and Prevention (CDC) ~2.5m people sustained a TBI in 2010. Of these TBI was associated with More than 50,000 deaths

280,000 hospitalizations

2.2m emergency department visits. This includes ~250,000 visits made by young people for sports or recreation related TBIs.

Mild TBI or concussion accounts for ~75% of all TBI in the US.

As an indication concussion is an underdiagnosed disease, since many people who suffer a concussion do not seek treatment for it. We expect that with growing awareness of the serious long-term effects of concussion, more people will seek medical attention, which is likely to grow the annual incidence figures.

Symptoms and Risks: Concussion has been identified as a risk factor for the occurrence of neurodegenerative disorders such as Alzheimers disease, Parkinsons disease as well as late-life memory impairment. Research has identified that damage to the brain caused by concussion can last for decades, even though the symptoms of the concussion might appear to have disappeared.

Concussions may lead to problems with memory and communication, personality changes, as well as depression and the early onset of dementia. Many people with concussion have difficulty returning to routine, daily activities and may be unable to resume work for weeks or months.

One of the recent studies showed that older athletes who suffered from a concussion 30 years ago had symptoms similar to those of early Parkinsons disease as well as memory and attention deficits. Research has also established the link between repeated sporting concussions and chronic traumatic encephalopathy (CTE). CTE causes early onset dementia.

Symptoms of concussion fall into four categories as depicted in the below figure.

Figure 2 - Symptoms of concussion

SOURCE: CDC, BELL POTTER SECURITIES

Concussion can also lead to a short period of unconsciousness lasting less than 30 minutes and seizures. Some symptoms may be visible immediately after trauma to the head, however some may not be noticeable for days or months after the injury. Sometimes people ignore their symptoms or dont recognize them.

Standard of Care and its quality: There is currently no drug treatment approved for concussion. Physical and mental rest and some analgesics (painkillers) like paracetamol to help with the related pain are generally standard treatment. Doctors would recommend a step-wise approach where the patient will be on complete rest till they are free of symptoms and then resume low level physical activity. If symptoms do not reappear then they can step up to more intense levels of physical and mental activity.

There is no approved drug for concussion

More than 1 million concussions occur each year in the US


The recovery period varies but on average a person may be unable to return to work for a few weeks to months. Also, there is a danger that if a person suffers another concussion during the recovery period, the risk of the person having a post concussive syndrome is very high.

Hence, there exists an unmet need for safe and effective pharmacological treatments that can limit the damage to the brain, therefore allowing the brain to heal or recover faster and reduce the likelihood of long term complications of concussion.

Concussion - a Growing Public Health Concern Concussion affects all pockets of society from young children, old age people, young adults who play contact sports as well as the service members in the military.

Sports-related concussions have grabbed headlines recently and in the US especially sports-related concussions among children and other young athletes has become a widely debated topic of national conversation.

In recent times the efforts to increase awareness of concussion as well as funding directed towards research into this condition has been stepped up. This growing awareness and support from government, sporting associations and non-profit organizations bodes well for Neurens efforts in this field. We discuss some of the key events and efforts which are contributing towards this rising awareness.

On 29th May, 2014 President Obama hosted the Healthy Kids and Safe Sports Concussion Summit at the White House to address the growing risks of concussions in youth. It was a daylong summit widely attended by researchers, the Head of NIH, professional athletes, coaches, league officials and sportcasters such as ESPN. The objective of the summit was to raise awareness as well as advance research into sports-related concussion.

During the summit, the President announced a series of initiatives to promote awareness and research efforts. These initiatives are to be funded by the US government, non-profit organizations and major sports leagues. We list the funding commitments below. National Football League (NFL) - US$25m over next 3 years to promote youth sports

safety. This funding will be used to test strategies like creating health and safety forums for parents and getting more trainers at high school games. The funding is in addition to NFLs previous donation of US$45m to USA Football for their Heads Up Football program aimed at promoting safer tackling techniques and coaching certification. US$16m from NFLs previous donation will be dedicated towards studies and clinical trials to examine the chronic effects of repetitive concussions.

National Collegiate Athletic Association (NCAA) and Defense Department - The NCAA which oversees college sports along with the Defense Department will spend US$30m together for concussion education and a huge concussion study involving 37,000 college athletes. This study will be supported by the military academies as required including the US Army, Navy, Air Force and Coast Guard.

National Institute of Standards and Technology (NIST) The NIST will invest US$5m over the next 5 years to develop more advanced materials that could provide better protection against concussion for athletes as well as military personnel.

Private donation by Steve Tisch to expand UCLA TBI programme Philanthropist Steve Tisch, Chairman of the NFL team New York Giants donated US$10m of his personal funds to expand the BrainSPORT (Brain Sports concussion Prevention Outreach Research and Treatment) Program at UCLA (University of California, Los Angeles) to prevent, study and treat concussion and TBI for athletes of all ages, especially youth.

US President Obama hosted in May 2014, a Concussions Summit to raise awareness about this serious health issue


Other initiatives taken in the US include:

All states in the US have passed laws which require athletes who have suffered a concussion to get a medical clearance before they can return to play. It also prohibits same day return to play after suspected concussion for the athlete.

Some organized youth sports groups have restricted the aggressive body contact prevalent otherwise in the sports for very young children. For example, in USA Hockey checking has been banned before 12 years of age.

The US CDC has spearheaded a public awareness campaign for parents, athletes, coaches and school staff called Heads Up.

Last year, President Obama presented a national plan during his address to Disabled American veterans, committing US$107m funding towards research into TBI and Post-Traumatic Stress Disorder (PTSD), citing the need to end the epidemic of suicide among returning war veterans.

The USAMRMC (U.S. Army Medical Research and Materiel Command) has extended grant funding to Neuren for its moderate-severe Traumatic Brain Injury and Concussion Trials. With the additional US$3m grant funding announced recently, the USAMRMC has extended ~US$24.5m in grant funding to Neuren to date. The Army through WRAIR (Walter Reed Army institute of Research) is also providing other support to Neuren in terms of conducting pre-clinical work to understand the mechanism of action of NEUs drug.

The USAMRMC has also teamed up with the Medical College of Wisconsin to conduct a head-to-head trial of neurocognitive test batteries for assessment of concussion. The objective of the study is to compare the different neurocognitive assessment tests used both in sports and military setting and determine which is most clinically effective in diagnosing concussion and assessing its effects.

Also, there have been some high profile events in both US and Australian sports which have served to highlight the issue of sports related concussion and the high risk of long term damage to the brain which occurs due to repeated TBIs.

Some specific sports events highlighted in media recently related to concussion:

In the US, earlier this month a Federal judge in Philadelphia granted preliminary approval to a deal which would compensate more than 20,000 retired NFL players suffering the long-term effects of concussion. The agreement figures to cost the NFL several hundred million dollars (the original proposal included US$675m on damage claims by retired players, US$75m for baseline testing, US$10m for medical research and education and up to US$112m to players lawyers), although there is no specific limit on how much the league might be required to pay eligible retirees.

The settlement is designed to last at least 65 years and cover retirees who develop Lou Gehrig's disease and other neurological problems including Alzheimers disease, Parkinsons and dementia.

In Australia, earlier this month prominent NRL (National Rugby league) player Liam Fulton (age 29 years) announced his retirement following a series of concussions (4 concussions in 6 games in 2014). The player had to retire early as he was at risk of long term, permanent brain damage from repeated concussions.

In June this year, prominent AFL (Australian Football League) player Jonathan Brown (age 32 years) announced his retirement on medical advice after failing to recover from his latest concussion.

Over the last month two prominent Australian AFL and NRL players have retired early due to concussion


Pre-clinical evidence in support of NNZ-2566 as a potential treatment for Traumatic Brain Injury In order to understand how NNZ-2566s mechanism of action lends itself as a potential treatment for TBI (both mild and moderate-severe), it is important to understand the underlying pathobiology of TBI.

PATHOBIOLOGY OF TBI

When a TBI occurs there are two distinct phases of damage due to the injury. The first phase is of the primary insult, which represents the direct mechanical damage

that occurs at the time of injury. The second phase is of the secondary injury, which follows the mechanical damage

and represents the resultant complex cascade of pathobiological processes that occurs over a few hours and days, to even months after the initial injury causing further damage.

There is no cure for the first phase besides prevention, hence the target for pharmacological treatments including Neurens NNZ-2566 is limiting and ameliorating the secondary damage.

Figure 3 - Traumatic Brain Injury Cascade

SOURCE: PUBMED1, BELL POTTER SECURITIES

SECOND PHASE OF INJURY AFTER TBI

Secondary brain injury is a delayed response to the primary injury. The primary injury initiates secondary events at the cellular, biochemical, and molecular levels that collectively mediate widespread damage. These events lead to neuro-inflammation, brain edema and delayed neuronal death. These events include (but are not limited to) disruption of blood brain barrier which leads to release of excitatory amino acid neurotransmitters especially glutamate, activation of glutamate receptors, influx of calcium into cells and release of calcium from intracellular stores, free-radical generation and inflammation. Excess calcium activates two groups of cysteine proteases called caspases and calpains, both of which initiate processes (necrosis and apoptosis) leading to cell death. With advances in research and greater understanding of the complexity of the TBI cascade, it is now recognized that a therapy which targets multiple secondary injury mechanisms has a higher likelihood of ameliorating the effects of TBI rather than one which just focuses on a single injury mechanism.

1 Schlosberg, D.Benifla, M.Kaufer, D. and Friedman, A.(2010). Blood-brain barrier breakdown as a therapeutic target in TBI. Nat Rev Neurol. 2010 July ; 6(7): 393403.


Some of the more important secondary injury mechanisms involve activation of neuronal cell death pathways, microglial and astrocyte activation, and neurotoxicity. Notably, studies have indicated that sustained microglial activation after trauma and the release of associated inflammatory factors may play a role in the chronic neurodegeneration and loss of neurological function after trauma.

NNZ-2566 - A PROMISING NEUROPROTECTIVE DRUG

The ability to reduce the damage and consequences of brain injury is referred to as neuroprotection and we view NNZ-2566 as a promising neuroprotective drug currently in development for TBI.

In animal models, NNZ-2566 has been shown to inhibit inflammatory cytokines, normalize microglial function, restore synaptic signalling and attenuate apoptotic pathways which lead to cell death. These are key features of the biology of TBI. As a result, it improves functional recovery, preserves cognitive function and inhibits post-injury seizures, addressing symptoms that are of primary concern in TBI patients.

Additionally, we believe NNZ-2566 ticks off on some of the key characteristics required for a neuroprotective drug

It targets multiple secondary injury mechanisms of TBI; It exhibits a clinically relevant therapeutic window;

It is able to cross the blood brain barrier;

Can be administered both as IV and oral formulation; Its been found to be safe in pre-clinical and clinical studies to date.

PRE-CLINICAL EVIDENCE IN SUPPORT OF NNZ-2566S NEURO PROTECTIVE EFFECTS

We highlight below some of the key preclinical studies which have helped in identifying the mechanism of action of NNZ-2566 and give evidence of its neuroprotective effects:

NNZ-2566 treatment inhibits neuroinflammation and pro-inflammatory cytokine expression induced by experimental penetrating ballistic-like brain injury (PBBI) in rats Wei, H. H.; Lu, X.-C. M.; Shear, D. A.; Waghray, A, et al. Journal of Neuroinflammation 2009

In this study the WRAIR (Walter Reed Army Institute of Research) suggest that neuroprotective effects of NNZ-2566 may, in part, be functionally attributed to the compound's ability to modulate expression of multiple neuroinflammatory mediators in the injured brain. Key findings from the study were:

3 days following PBBI, NNZ-2566 suppressed the inflammatory cell infiltration in tissue as compared to placebo arm.

The study found that NNZ-2566 treatment significantly reduced injury-mediated up-regulation of pro-inflammatory cytokines IL-1, TNF- and interferon gamma in the injured brain, but did not affect the PBBI-induced up-regulation of anti-inflammatory cytokine IL-6 levels. It is noteworthy that NNZ-2566 inhibited TNF- and interferon gamma during the acute injury stage (4-12 hours post injury) but did not have a prolonged inhibitory effect on them. On the contrary, NNZ-2566 suppressed IL-1 four hours post injury and maintained prolonged suppression of it out to 7 days. We view this differential effect of NNZ-2566 on the abovementioned cytokines as a vital element of its neuroprotective effect, given that sustained up-regulation of IL-1 has been implicated in neuronal loss whereas both TNF- and interferon gamma while considered as detrimental during acute phase are actually considered beneficial during the chronic (3-7 days post injury) phase.


NNZ-2566, a Glypromate Analog, Improves Functional Recovery and Attenuates Apoptosis and Inflammation in a Rat Model of Penetrating Ballistic-Type Brain Injury Lu, X.-C. M.; Chen, R-W, Wei, H et al. Journal of Neurotrauma 2009

In this study the WRAIR demonstrated that NNZ-2566 reduced the level of expression of genes associated with inflammation, necrosis and apoptosis key elements of the brain injury cascade and reduction in the functional deficits induced by these phenomena. Key findings from the study were:

NNZ-2566 promoted recovery of motor function in a dose and time-dependent manner following PBBI.

NNZ-2566 attenuated the PBBI induced inflammatory response by reducing the activation of microglial cells and decreasing the infiltration of neutrophils at 72 hours post-injury.

NNZ-2566 protected against PBBI-induced apoptotic and inflammatory responses by modulating Bax and Bcl-2 protein expression and reducing injury-induced activation of microglial cells and neutrophil infiltration. NNZ-2566 decreased Bax expression and increased Bcl-2 expression.

We view this differential effect of NNZ-2566 on the abovementioned proteins as a vital element of its neuroprotective effect, given that the antagonistic effects of Bax to promote apoptosis and Bcl-2 to inhibit apoptosis have been reported in studies in which increases in Bax were associated with poor functional outcome and increases in Bcl-2 correlated with improved functional recovery.

NNZ-2566, a glypromate analog, attenuates brain ischemia-induced non-convulsive seizures in rats Lu, X.-C. M.; Si, Y et al. Journal of Cerebral Blood Flow & Metabolism 2009

This study conducted by the WRAIR indicated that NNZ-2566 significantly reduced the number and duration of non-convulsive seizures following brain injury. Besides the direct cellular and molecular effects of TBI, up to one-third or more of patients experience non-clinical or non-convulsive seizures in the acute, post-injury period. Non-convulsive seizures (NCSs) are associated with increased brain injury and long-lasting cognitive and neurological deficits.

Inflammatory cytokines after brain injury have been implicated in epileptogenesis. Blood-brain barrier disruption is also considered to be a fundamental catalyst for the initiation of epileptic activity (seizures) in the injured brain. The WRAIR suggest that the anti-seizure effects of NNZ- 2566 may, in part, be functionally attributed to the compound's ability to modulate expression of multiple neuroinflammatory mediators in the injured brain as identified in previous studies.

The Path Forward Phase II Concussion Trial Neuren is in advanced stages of preparation for its planned Phase II concussion (mild TBI) trial. The trial is expected to enrol 132 patients with mild TBI at the Womack Army Medical Centre in North Carolina. It will be double-blind and placebo-controlled.

Ethics approval from the Institutional Review Board at Womack Army Medical Centre has been received. The company is waiting to receive approval from the Human Research Protection Office (HRPO) of the US Army Medical Research and Materiel Command (USAMRMC), to commence enrolment into the trial. We expect this trial to start recruiting patients before the end of August 2014. The company expects to release Top-line results from the trial in CY2H15. We expect that the trial will finish enrolment by end of CY3Q15 with results released towards the end of CY15.


In the trial, patients with concussion will be randomised (1:1:1) to receive within 24 hours of injury either 35mg/kg of NNZ-2566, 70mg/kg of NNZ-2566 or placebo, twice daily for 7 days. Post-injury assessments will be made out to 28 days (including the initial 7 day treatment period). NNZ-2566 will be administered as a powder mixed in a strawberry flavoured solution.

The trial will have a number of safety and efficacy measures assessing the following

Change from post-injury baseline cognitive function, Time to return to pre-injury cognitive function, Ability to return to duty,

Physical, psychological and functional disability measures.

The objective of the trial is to determine whether treatment with NNZ-2566 within 24 hours of injury aids in faster or more complete recovery of neurological and cognitive function. Some points for discussion on the trial

Some aspects of the trial warrant further discussion as we detail below:

Inclusion criteria and diagnosis of mTBI: We are happy with the inclusion criteria which take into account a diagnosis of mild TBI based not only on the widely-used severity scoring GCS scale but also considers the signs and symptoms of concussion as determined by a qualified clinician. The signs and symptoms basically account for the conceptual definition of concussion given that the GCS classification has an arbitrary nature.

Patients will be included if they have a diagnosis of mTBI resulting from an injury that meets the following criteria:

Occurred within 24 hours of Screening and was associated with a clear mechanism of injury and an alteration of consciousness (e.g., confusion, feeling dazed, or "seeing stars")

Was associated with a GCS (Glasgow Coma Scale) score of 13-15 which is classified as mild.

Was associated with 1 or more of the signs and symptoms, as determined by a qualified clinician such as headache, loss of consciousness, amnesia, difficulty concentrating, balance problems, dizziness, visual problems, personality changes, etc.

Trial being conducted at a military site: The fact that the trial is being conducted at a military site, in our view, is advantageous for Neuren. Availability of baseline data on patients prior to injury such as drug use and medical history as well as baseline results from ANAM (Automated Neuropsychological Assessment Metrics) will make it easier to compare with post injury baseline data. This allows for better characterisation of outcomes post injury. The ANAM is a library of computerized tests that measures 6 cognitive domains believed to be most highly impacted by mTBI: simple reaction time, procedural reaction time, learning, working memory, delayed memory, and spatial memory.


Earnings and Valuation Changes We have revisited our assumptions for Neuren based on progress with the concussion and moderate-severe TBI programmes.

Key changes to our modelling assumptions Following ethics approval for the Phase II concussion trial and its imminent start before

end of August, we have increased our assumed probability of success for NNZ-2566 in Concussion or Mild TBI to 14.5% (from 9%).

We had expected the NNZ-2566 concussion trial to be initiated before end of June, with results released by mid CY15. Given the ~4-8 weeks delay in initiation of the trial we now expect the results from the trial by end of CY15. Accordingly, we have pushed our launch estimate timeline from CY3Q19 to CY4Q19. As a result, we have reduced our launch year (FY19) market penetration for NNZ-2566 and adjusted the growth in market share for subsequent years accordingly.

We have included the additional US$3m grant from the US Army for the development of NNZ-2566 for Traumatic Brain Injury announced by Neuren earlier this month. This brings the total grant funding from the US Army to date for the NNZ-2566 TBI program to US$24.5m. The timeline for the grant has also been extended to 31st December 2015.

We had earlier expected the NNZ-2566 INTREPID (moderate to severe TBI) trial to be fully enrolled by end of CY14 with results in CY1H15. The company now plans to have 10 additional trauma centres actively enrolling patients in CY2H14, bringing total sites in the trial to 22 (vs. 12 originally planned) in order to accelerate recruitment into the trial. The additional grant funding and extension of grant timeline while positive, have resulted in later activation of the new centres. As a result, the company now expects the trial to complete enrolment in CY1H15 with Top-line results expected to be released in CY2H15.

Accordingly, we have pushed our launch estimate timeline from CY1H19 to CY2H19. As a result, we have reduced our launch year (FY19) market penetration for NNZ-2566 for moderate to severe TBI and adjusted the growth in market share for subsequent years accordingly.

We have re-adjusted our R&D expenses forecasts for the INTREPID and concussion trial based on the changed timelines resulting in a decrease in our FY14 numbers offset by an increase in our FY15 numbers.

At this stage, we continue to assume that NNZ-2566 could be licensed in CY2H15 both the IV and oral form across all 4 indications Rett Syndrome, Fragile X Syndrome, Moderate-Severe TBI and Concussion. However, given that results from Phase II INTREPID and concussion trials will only be available in CY2H15, we have reduced our upfront payment estimates while leaving the total deal values unchanged. We continue to expect a US$680m deal but have reduced our upfront payment forecast to US$90m vs. the US$120m forecast earlier.

We forecast NEU to end FY14 with NZ$16.7m (was NZ$15.9m) in cash. We have rolled forward our DCF model.

We now use the Bell Potter AUD/NZD 2014 FX rate estimate of 1.0809 vs. FY14 FX rate of 1.0677 used earlier.

We have updated our model for change in the Bell Potter USD/NZD cross rates for FY14-16E (~4-6% change) used to convert the forecasted royalties and milestones receivable by NEU.


We note that the company has started reporting in AUD from 1st January 2014, changing its historical reporting currency of NZD. We expect to make changes to our model once we receive proforma historical statements from the company in AUD.

The impact of our revised assumptions stemming from delayed timelines for trial completion for both the TBI trials were offset by additional funding, revised risk weighting and DCF roll over. Following the above changes, our DCF value for Neuren remains unchanged at A$0.19/sh.

Table 1 - Key Changes to our FY14-16 Forecasts

ALL AMOUNTS IN NZD IN MILLIONS EXCEPT EPS. OPERATING COSTS ARE ADJUSTED TO EXCLUDE SHARE BASED COMPENSATION. FY15/16 REVENUE NUMBERS COMPRISE OF POTENTIAL UPFRONT AND MILESTONE PAYMENTS RECEIVED ON NNZ-2566 (ALL FORMS) FROM LICENSEES SOURCE: BELL POTTER SECURITIES ESTIMATES

Table 2 - Summary of Valuation

SOURCE: BELL POTTER SECURITIES ESTIMATES

Table 3 - NEU -Probability-Weighted Sum-of parts Base Case Valuation Summary (AUD)

GLOBAL PEAK SALES ARE PRE-RISK ADJUSTMENT AND ROYALTIES SOURCE: BELL POTTER SECURITIES ESTIMATES

Table 4 Base case Valuation Sensitivity Analysis to WACC and Terminal Growth Rate


Old New Change (%) Old New Change (%) Old New Change (%)

Revenues 2.9 2.9 0.0% 154.8 110.5 -28.6% 52.4 50.1 -4.3%

Interest Income 0.6 0.6 1.9% 2.1 1.6 -22.5% 4.3 3.3 -23.4%

R&D 12.5 11.5 8.0% 3.9 4.4 -13.7% 4.3 4.3 0.0%

G&A 4.0 3.5 12.5% 4.0 4.0 1.1% 4.2 4.2 0.0%

EBITDA -13.6 -12.1 11.0% 146.9 102.1 -30.5% 43.9 41.6 -5.1%

EBIT -13.7 -12.2 10.9% 146.7 102.0 -30.5% 43.7 41.5 -5.1%

NPAT (adjusted) -12.9 -11.5 11.6% 106.1 73.9 -30.4% 34.2 31.9 -6.8%

Adjusted Diluted EPS -0.8 -0.7 12.0% 6.3 4.4 -29.6% 2.0 1.8 -7.9%

FY2014E FY2015E FY2016E

Revised Forecasts Base case

Enterprise value from DCF (AUDm) 313.4Add: Cash at end FY14E (AUDm) 15.4Less: Debt at end FY14E 0.0Equity value (AUDm) 328.8Total diluted shares (million) 1,753.9Value per share (AUD) $0.19Current Share price (AUD) $0.110Expected Capital Growth 72.7%

Asset Stage

First Fiscal

Year of sales

(Est.)

Peak Market

share

Peak Global

Sales (US$m)

Probability of

success

Probability

adjusted NPV

(A$m)

Value per

share (A$)% Mix

NNZ-2566 (IV) - Severe Traumatic Brain Injury Phase II 2019 12.0% $1,162 14.5% $85 $0.05 26.0%

NNZ-2566 (oral) -Concussion Phase II ethics approval received 2019 12.0% $547 14.5% $74 $0.04 22.4%

NNZ-2566 (oral)- Rett Syndrome Phase II enrolment complete 2018 20.0% $557 14.5% $98 $0.06 29.7%

NNZ-2566 (oral)- Fragile X Syndrome Phase II 2019 10.0% $700 14.5% $90 $0.05 27.3%

Other Pipeline/Non-allocated NA NA NA NA NA -$33 -$0.02 -10.0%

Cash (EOY 2014E) NA NA NA NA NA $15 $0.01 4.7%

Equity Value $329 $0.19 100%

$0.19 15.0% 18.0% 21.0% 24.0% 27.0%

-0.5% $0.22 $0.19 $0.16 $0.14 $0.13

0.0% $0.22 $0.19 $0.16 $0.14 $0.13

0.5% $0.22 $0.19 $0.16 $0.14 $0.13

1.0% $0.22 $0.19 $0.16 $0.14 $0.131.5% $0.22 $0.19 $0.16 $0.14 $0.13

2.0% $0.22 $0.19 $0.16 $0.14 $0.132.5% $0.22 $0.19 $0.16 $0.14 $0.13

WACC

Terminal Growth

We value NEU at A$0.19/sh


Neuren Pharmaceuticals (NEU) COMPANY DESCRIPTION

Neuren Pharmaceuticals (ASX: NEU), domiciled in Auckland, NZ and with offices in the US and Australia, is a clinical stage drug development company focused on drugs to treat disorders of the Central Nervous System. The companys lead candidate is NNZ-2566, now in Phase II, for the treatment of Traumatic Brain Injury, Rett Syndrome and Fragile X Syndrome. Neuren is also planning to start a Phase II with NNZ-2566 in Concussion shortly. The company is doing pre-clinical work on NNZ-2591 as a potential treatment for Fragile X Syndrome, Multiple Sclerosis, Parkinsons disease and peripheral neuropathy. NEUs subsidiary Perseis Therapeutics is working on monoclonal antibodies for the treatment of breast and other cancers. Neuren currently has one major shareholder, Walker Corporation, associated with the Sydney businessman Lang Walker, with 17% of the stock.

INVESTMENT STRATEGY

In our view, Neurens shares are poised to re-rate as the company develops and subsequently commercializes its oral NNZ-2566 product initially in two attractive orphan neurodevelopmental disease markets, Rett Syndrome (RS) and Fragile X Syndrome (FXS), with the potential to be useful in a wide variety of autism spectrum disorders. We estimate that at an annual reimbursement of $100,000 per patient, Rett Syndrome would represent a US$1.6bn market and Fragile X would represent a US$7bn market in the US alone. Neuren is an attractive orphan drug play and is well placed to benefit from the heightened interest by big and specialty pharma in the space from a licensing and M&A perspective. We believe that 2014 will be a watershed year for Neuren, with the release of Top-line data from the Phase II Rett Syndrome trial in CY4Q14. Positive data from this trial will serve as a proof of concept for NNZ-2566 and substantially de-risk the company. We also expect considerable upside in the event of clinical success for NNZ-2566 (IV version) in Traumatic Brain Injury and NNZ-2566 (oral) in Concussion. We believe NEUs progress in clinical trials for NNZ-2566 will strengthen its value proposition and increase its attractiveness to a potential licensee. A favourable licensing deal for NNZ-2566 could trigger a significant re-rating.

KEY RISKS

We see the following key stock specific risks to our investment thesis on Neuren:

Reliance on partnerships to unlock value: The success of NEUs business model is underpinned by its ability to ultimately attract a valuable partnering deal for its NNZ-2566 asset. Failure to attract licensees for this drug candidate or to negotiate attractive deal terms as we have postulated will severely impact our forecasts.

Clinical risk: There is a risk that NEUs clinical trials for NNZ-2566 fail to reach their endpoints, which would in turn impact its partnering prospects.

Reliance on one drug class to drive value: NEUs drug candidate NNZ-2566 for both versions IV and oral and pre-clinical candidate NNZ-2591 are of the same class. This makes them vulnerable to the success/failure of any one trial in any one indication to impact the sentiment of the drug being trialled in any other indication.

Funding risk: Delays in partnering of NNZ-2566 and receipt of upfront/milestone payments from the licensee may impact NEUs funding position in the long term. Although NEU has a high cash balance currently, the company may need to raise additional capital if its burn rate increases significantly.

.

NEU had A$22.5m cash at the end of 2Q14 and on average has burned ~$0.63m/month over the last twelve months


Neuren as at 29 July 2014

Recommendation Buy, Speculative Price $0.11 Valuation $0.19

Table 5 - Financial summary


Neuren Pharmaceuticals (NEU) Share price (A$) $0.110As at 29 July 2014 Market cap (A$m) 172.0

Profit and Loss Valuation dataY/e December 31 (NZ$m) 2012A 2013A 2014E 2015E 2016E Y/e December 31 2012A 2013A 2014E 2015E 2016ERevenue* 5.3 5.7 2.9 110.5 50.1 Adjusted Net profit (NZ$m) -4.7 -8.4 -11.5 73.9 31.9EBITDA

-4.5 -6.5 -12.1 102.1 41.6 EPS (c) -0.40 -0.66 -0.70 4.44 1.83Depreciation & Amortisation

-0.5 -0.5 -0.1 -0.1 -0.2 EPS growth (%) N/A N/A N/A NM NMEBIT

-4.9 -7.0 -12.2 102.0 41.5 P/E ratio (x) N/A N/A N/A 2.7 6.6Net interest & Other Income/(Expense) 0.1 -1.4 0.6 1.6 3.3 CFPS (c) -0.3 -0.7 -0.7 4.5 1.8Pre-tax profit

-4.9 -8.4 -11.6 103.6 44.7 Price/CF (x) -38.2 -18.2 -18.0 2.7 6.6Tax 0.0 0.0 0.0 29.0 12.5 DPS ( c ) 0.0 0.0 0.0 0.0 0.0NPAT (adjusted)

-4.9 -8.4 -11.6 74.6 32.2 Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%Less minority interests

-0.1 0.0 -0.1 0.7 0.3 Franking (%) N/A N/A N/A N/A N/ANet profit to shareholders

-4.7 -8.4 -11.5 73.9 31.9 EV/EBITDA -36.9 -25.2 -13.6 1.6 4.0EV/EBIT -33.5 -23.5 -13.5 1.6 4.0

CashflowY/e December 31 (NZ$m) 2012A 2013A 2014E 2015E 2016E Share price now (A$) $0.110Reported NPAT plus minority interests

-6.5 -12.3 -12.6 72.6 30.2 Valuation (A$): $0.19Non-cash items 2.3 6.0 1.1 2.1 2.2 Premium (discount) to price 72.7%Working capital 0.5 -2.1 0.5 -0.3 -0.5 Recommendation: BuyOther operating cash flow 0.0 0.0 0.0 0.0 0.0 Risk Rating SpeculativeOperating cashflow

-3.7 -8.4 -11.0 74.4 31.8 Profitability ratiosY/e December 31 2012A 2013A 2014E 2015E 2016E

Capex 0.0 0.0 0.0 -0.1 -0.1 EBITDA/revenue (%) N/A N/A N/A 92.4% 83.1%Investments 0.0 0.0 0.0 0.0 0.0 EBIT/revenue (%) N/A N/A N/A 92.3% 82.8%Other investing cash flow 0.0 0.0 0.0 0.0 0.0 Return on assets (%) -44.2% -29.1% -60.8% 78.3% 24.8%Investing cashflow 0.0 0.0 0.0 -0.1 -0.1 Return on equity (%) -59.3% -31.4% -70.3% 81.4% 25.6%

Return on funds empld (%) -59.1% -31.5% -71.1% 80.2% 25.2%

Change in borrow ings 0.0 0.0 0.0 0.0 0.0 Dividend cover (x) N/A N/A N/A N/A N/AEquity issued 0.5 30.0 1.6 1.4 2.1 Effective tax rate (%) 0.0% 0.0% 0.0% 28.0% 28.0%Dividends paid 0.0 0.0 0.0 0.0 0.0Other f inancing cash flow 0.0 0.0 0.0 0.0 0.0 Liquidity and leverage ratiosFinancing cashflow 0.5 30.0 1.6 1.4 2.1 Y/e December 31 2012A 2013A 2014E 2015E 2016E

Net cash (debt) (NZ$m) 6.5 26.5 16.7 92.4 126.2Net change in cash -3.2 21.6 -9.4 75.7 33.8 Net debt/equity (%) N/A N/A N/A N/A N/A

Net interest cover (x) N/A N/A N/A N/A N/ACash at end of period* 6.5 26.5 16.7 92.4 126.2 Current ratio (x) 2.5 12.6 6.7 42.0 57.4* Inc ludes e f f e c t of e x cha nge r a t e f luc t ua t i ons on c a sh ba la nce

Free cash flow-3.8 -8.4 -11.0 74.4 31.8

Balance sheet InterimsY/e December 31 (NZ$m) 2012A 2013A 2014E 2015E 2016E Y/e December 31 (NZ$m) 2H12A 1H13A 2H13A 1H14E 2H14ECash 6.5 26.5 16.7 92.4 126.2 Revenue 2.7 3.4 2.3 2.2 0.7Current receivables 0.0 1.8 1.8 1.6 2.1 EBITDA -2.8 -2.7 -3.8 -3.7 -8.4Inventories 0.0 0.0 0.0 0.0 0.0 Depreciation & Amortisation -0.2 -0.2 -0.2 -0.1 -0.1Other current assets 0.2 0.0 0.0 0.0 0.0 EBIT -3.0 -2.9 -4.1 -3.7 -8.5Current assets 6.6 28.3 18.5 94.0 128.4 Net interest & Other Expense 0.1 0.0 -1.4 0.3 0.3

Pre-tax profit-2.9 -2.9 -5.5 -3.4 -8.1

PPE 0.0 0.0 0.0 0.0 0.0 Tax 0.0 0.0 0.0 0.0 0.0Non-current receivables 0.0 0.0 0.0 0.0 0.0 Adjusted Net Profit -2.9 -2.9 -5.5 -3.4 -8.1Intangible assets 4.0 0.4 0.3 0.3 0.2 Less minority interests 0.0 0.0 0.0 0.0 -0.1Other non-current assets 0.0 0.0 0.0 0.0 0.0 Net profit to shareholders -2.9 -2.9 -5.5 -3.4 -8.1Non-current assets 4.1 0.5 0.4 0.3 0.2

Total assets 10.7 28.7 18.9 94.3 128.6

Payables 2.7 2.2 2.2 2.2 2.2Debt 0.0 0.0 0.0 0.0 0.0Provisions 0.0 0.0 0.0 0.0 0.0Other liabilities 0.0 0.0 0.5 0.0 0.0Total liabilities 2.7 2.2 2.7 2.2 2.2

Shareholders equity 8.2 26.7 16.4 91.7 125.7Minorities

-0.2 -0.2 -0.3 0.4 0.7Total shareholders funds 8.0 26.5 16.1 92.1 126.4

Total funds employed 10.7 28.7 18.9 94.3 128.6

W/A Diluted shares on issue 1,174.1 1,261.2 1,625.8 1,662.5 1,741.6

* FY 15/ 16 revenue numb ers comprise o f po t ent ial up f ront and milest one payment receip t f o recast f rom l icensee on N N Z- 2 56 6 deal in FY 2 H15


Bell Potter Securities Limited ACN 25 006 390 7721 Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone +61 2 9255 7200 www.bellpotter.com.au

Recommendation structure

Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected.

Hold: Expect total return between -5% and 15% on a 12 month view

Sell: Expect

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