SYNACT PHARMA

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Ticker: SYNACT
Price: 5.25 SEK
Shares outstanding: 12 417 449
Market cap: 64,57 MSEK
Cash: 21 MSEK
Debt: 1,9 MSEK
Date: June 24, 2017

Company

Synact Pharma is a biotechnology company engaged in research and development in the treatment of inflammatory disease. The company has a platform technology based on a new class of drugs targeting acute flares in inflammatory states and diseases with dual-activity. Their current main focus is Psoriasis arthritis, with a primary purpose of reducing inflammation and stimulating natural healing mechanisms using their product AP1189.

Board and management

Synact Pharmas board and management consists of several well experienced people with a history from several major drug companies and license deals. Some of the experience stem from companies such as AbbVie, Johnson & Johnson, Pfizer, Meda, Alfa Laval, Santaris and others.

Previous license deal involvement by board and management:

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Obviously, Synact Pharma is led by a group of well experienced people that have an idea of what works and what not. If they are successful once again remains to be answered, but their history definitely gives them an edge.

Company strategy

Synact Pharma has a very unique strategy with its lead project AP1189. The company currently has one goal, a commercial deal. It is not often you come across a company that does not wish to reach the market as a stand-alone company. The company has openly stated that they understand the market, and with positive Phase II studies comes the need for more capital, followed by several years of studies in a Phase III study. Synact Pharma wish to complete their Phase II, and then sell the company to a bigger pharmaceutical company. Since the company has announced they expect Phase II results in 2019, current and future stock holders have a chance for a market exit in a 24 month period. Attractive indeed. Since their IPO, the company announced that the capital they raised will be sufficient to proceed with the current Phase I study and the upcoming Phase II study. This decreases the risk from a shareholders perspective as no capital raise will be needed until a potential exit.

Melanocortin receptors and AP1189

Synact currently holds one product in its pipeline, AP1189. AP1189 has a first-in-class potential, meaning it is a completely new treatment method with a new mechanism of action in relation to existing treatments. The drug is expected to slow down the inflammatory process and thus reduce the acute symptoms of pain, swelling and stiffness, but also contribute to a faster healing process.

The melanocortins are peptide hormones which includes adrenocorticotropic hormone (ACTH) and different forms of melanocyte-stimulating hormones (MSH), and are derived from proopiomelanocortin (POMC) in the pituitary gland.

AP1189 is a biased agonist at melonocortin (MC) receptors (MC1-MC5). These receptors refers to a set of hormonal, neuropeptidergic, and paracrine singling pathways that are defined by components that include the five G protein-coupled melanocortic receptors. This signalling system regulates a remarkably diverse array of physiological functions, including adrenocortical steroidogenesis, energy homeostasis, pigmentation, natriuresis, erectile responses and exocrine gland secretion.

Physiological functions of MC1 includes melanocyte differentiation, synthesis of melanin, pigmentation and anti-inflammatory. It is located mostly in melanocytes, keratinocytes, macrophages, monocytes, neutrophils and endothelial cells. MC2 is mostly involved in steroidogenesis, especially in the adrenal cortex, keratinocytes and adipocytes. MC3 regulates anti-inflammatory, energy homeostasis and natriuretic activity specifically in the hypothalamus and limbic system, digestive tract, heart, kidney, immune cells and the placenta. MC4 is involved in energy homeostasis, sexual behaviour, and shares anti-inflammatory properties with MC1 and MC3, while being neuroprotective. It is widely distributed in the brain. MC5 is mainly involved in exocrine gland secretion and is well distributed in the peripheral tissues, specially in glands.

Inflammation is a physiological response to infection or tissues damage which, if properly controlled, ultimately leads to restoration of homeostasis. Cytokines, chemokines, nitric oxide and prostaglandins are mediators of inflammatory processes that induce vasodilation and extravasation of immune cells into injured tissues, activation of pathogen clearance mechanism and tissue regeneration. The inflammation we experience during simple infections cause, in a sense, more damage than the actual pathogen/infection we are experiencing. The human body is in a way, the reason we feel sick or bad. The inflammation factors have been linked to the pathology of several disorders with an exacerbated inflammatory component such as Alzheimer’s, Parkinson disease, multiple sclerosis, HIV, gout, RA and brain ischemia Melanocortins play an important role in the regulation of immune and inflammatory reactions. Different receptors are responsible for the anti-inflammatory properties of the melanocortins depending on the tissue or cell type involved.

Acute inflammatory response usually ends once the insult/pathogen is eliminated and tissue is repaired. If this does not occur, chronic inflammation will follow, leading to harmful effects. Our bodies local inflammation response is essential for pathogen clearance, tissue recovery and regeneration. With this in mind, rather modulating the inflammation process, instead of inhibiting it is important. Ideally, creating a drug which speeds up the inflammation process while speeding up recovery will prove a great benefit for not only the disease process, but resolution as well. This also decreases the chances of chronic inflammation, as seen in psoriasis, gout, rheumatoid arthritis etc.

AP1189 have been tested in mice in a preclinical setting. It was shown that orally active AP1189 is a biased agonists at MC1 and MC3 receptors, exerts anti-inflammatory and pro-resolving actions and reduces arthritis in mice.

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AP1189 was shown to inhibit cytokines as a typical anti-inflammatory effect, and stimulated phagocytosis and efferocytosis as a pro-resolving effect. AP1189 promoted phagocytosis by increasing both the proportion of phagocytic macrophages and the number of particles internalized per single cell. It also promoted phagocytosis of apoptotic neutrophils, a crucial event in resolution and for restoration of tissue homeostasis after an inflammatory event.

Melanocortins are well known compounds for their anti-arthritic actions in both preclinical and clinical setting. They’ve been shown to be effective in the treatment of rheumatoid arthritis and gout. The study on AP1189 revealed a significant reduction of synovitis, evident by the lower extent of leukocyte infiltration. It was also shown to lower total disease activity.

As a summary, AP1189 functions as a unique immune modulatory drug that stimulates melanocortin receptors to reduce the inflammation process by inhibiting major infiltration of white blood cells and decrease the release of inflammatory mediators, increasing phagocytosis which increase the healing process shown in the figure above. AP1189 will be given orally and is expected to be given once or twice daily.

Further studies

Synact Pharma has recently entered into Phase I study on healthy subjects. The purpose of the study is to evaluate safety, tolerability as well as pharmacokinetics of AP1189. Results of the study are expect in the second quarter of 2018, and they are currently preparing Phase II studies expected to begin in 2018.

Psoriasis

Psoriasis is a very common, chronic, noncommunicable, painful, disfiguring and disabling disease for which there is no cure. It is mostly characterised by well-demarcated erythematous plaques with silver scale. The etiology remains unclear, although there is evidence for genetic predisposition. The role of the immune system play a major role for current research.

Prevalence estimates have varied across studies, but it is estimated that the prevalence in adults range from 0.91% – 8.5% percent, and the prevalence of the disease in children is estimated up to 2.1%. Geographic location appears to influence the likelihood of having the disease, which tended to increase with increasing distance from the equator.

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Prevalence of Psoriasis – Global report on Psoriasis – WHO

There is no clear gender predilection, but genetic predisposition clearly plays a role in the development of psoriasis. Risk factors include smoking, obesity, drugs, infection, alcohol and vitamin D deficiency.

Psoriasis is a complex immune-mediated disease in which T-lymphocytes and dendritic cells play a central role. Typical findings of erythema and scaling are the result of hyperproliferation and abnormal differentiation of the epidermis, plus inflammatory cell infiltrates and vascular changes. Hyperproliferation changes can be seen as increased numbers of epidermal stem cells, increased number of cells undergoing DNA synthesis, a shortened cell cycle time for keratinocytes, and a decreased turnover time of the epidermis.

Psoriasis has been associated with multiple comorbidities, including cardiovascular disease, malignancy, diabetes, hypertension, metabolic syndrome, inflammatory bowel disease, serious infection and certain autoimmune disorders.

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Psoriasis arthritis

Psoriasis arthritis is an inflammatory arthritis associated with psoriasis. Initially, it was considered a variant of rheumatoid arthritis but has emerged as a distinct clinical entity. The disease affects woman and men equally, with an incidence of approximately 6 per 100,000 per year, with a prevalence of about 1-2 per 1000 in the general population. It is presented with pain and stiffness in affected joints. Usually, the stiffness is accentuated with prolonged immobility and is alleviated by physical activity. A history of psoriasis is presented in roughly 70% of patients.

Laboratory findings are consistent with an acute phase response and a degree of chronic inflammation, but unfortunately there are no characteristics making it distinct from inflammatory arthritis or systemic autoimmune rheumatic disease. Treatment involves NSAID’s, DMARD’s, biological agents and in severe cases, methotrexate, an anti-cancer drug. Currently there are no drugs treating the disease, only symptoms. This is the general case for all type of inflammatory diseases affecting the joints.

The global market is estimated to $2.5 – $4 billion and is expected to grow in the coming years.

Patents

The company holds patent protection relating composition, production and use up to and including 2027 (USA until 2028), with the option for a five-year extension for AP1189. The transfer of ownership has been registered in most countries were patents still apply, but have not yet been registered in Hong Kong and India.

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Competition

The major players operating in this market includes Johnson & Johnson, AbbVie, AMGen, Novartis, Pfizer, Eli Lilly, March & Co including several other companies. It is a highly competitive market.

As mentioned, there is no specific treatment available, but it is based on controlling the symptoms. Current treatments for psoriasis arthritis and similar disorders acts by reducing the inflammation and joint stiffness. Standard treatment includes NSAID’s, DMARD’s and steroids. These are drugs that inhibit the inflammatory process so that pain, swelling and joints are relieved of disease. There are certain biological drugs such as TNF-a blockers and immunosuppressants available. These drugs act by reducing or inhibiting the immune systems activity, thereby inhibiting the inflammatory process. These drugs are very effective, but come with a higher degree of side effects. In very severe cases we treat patients with methotrexate, an anti-cancer drug. So far, there is no therapy that would give hope for a complete cure of psoriasis.

AP1189 strength lies in its dual-effect of reducing the inflammation and speed up the healing process. If AP1189 is proven to be effective in patients with disease in the upcoming Phase II study, the potential market could escalate to a multi billion dollar market as not only psoriasis arthritis would be a valid target. AP1189 if successful, might then be a valid strategy for similar disorders such as rheumatoid arthritis.

Valuation

It is very hard to really valuate Synact in any way since we can’t really estimate the potential price of a license deal or calculate market numbers since the company will not proceed after completing Phase II studies. But with ongoing Phase I studies, it is safe to say that current valuation at roughly 65 MSEK is very low.

In hypothetical numbers, let’s assume that Synact succeeds with Phase I studies and continue to Phase II. Assume Phase II studies are successful and the company proceeds with a license deal.  Again, in hypothetical numbers, let us assume a market deal for 1 billion SEK (a low and conservative number comparing the product with market size potential), the market is currently giving Synact Pharma a 6.5% chance of market success. Based on the global data report that came out in 2016, the chance of approval for all indications in Phase I sits at 9.6%. Now as Synact will not be proceeding to approval, we could still use these numbers as it would impact the price of a license deal, even though maybe not very accurate. But it is the best we have for now.

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As psoriasis is assumed to be a multifactorial disease, I will use 9.6% as referral, but we could also use 11.1% for autoimmune if we’re picky. But by sticking with a 9.6% chance of success, the ”real” number should be 9.6%,  and not 6.5%. And let me remind you we are using a low sales numbers here, 1 billion SEK is a very conservative number if all things are considered. Putting this into the calculation, a fair price of Synact will be 7.7 SEK.

The potential license deal numbers that have been estimated by the management are $300-700 million. So, assuming we use these numbers instead we get a reference range of 2,6 – 6,1 billion SEK. In regards to chances of success, we receive a future potential share price of 208 – 490 SEK. Now, we can’t really use these numbers as Synact is currently nowhere near the potential of realizing these numbers yet.  But it gives an interesting perspective on risk-reward ratio. Is current share price of 5.25 SEK worth the risk of a potential reward of 208 SEK if we trust the managements numbers? I believe it is.

Now let us use the potential deal price proposed by the management in calculating our numbers. Assume a 2.9 billion SEK license deal, the market currently gives Synact a 2.2% chance of success. Assuming still a 9.6% chance of success as indicated by the global report, our new fair value is 22 SEK.

Now these numbers are calculated using a very hypothetical number, and something the market and investors can argue about for days with no-one really being right on either side. I am not saying that Synact should be worth 22 SEK per share right now, but I do believe that it shows that Synact is heavily undervalued at current valuation.

Upcoming catalysts

Patent approval in Hong Kong
Patent approval in India

2018

Completion of Phase I studies
Preparation of Phase II studies
Preparation of commercial deal with AP1189

2019
Completion of Phase II studies
Commercial deal

Financials

The company is well funded moving forward, and there should be a very low risk of a capital raise the next 24 months as the company will not be proceeding with more studies after completion of Phase II studies in 2019.

Ownership

Insider holdings of Synact Pharma is currently siting at 38.46%.

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Technicals

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Synact made a double bottom formation at 5 SEK, and is currently sitting at share price of 5.25 SEK. The market sentiment for biotech companies in Sweden have been low the past months. With IBB making a new 52-week high and breaking out of formation, we will hopefully see a shift in the trend. Current major support level is 5 SEK. A breakout on the upside could indicate new highs. Bigger resistance is found at a share price of 6.10, 6,45, 7,45 and 8 SEK.

Summary

Synact Pharma is a very interesting company, and one that I feel deserves more respect than it is being given by the market.  The low market cap and strong financials should be able to accelerate the company further if the trend in sentiment shifts for Swedish biotech.

As the biotech sector is a risk-reward game, and that current studies have shown themselves to be very promising, I do believe Synact is worth a small percentage of your portfolio.

Synact is currently in my portfolio with a 1.5% portfolio weight. I am initiating a buy on the stock with a price target of 7.7 SEK. In regards to the current Phase I study, I do believe it will be successful as nothing have indicated otherwise in preclinical studies. I will, if my target is reached, keep some of my shares moving into Phase II.

A successful Phase I study would increase the likelihood of a potential license deal, and would change my current estimations on the stock.

Risks

Risks include competition, financials and potential dilution, failure of clinical trials and cost compensation issues, general market and economic risks.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. I make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed will be met.

I wrote this article myself, and it expresses my own opinions. I have no business relationship with Synact Pharma mentioned in this article. This is no investment advice. I am not an investment adviser.

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