We are initiating coverage of ESSA Pharma Inc. (NASDAQ:EPIX) with a $6.00 valuation. ESSA is a biopharmaceutical company developing treatments for prostate cancer that are no longer responding to current therapies. The company is developing a series of compounds (‘anitens’) that disrupt the androgen receptor (AR) signaling pathway through a unique mechanism of action that targets the N-terminal domain (NTD) of the AR, as opposed to the ligand-binding domain (LBD) of the AR that is targeted by all other AR-directed prostate cancer treatments. The company has selected a lead preclinical aniten (EPI-7386) to advance to clinical trials, and we anticipate a Phase 1 clinical trial initiating in the first half of 2020.
Unmet Need in mCRPC
Following initial treatment, approximately one-third of patients with localized prostate cancer will develop recurrent or advanced disease. Many of these patients will undergo androgen ablation through the use of androgen deprivation therapy (ADT). However, most patients’ tumors will recur despite the absence of testosterone, and at that point the patient is deemed to have castration-resistant prostate cancer (CPRC). Patients with CPRC are typically treated with anti-androgens that inhibit the synthesis of androgens or the binding of androgens to the AR. Even with new anti-androgen therapies, resistance will develop for most every patient and at this point CPRC remains incurable.
Novel Class of Drugs to Treat Prostate Cancer
All current anti-androgen prostate cancer treatments that target the AR are specific to the ligand binding domain (LBD). These drugs are effective, but positive long-term outcomes are difficult due to various resistance mechanisms that develop. These mechanisms ultimately result in alterations to the AR in the LBD that result in keeping the activity of the AR intact and cause anti-androgen therapies to be ineffective with the cancer progressing. ESSA is developing a novel class of compounds (anitens) that target the N-terminal domain of the AR, where few if any resistance mechanisms are known to occur.
Lead Preclinical Asset Selected
Following completion of a Phase 1 clinical trial with the first-generation aniten compound EPI-506, the company discontinued its development due to an inability to achieve exposures that produced efficacy in animal models. The company then designed, synthesized, and screened a series of more potent and stable next-generation compounds. From these compounds, the company identified a next-generation aniten compound, EPI-7386, that has increased potency and reduced metabolism while maintaining a clean off-target profile. We anticipate a Phase 1 clinical trial of EPI-7386 initiating in the first half of 2020.
Financing Through Multiple Inflection Points
In July 2019, ESSA completed the acquisition of Realm Therapeutics, which gives ESSA access to Realm’s estimated net cash amount of $20.5 million. In addition, in August 2019 the company announced a public offering of common stock that is intended to raise gross proceeds of $36 million through the issuance of 18 million common shares. Following the closing of the public offering, we estimate the company will have sufficient financial resources for multiple inflection points, including the completion of the Phase 1 clinical trial of the EPI-7386 in patients with advanced prostate cancer and proof-of-concept data from a Phase 1 trial of EPI-7386 in combination with current anti-androgen therapy in earlier stage mCRPC patients.
We value ESSA using a probability adjusted discounted cash flow model that takes into account potential future revenues for EPI-7386. We model for ESSA to partner the asset and to receive a 15% royalty on net sales.
For EPI-7386, we estimate that the company will initiate a Phase 1 trial in 2020, a Phase 3 trial in 2023, and file for approval in 2025. While the opportunity could exist for accelerated approval with exceptional results, we believe our timeframe is a bit more conservative of an estimate. For the initial indication, which is patients with mCRPC who are no longer responding to therapy, we estimate there are approximately 30,000 in the U.S. and 80,000 in the E.U. who would be eligible for treatment based on the number of deaths attributed to prostate cancer each year. While this represents a potential billion dollar opportunity on its own, we believe the much larger opportunity exists in combination therapy with earlier stage patients. We estimate there are approximately 160,000 patients who have either non-metastatic CRPC, metastatic hormone sensitive PC, or ADT-failing metastatic CRPC. When including these patients in our model we believe EPI-7386 could achieve peak sales of $4 billion worldwide. Using a 25% chance of approval along with a 13.5% discount rate leads to a net present value for EPI-7386 of $154 million. Combining the net present value of EPI-7386 with the company’s current estimated cash balance and dividing by an estimated fully diluted share count of 34.1 million (excluding warrants that are priced at $42.80 and $66 per share) leads to a valuation of approximately $6 per share.
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