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NNVC: Initiating Coverage

By Anita Dushyanth, PhD

NYSE:NNVC

READ THE FULL NNVC RESEARCH REPORT

INITIATING COVERAGE
NanoViricides, Inc. (NNVC) is an early stage nano-pharmaceutical company that was first listed in 2005 and became a reporting company the following year. The company is involved in discovering and developing therapeutics for treating viral infections with drug candidates in the preclinical stage.

NanoViricides is currently focused on the development of a potential candidate for the treatment of shingles (herpes zoster), which is caused by the reactivation of varicella zoster virus (VZV). The incidence of shingles is about one million new cases every year and it continues to rise. The number of cases is driven by an aging population and immunocompromised adults. The increase in incidence of viral infections highlights an unmet need for novel therapies such as NanoViricides’ that could potentially offer advantages to traditional therapies. NanoViricides has candidates for shingles treatment, which addresses a market of close to one billion dollars annually. The company also intends to further develop this lead candidate for the prevention of post-herpetic neuralgia (PHN), a debilitating neuropathic pain syndrome that is the most common complication of shingles and occurs long after the blisters disappear.

HerpeCideTM Program
NanoViricides is primarily focused on the HerpeCide program which involves clinical development of drugs against
cold sores, genital herpes and shingles. The drug candidates for these indications exhibit similar chemistry profile and are based on the same family of ligands and polymers, thus enabling parallel development.

Indications:
Shingles
: Initial infection by VZV establishes the virus in the sensory nerve ganglia. In immunocompromised patients, the elderly and those who have already had chickenpox, the virus is reactivated and causes shingles. Since the virus has invaded the nervous system, the symptoms of shingles are more severe than those of chickenpox. Shingles usually develops as a unilateral dermal pain around the waistline. The pain could be tingling, numbing and precedes the appearance of rash. Its symptoms are characterized by blisters that burn, are itchy and painful. The rash develops over the course of about one week, evolves into fluid-filled blisters which dry up and forms crusts. The scabs clear in two to three weeks’ timeframe.

PHN: PHN, a complex neuropathic pain, is the most common complication of shingles and can last for months or years, long after the rash has cleared. The pain resulting from a peripheral-nerve damage from VZV infection is burning, throbbing and sharp in nature accompanied by an exaggerated response to a painful stimuli (hyperalgesia) and altered sensitivity to touch (allodynia). Such pain that lasts beyond 120 days is classified as PHN. Treatment for PHN involves either topical analgesics (lidocaine or capsaicin) or systemic therapy with gabapentin (Neurontin®, Gralise®), pregabalin (Lyrica®). These drugs have been approved for use by the FDA. At times, opioid analgesics and tricyclic antidepressants are also used. However, no drugs have been effective in relieving pain from PHN.

Currently available treatment options…
Vaccines
: Vaccination against shingles is recommended for persons who have already experienced primary VZV infection (chickenpox). The Centers for Disease Control and Prevention (CDC) Advisory Committee on Immunization Practices (ACIP) recommends zoster vaccine for all persons aged 60 years and above who have no contraindications. Currently, there are two vaccines available in the market: the Shingrix® vaccine by GlaxoSmithKline and the Zostavax® vaccine by Merck.

Antiviral medications: Antiviral prescriptions include acyclovir, valacyclovir, and famciclovir, which are guanosine analogs, that are competitive inhibitors of viral DNA polymerase causing viral replication to terminate. They are dosed at ~800 mg three times a day for one week to ten days and inhibit replication of both HSV and VZV. Other treatments including anti-inflammatory corticosteroids such as prednisone are considered when facial nerves are affected.

Challenges with currently available treatment options
Treatment with antiviral therapies are required to be initiated within the first 72 hours of onset of shingles rash for maximum benefits. Clinical trials have demonstrated that antiviral therapies must be taken as multiple doses per day to minimize the intensity of pain and duration of healing. For both acyclovir and valacyclovir, dosage alterations are required for patients with significant renal dysfunction1. Further, antiviral therapies are not effective in PHN and require patients to resort to analgesics to alleviate pain temporarily.

The zoster vaccine cannot be administered to immunocompromised individuals. While Shingrix reduced PHN by 90%, Zostavax had shown just a 67% reduction in adults aged 60 or older, according to the SPS study2. Given the complex nature of the condition and its high variability in manifestation among patients, it might be worthwhile to treat patients with drugs that could potentially inhibit the onset of action.

Market Potential
Anyone who has been afflicted with chickenpox, is a potential candidate for shingles. As per CDC statistics, one-third of Americans will get shingles in their lifetime and 15% of those will experience PHN and there are about 1 million new cases annually. The immune system is compromised in function with increasing age and therefore the incidence of shingles is greater (more than 50% of cases) in people over the age of 60. Shingles most often occurs once in most people. However, about 4% of the affected population has recurrent attacks.

Rate (per 1000 person-years) of HZ and PHN by age in the U.S.3



View Exhibit I

VZV complications can cause hospitalization in about 1-4% of patients4. A study was conducted in 20095 to assess the healthcare cost associated with shingles. The annual cost of treating shingles in patients 50 years and older immunocompetent adults was estimated at roughly $1 billion. Sales of Valtrex (valacyclovir), the high-value growth product for herpes from GSK, was around $1.5 billion and accounted for roughly 43% market share in 20086. Valtrex is indicated for the treatment of shingles as well as cold sores.

Clinical Development Plan
Preclinical data supporting drug candidates for the treatment of Shingles and PHN

NanoViricides is developing drug candidates for the treatment of Shingles and PHN. The drug candidates are developed based on NanoViricides’ proprietary technology that possess a VZV specific ligand on the surface of a nanoviricide polymeric micelle. The company’s lead clinical drug candidates for VZV were evaluated in the following preliminary in-vitro studies and have demonstrated superior efficacy. The drug candidates differ only in the chemical structures of their ligands, demonstrating ligand-directed virus specificity.

Study 1: In late 2016, NanoViricides entered into an agreement with SUNY Upstate Medical University to test its novel drug candidates against VZV. The research conducted by Dr. Jennifer Moffat included in vitro and ex vivo studies. Dr. Moffat has extensive experience in VZV infection and antiviral agent discovery.

Evaluation in cell cultures:
The study was conducted using retinal cell lines (ARPE-19). Retinal pigment epithelial (RPE) cells are a layer of antigen-presenting cells that play a crucial role in maintaining immune response within the eye. RPE cells provide a physical barrier, express immunosuppressive factors and suppress systemic immune responses to antigen. VZV are capable of infecting RPE cells. Due to challenges associated with obtaining RPE cells, researchers used ARPE-19, a retinal pigmented epithelia (RPE) cell line to understand the effect of drug candidates to VZV infection. ARPE-19 cells possess structural and functional properties characteristic of RPE in vivo. In this study, the effect of drug candidates on VZV infected ARPE-19 cells was evaluated.


View Exhibit II

NV-118 versus VZV Yield


View Exhibit III - (Source:www.nanoviricides.com)

VZV was pre-incubated with the compounds or vehicle for an hour, then added to ARPE-19 cells and cultured for six days. ARPE-19 cells were seeded in 96-well plates 24 hours prior to infection. Serial dilutions of VZV stock virus preps were tested and plates were fixed in formalin at various time points. Absorbance was measured to determine optimum concentration of virus to be used in studies. Based on the graphic below, plates were infected with either 1:4 or 1:8 dilution of virus stock, and fixed in formalin after 6 days. Four different primary antibody (Ab) dilutions and 2 different secondary Ab concentrations were used to optimized the assay.

VZV-infected cells were detected by immunocytochemistry and measured by ELISA. The percent infection relative to untreated infected controls was determined by measuring absorbance. The graph above shows NV-118 demonstrated close to five times superiority in inhibiting VZV at the highest drug dose as compared to acyclovir. Additional studies with another cell line, namely BS-C-1 produced comparable results. In order to determine if the drug compound, control, or vehicle were toxic to the cells themselves, a cell-viability assay was performed. Cell viability was determined by Promega’s CellTiter-Glo Luminescent Cell Viability Assay. No cytotoxicity was observed at any of the doses tested. In randomized clinical trials involving acyclovir, the mean time to full crusting of lesions was roughly 15 days. NV-118 inhibited VZV infection in ARPE-19 cell lines in 6 days.

Evaluation in human skin organ culture:
The human skin organ culture (SOC) is composed of all the major cell types including dermis, epidermis, hair follicles and sebaceous glands that are correctly positioned and differentiated. There is growing evidence that hair follicles are the site of VZV transfer to the skin from infected T cells. An ex vivo human skin patch model involving VZV infection is considered to be a close representation of natural course of shingles. Researchers found that VZV infection in an SOC model closely mimicked viral replication in vivo, where all layers of the skin were infected causing typical lesions and producing abundant virions7. The panel of the drug candidates evaluated in cell cultures previously were evaluated in human skin organ culture. The effectiveness of the candidate in reducing viral yield was observed and compared to cidofovir which was used as a positive control.

Human skin patch (ex vivo study): Left -VZV lesion in the epidermis with multinucleated giant cells and breach of the basal cell layer. Right - Normal Dermis and Epidermis. No viral infiltration or lesions seen


View Exhibit IV - (Source:www.nanoviricides.com)

The drug candidate was applied to the skin five minutes after VZV inoculation.  The tissue was stained with hematoxylin and eosin (HE) for contrast. In the above graphic, the infected skin shows VZV lesion in the epidermis (circled), multinucleated giant cells (orange arrow), breach of the basal cell layer (black arrow) and the vesicle forming in lesion in between the arrows (*). In the patch treated with NV-118, no VZV lesions were observed. The skin appeared to have normal skin layers and hair follicles were abundant. The black arrow shows needle track where VZV was inoculated.

Bioluminescence of cell treated with NanoViricide and Cidofovir


View Exhibit V - (Source:www.nanoviricides.com)

NanoViricide versus VZV yield


View Exhibit VI - (Source:www.nanoviricides.com)

The infected skin tissue was analyzed using bioluminescence imaging to observe the kinetics of VZV replication. Overall, results revealed that NV-118 inhibited VZV infection, replication and spread in human skin cultures. This was shown by direct assay of viral infection of human skin. In addition, normal skin architecture was found to be preserved in microscopic tissue analysis of VZV-infected, nanoviricide-treated human skin, indicating excellent preliminary tolerability and safety.

Study 2 (non-GLP safety and toxicology): AR Biosystems of Beverly, MA conducted this study in April 2018 to evaluate the effect of drug candidates on skin and organs as well as to assess its potential effect on organs in uninfected animals. Nanoviricide drug candidates were applied as skin cream, and were also injected subcutaneously and intravenously in different groups of animals. Full blood pathology analysis, gross histology of various organs, and microscopic histology were performed. There were no adverse effects on the skin at the treatment sites, and no overall observable systemic effects or direct effects on liver and kidney function. The results were consistent with the strong safety observed in the human skin patch model.

Study 3 (Direct Pain Effect Study): Following reactivation of VZV, PHN develops and persists after the disappearance of skin lesions. Persistent pain from PHN increases in incidence with age and responds poorly to analgesics. AR Biosystems of Beverly, MA conducted a study in 2018 using a standard rat model of neuropathic pain. The rats were not infected with VZV. The results from the investigation demonstrated that the anti-VZV compounds significantly reduced abnormal pain sensations in the animals. The results suggest that the nanoviricide compound could be instrumental in resolving PHN without resorting to aggressive pain medications such as gabapentin or morphine derivatives.

How do NanoViricides’ candidates compare to currently available therapies for shingles?

‣ As compared to current standard of care, NanoViricides’ drug candidate for shingles is being developed as a topical treatment. A localized treatment at the site of infection is expected to be more efficient than systemic drug that is administered either orally or intravenously. The effective concentration of a systemically delivered drug at the site of rash would generally be suboptimal. Although acyclovir is available in topical formulations, it is not recommended by current guidelines as there is no clinical benefit associated with it.
‣ Initial studies have shown that NanoViricides’ two active candidates inhibited VZV activity up to five fold better than the current standard of care (acyclovir) in cell cultures. In human skin organ culture studies, the NanoViricide drug candidates were equivalent to a topical formulation of 1% cidofovir applied directly onto the skin patch. Clinically, 2% cidofovir is prescribed for patients with severe symptoms.
‣ NanoViricides’ drug candidates did not cause ulcerations in the skin patch model. Cidofovir (current standard of care) is cytotoxic, causes ulceration at site, and has dose-limiting renal toxicity. Although the wound heals naturally, it results in scarring of the skin.
‣ While most of the currently available anti-herpes drugs inhibit viral replication by competitive inhibition, a nanoviricide particle exclusively targets the virus leaving the host cell intact, which contributes towards an inherent safety profile.
‣ The components of a nanoviricide are biodegradable which contributes to its safety profile. In contrast, acyclovir is not readily biodegradable which warrants a lower dosage in elderly patients or those with impaired renal function. Furthermore, the zoster vaccine administration is contraindicated in any individual who is actively undergoing high-dose immunosuppressive therapy such as chemotherapy or radiation.

RECENT AND NEAR-TERM Milestones
‣ Declare a clinical candidate as the lead drug for Shingles – Q2 2019
‣ Complete cGMP-like production of the drug as required for toxicology studies – Q2/Q3 2019
‣ Complete toxicology studies – Q2/Q3 2019
‣ File an IND – Q3 2019
‣ Commence Phase I clinical trial – 2H2019

VALUATION
The science is incredible but what is NanoViricides’ value today? Are we buyers of this antiviral therapy?

The company has demonstrated activity in two drug candidates (NV-118 and NV-173), and has continued to further optimize them. The optimized candidate will be advanced into IND-enabling activities. The candidates have demonstrated significant therapeutic potential in preclinical models for the treatment of shingles and additional studies are being planned to determine therapeutic potential for the treatment of PHN. An IND is expected to be filed for this treatment in 2019. Currently, the company is developing a clinical plan for their candidate and anticipates initiating a Phase I clinical trial in shingles patients within the next year.

We've modeled our financial projections primarily for drug candidates addressing VZV and HSV related infections.
Shingles occurs in individuals who are more than 60 years of age. In 2016 about 15% of the U.S. population was 60 years of age or older. Of this pool, the lifetime prevalence of shingles and age at occurrence for older adults was estimated to be about 12%8 . As per CDC, 48% and 16% of people between the ages of 14 and 49 (~150 million), are affected by HSV-1 and HSV-2 respectively. Therefore, the estimated 6 million (or more) potential shingles patients and 100 million afflicted with oral or genital herpes in the U.S. presents a sizeable opportunity for NanoViricides’ candidate.

Almost a decade ago, while it still enjoyed market exclusivity, Valtrex had a market share of ~43%9 and sales in the U.S. exceeded $1.5 billion in 2008. Despite the diversity that could exist in the competitive landscape, we think that with the increasing need for novel therapies, the nanoviricides particle could represent a new standard of care for the prevention of shingles and command as much as 40% share of the market. We estimate the drug pricing to be in the ballpark of $290 per patient in 2025 (comparable to the cost of branded antivirals in the market). If the drug candidate can demonstrate a reduction in blister healing time and reduced risk of developing PHN, it could command superior labeling and pricing as compared to currently available antiviral options if and when approved and commercialized.

The historical probabilities of success for the different stages of a clinical drug candidate are shown in the table below. As the studies are still in the developmental stage, we take a conservative stance and assume the probability of success from now until commercialization is ~10%10.




























































































View Exhibit VII

We use a risk-adjusted DCF model, to value the company which recognizes the relative probability of development success. We assume a 10% likelihood of commercialization and estimate first sales in 2025. Other inputs to our DCF model include an 18% discount rate. We model peak market share of 40% for the VZV candidate and 10% for the HSV candidate, which we believe could occur in 2031.

Based on comparable analysis and considering the risk associated with such an early-stage firm, we think a reasonable estimate for a partnering deal focused on shingles could bring in $10 million upfront payment with sequentially increasing development milestones of ~$100 million. We assume that management will sign partnership deals with large pharmaceutical companies and receive roughly mid-teen percent royalties on net sales for their drug candidates.

We forecast free cash flow to be 65% of gross revenues. This gives us a net present value for the company of approximately $40 million ($0.60 per share). This valuation provides a significant upside to the current trading price, which is undervalued. We believe a convergence of the market price towards our intrinsic fair value could occur as the drug candidate successfully makes progress in clinical development.

Risks: The nanoviricide particle, if successfully developed, would be the first of its kind that eliminates the virus quickly. As such, it could capture a sizeable share of the shingles therapeutics market. However, while the candidate would be novel as compared to currently commercialized shingles drugs, the rapid pace of development of new classes of antivirals implies that competitive landscape could be quite different by the time the nanoviricides particle is eventually commercialized.

The dominant risk to our valuation is the outcome of the clinical studies. Advancing a molecule from the bench to commercialization is time consuming and cost intensive and usually takes longer than expected. Early stage companies such as NanoViricides require substantial financial resources to execute their goals. Currently, the balance sheet shows ~$6 million (cash, cash equivalents and investments) while the firm has a burn rate of $2 million/quarter. We expect that cash required for IND-enabling studies, IND application and toxicology studies will be in the $1 million - $2 million range.

Despite the difficulty associated with forecasting timelines related to completion of clinical trials, our estimates are based on our experience with other trials and management guidance. Protracted clinical trials and a subsequent delay in obtaining regulatory approval can hinder clinical progress in a fast-paced research environment such as the biotech sector.

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1 Gnann Jr. JW. Antiviral therapy of varicella-zoster virus infections. In: Arvin A, Campadelli-Fiume G, Mocarski E, et al., editors. Human Herpesviruses: Biology, Therapy, and Immunoprophylaxis. Cambridge: Cambridge University Press; 2007. Chapter 65.
2 Sanford, M. & Keating, G.M. Drugs Aging (2010) 27: 159.
3 www.cdc.gov/mmwr/preview/mmwrhtml/rr57e0515a1.htm
4 https://www.cdc.gov/shingles/hcp/clinical-overview.html
5 Yawn BP, Itzler RF, Wollan PC, Pellissier JM, Sy LS, Saddier P. Health care utilization and cost burden of herpes zoster in a community population. Mayo Clin Proc. 2009;84(9):787-94.
6 Express Scripts, 2009 drug trend report
7 Taylor SL, Moffat JF. Replication of varicella-zoster virus in human skin organ culture. J Virol. 2005;79(17):11501-6.
8 THE PREVALENCE OF SHINGLES AMONG OLDER ADULTS IN THE U.S., The Gerontologist, Volume 56, Issue Suppl_3, 1 November 2016, Pages 48
9 Express Scripts 2009 Drug Trend Report
10 http://www.pharmoutsourcing.com/Featured-Articles/166239-Relative-Success-Rates-by-Drug-Class-The-Case-for-Peptides/