Potential 1st-Ever Drug Discovery to Treat Acute Kidney InjuRaymond James Coverage Initiated:
New MoA vs. Organ Inflammation | Potential 1st-Ever Drug to Treat Acute Kidney Injury
RECOMMENDATION
We initiate coverage of ARCH with a C$3.50 target and Market Perform (3) rating. Arch Biopartners (ARCH-TSXV) is a clinical-stage biotechnology company developing novel drugs for the treatment of organ inflammation by inhibiting the DPEP-1 pathway: a novel mechanism of action vs. inflammation first described by ARCH scientists, published in Cell (2019), and further elucidated in the context of kidney inflammation in Science Advances (2022). During CY23, ARCH is poised to enter its second Phase II clinical trial with its lead candidate, LSALT peptide (or Metablok)—a demonstrated DPEP-1 inhibitor discovered and developed by ARCH—addressing cardiac surgery-associated acute kidney injury (AKI).
Cardiac Surgery-Associated AKI
Acute kidney injury (AKI), characterized by an abrupt deterioration in kidney function that disrupts metabolic, electrolyte, and fluid homeostasis, represents a significant clinical need for which there is no current treatment. AKI is a major determinant of both operative and long-term mortality, and occurs in approximately 30% of patients that undergo cardiac surgery, representing at TAM of ~450k across the U.S. + Canada + EU5. Metablok, in our view, has the potential to be a breakthrough drug in the treatment of cardiac surgery-associated AKI.
Imminent Data from Ph II Trial in COVID-19 Likely Predictive of Ph II Trial Success in AKI
In 2021, ARCH completed a Phase II clinical trial among COVID-19 patients, providing key human data which, in conjunction with extensive preclinical studies, support DPEP-1 as a relevant therapeutic target for diseases of the lung, liver, and kidney where inflammation plays a major role. Full results from this COVID-19 Phase II trial are expected to be published during 1H23, which, in our view, will be seminal in determining the likely success (or failure) of ARCH’s anticipated Phase II trial in cardiac surgery-associated AKI. While the positive topline data, and inclusion in CATCO (Canadian arm of the World Health Org’s SOLIDARITY trial) give us confidence in LSALT’s likely efficacy (LSALT-treated patients experienced a ventilationfree-day improvement of 6.7 days from 22.8 days [placebo; age-adjusted]), we await publication of the full data set (which comprises data to interrogate a long list of secondary outcome measures, including measures of kidney dysfunction) before making further prognostications on its predictiveness, so we initiate coverage with a Market Perform (3) rating.
VALUATION
We value ARCH as a sum of its risk-adjusted NPV (rNPV) of estimated future cash flows from Metablok in cardiac surgery-associated AKI = $245 mln. We estimate an FD sh. count of 72.6 mln (incl. all conv. notes + est. $10 mln eq. raise), which derives a per-share value of $3.38. We round this, and ascribe ARCH a target price of $3.50/sh. We do however highlight our forward estimates on positive Phase 2 (CY2025) and Phase 3 (CY2027) readouts which represent ~$20/sh., and ~$55/sh., respectively.