Memorandum

Zealand 3Q15 – $1.1 million in Lyxumia royalties; Confirmed LixiLan submission in 4Q15; Focus on stable glucagon and new company strategy – November 10, 2015

Executive Highlights

  • Zealand received DKK 7.1 million (~$1.1 million) in royalty revenue from Lyxumia (lixisenatide) in 3Q15 from Sanofi’s total sales of €9 million (~$10 million). An FDA decision is expected in 3Q16.
  • Zealand referenced confirmed plans by Sanofi that LixiLan will be submitted in the US in 4Q15 and in the EU in 1Q16. Full phase 3 results are expected to be presented at a conference in 1H16.
  • The company expects to initiate the next clinical stage for both the single- and multiple-dose versions of its stable glucagon analog ZP4207 in 2016.

Zealand provided its 3Q15 update last week in a call led by CEO Ms. Britt Meelby Jensen. Below we include our top five highlights from the call, followed by Q&A.

1. Zealand received DKK 7.1 million (~$1.1 million) in Lyxumia (lixisenatide) royalty revenue in 3Q15 from Sanofi’s total sales of €9 million (~$10 million). An FDA decision is expected in 3Q16.

2. Zealand confirmed that Sanofi plans to submit LixiLan in the US in 4Q15 and in the EU in 1Q16. Full phase 3 results are expected be presented at a conference in 1H16.

3. The company expects to initiate the next clinical stage for both the single- and multiple-dose versions of its stable glucagon analog ZP4207 in 2016.

4. The company plans to engage with the FDA in 1H16 on the clinical program for GLP-1/glucagon dual agonist ZP2929. BI is now investigating a new once-weekly lead candidate for the companies’ GLP-1/glucagon dual agonist partnership.

5. CEO Ms. Britt Meelby Jensen highlighted Zealand’s refreshed company strategy, first spotlighted at the recent Capital Markets Day in New York, NY, which includes a shift toward specialty disease areas.

Top Five Highlights

1. Zealand received DKK 7.1 million (~$1.1 million) in Lyxumia (lixisenatide) royalty revenue in 3Q15 from Sanofi’s total sales of €9 million (~$10 million). Royalty revenue was up 18% year over year and was flat sequentially. Management stated that Sanofi has launched Lyxumia in over 40 countries outside the US, the same as in 2Q15, with additional launches planned. Uptake of Lyxumia has been sluggish since its launch, and its lower-than-expected penetration was cited as one factor behind Sanofi’s recently downgraded short-term guidance for its diabetes revenues. During Q&A, Zealand management attributed Lyxumia’s challenges to the poor pricing/reimbursement environment in many European countries and expressed optimism that its prospects will improve with entry onto the US market (which accounts for 70% of the worldwide GLP-1 agonist market). Management also suggested that the strong recent growth for the overall GLP-1 agonist class should help boost Lyxumia. There is certainly truth to this assessment, though there is some evidence that Lyxumia is under-performing in ex-US markets. For example, Lilly’s once-weekly Trulicity (dulaglutide) has already surpassed Lyxumia in ex-US sales ($11 million in 3Q15) despite being launched a year and a half later. We do think the Lilly might has helped as has its dosing frequency and cool pen. With lixi, we believe the big interest will be in LixiLan, as we have said before.

  • Zealand indicated that an FDA decision on lixisenatide (which is expected to have a different trade name in the US) should arrive in 3Q16. The FDA accepted Sanofi’s NDA for lixisenatide, supported by the results from the ELIXA CVOT, in September. This timeline is consistent with a standard 10-month FDA review cycle.
  • Management suggested that Sanofi’s recent licensing agreement with Hanmi could have some impact on Lyxumia revenues in the future. This was the focus of several questions during Q&A, as investors expressed concern that the long-acting GLP-1 agonist (efpeglenatide) and GLP-1 agonist/basal insulin combination (LAPSInsulin Combo) included in the agreement could cut into revenue for Lyxumia and LixiLan (lixisenatide/insulin glargine; see below). In response, Zealand suggested that some impact is possible, as efpeglenatide will likely reach the market a few years before lixisenatide’s patent expires in 2025 and with it Zealand's rights to royalty revenue. However, management emphasized that Sanofi remains committed to Lyxumia and that there should be room in the market for both once-daily and once-weekly GLP-1 agonists, potentially targeting different patient segments.  

2. Zealand confirmed that LixiLan will be submitted in the US in 4Q15 and in the EU in 1Q16. Full results from the two phase 3 trials of the product, LixiLan-O and LixiLan-L, are expected to be presented at a conference in 1H16. We assume ADA is most likely. Zealand management noted that the two target populations covered by those trials (patients with type 2 diabetes either not at goal on oral medications or not at goal on basal insulin alone) include ~9.5 million people in the US. Topline results from the studies shared only that LixiLan produced superior A1c reductions compared to its components. Sanofi provided a few more details in a recent investor update, noting that LixiLan demonstrated reduced nausea vs. lixisenatide and similar hypoglycemia rates and “weight neutral” results vs. insulin glargine (we are not sure whether this means absolute weight neutrality or comparable weight gain to glargine). While we will have to wait for full results to know for sure, this suggests that Novo Nordisk’s Xultophy (insulin degludec/liraglutide) may come out of phase 3 with a more clearly differentiated profile than LixiLan, as Xultophy demonstrated significant weight and hypoglycemia benefits vs. Lantus in phase 3 trials. We have generally assumed that the two combinations will be fairly comparable clinically, but Novo Nordisk suggested in its 3Q15 update that it sees Xultophy as significantly differentiated.    

  • The Hanmi agreement is not expected to have any significant impact on LixiLan in the foreseeable future. Some of the discussion about the agreement during Q&A touched upon LixiLan as well as Lyxumia, but Zealand management noted that Hanmi’s GLP-1 agonist/basal insulin combination is still preclinical and therefore likely ~10 years away from reaching the market.

3. The company expects to initiate the next clinical stage for both the single- and multiple-dose versions of its stable glucagon analog ZP4207 in 2016. The single-dose version for severe hypoglycemia completed phase 1 in June. Zealand plans to begin the next clinical trial in 1H16 and expects results by the end of the year. This is all pending the completion of discussions with the FDA, expected within the next month. In Q&A, management indicated that the trial will likely be conducted in a controlled setting like the phase 1 trial, which will allow it to complete faster than an average phase 2 trial. The next steps for the multi-dose version for mild to moderate hypoglycemia are somewhat less clear, though Zealand indicated that the next clinical trial is expected to begin in 2H16. Zealand reported positive topline phase 1b results for the product in September and is currently conducting toxicology studies. Management stated that ZP4207 is ready for clinical trials in an artificial pancreas device once Zealand finds a device partner. The company is also evaluating the opportunity for a multiple mini-dose pen and has not yet made a decision on how to proceed. ZP4207 received a great deal of attention at Zealand’s recent Capital Markets Day. Management was very enthusiastic about the program and expressed confidence that the company can commercialize a single-dose rescue pen on its own, especially since this type of product should not require a CVOT.

  • Other companies developing novel glucagon formulations include Lilly, Xeris, Biodel, and Zosano. Lilly will likely be first to market after acquiring Locemia’s phase 3 intranasal glucagon powder for single-dose hypoglycemia rescue last month. The product has completed phase 3 studies in adults and children and Lilly hopes to submit it for regulatory approval in the next 18 months. Xeris’ auto-injector was expected to enter phase 3 this year, though it does not look like it has yet according to the company’s pipeline. Submission of Biodel’s auto-reconstitution device, previously expected in mid-2016, has been delayed until at least early 2017 due to manufacturing delays and contract discussions with partner Unilife. Zosano has a microneedle patch for severe hypoglycemia in phase 2, and results were expected in 3Q15. Device design will likely be an important differentiator among these options. Zealand should be well-positioned on this front with a single-step auto-injector, though some patients and caregivers may find the Locemia intranasal device more approachable.

4. Zealand provided several updates on its preclinical pipeline.

  • ZP2929: The company has completed additional preclinical studies on its GLP-1/glucagon dual agonist ZP2929 and plans to engage with the FDA in 1H16 on the clinical program. At the Capital Markets Day, management suggested that aberrant preclinical toxicology results were the main reason former partner BI decided to drop the compound, though Zealand believes the results were due to study design and not the molecule itself. The company will be looking for another partner for the program once back on the clinical track, and management suggested during the Capital Markets Day that big pharma players in diabetes like Sanofi, Lilly, or Novo Nordisk could be options.
  • GLP-1/glucagon dual agonist program with BI: BI has changed its focus on this program once again and is now investigating a new once-weekly lead candidate rather than the former once-daily compound. This pushes the timeline back slightly, as the next step will now be the beginning of preclinical studies in 1H16 rather than the beginning of clinical studies in that timeframe. The competitive landscape in this class is quite crowded, and the possibility for once-weekly dosing could be a helpful differentiating factor compared to some of the other candidates in development. Other companies in the race include Janssen (phase 1) Lilly (phase 2), Transition Therapeutics (phase 2; partnered with Lilly), Sanofi (phase 1), AZ (phase 1), Xenetic Biosciences (phase 1), and OPKO Health (preclinical). Novo Nordisk has also indicated that it ultimately intends to co-formulate its phase 1 glucagon analog with liraglutide.
  • Undisclosed cardiometabolic program with BI: Management highlighted BI’s recent selection of a new lead candidate to advance to preclinical development, which triggered a €3 million (~$3.4 million) milestone payment to Zealand. BI will be almost entirely responsible for development and commercialization going forward, though Zealand retains co-promotion rights in Scandinavia.
  • Other preclinical candidates: Zealand presented positive preclinical results for two new compounds at ADA, though neither was mentioned during the call. The GLP-1/GIP dual agonist ZP-DI-70 (poster 2061-P) demonstrated promise in a mouse model of type 2 diabetes, including superior weight loss vs. existing therapies and the potential for once-weekly dosing. The GLP-1/gastrin dual agonist ZP3022 has previously been shown to increase beta cell mass and improve glycemic control in several rodent models of type 2 diabetes, and a poster at ADA (2085-P) demonstrated favorable effects on pancreatic gene expression. This continued early-stage activity in diabetes/obesity is an encouraging sign that Zealand does not intend to abandon the area with its shift toward specialty diseases.

5. CEO Ms. Britt Meelby Jensen highlighted Zealand’s refreshed company strategy, first spotlighted at the recent Capital Markets Day in New York, NY. Most notably, the strategy includes a shift toward specialty disease areas, though Ms. Meelby Jensen noted that candidates for cardiometabolic disease could be included in that designation. Management also emphasized at the Capital Markets Day that Zealand does not plan to draw any attention away from the promising preclinical and early clinical cardiometabolic candidates in its current pipeline, meaning the company will still have a meaningful presence in diabetes for some time to come. The shift toward specialty diseases is accompanied by a greater focus on the company’s proprietary pipeline. We suspect the two decisions may be linked, as the path to market for a small company likely appears more manageable in specialty diseases compared to an expensive, relatively saturated area like diabetes. The other pillars of the renewed strategy are maintaining a dynamic R&D organization that combines internal and external innovation and shifting toward strategic partnerships rather than pure out-licensing.

Questions and Answers

Q: What are your thoughts on Sanofi’s in-licensing from Hanmi? When do you think those products may reach the market and how could they impact LixiLan’s peak potential?

A: Just to recap, Sanofi just entered a collaboration with Hanmi on a long-acting GLP-1 agonist, a long-acting insulin, and a combination of the two. I think it underpins their long-term focus on their diabetes franchise, which is good for us. If you look at where the products are, the long-acting GLP-1 agonist is still in phase 2, so it could very well be four to five years before it can come to market. The combination product is still preclinical, which means we could speculate it will take up to 10 years before it comes to market. I don’t have any comments on peak sales or positioning. I would note that as stated in Sanofi’s release, they see this complementing their portfolio in diabetes and reaching a broader patient population. It’s good for patients to have the opportunity to choose the treatment that fits best. If you look at the GLP-1 agonist market, lixisenatide is once-daily and there are once-weekly agents today that represent about one-third of the market. Many patients today use a GLP-1 agonist together with insulin, and lixisenatide has shown great potential with basal insulin. As long as insulin is prescribed once a day, you can speculate that the once-daily GLP-1 agonist market will still exist and be preferred by some.

Q: Have you had a meeting with the FDA on the rescue pen yet?

A: We have not had a meeting with the FDA yet. We have submitted all materials quite recently. This is why we are not pursuing the next clinical step yet because we want complete alignment and feedback. We’re expecting that within the next month.

Q: And this is phase 2 that will be starting?

A: We have not communicated anything about that. It’s highly dependent on feedback from the FDA. As we’ve reported, we have positive safety and efficacy data from phase 1. We’re expecting to move it further. We will discuss the full clinical path with the FDA. We expect to be able to do it in a controlled setting like phase 1, which means it will be relatively faster to do. That explains why we’re comfortable to guide that we will initiate and complete the next trial in 2016.

Q: Can you confirm that you expect Lyxumia royalty income to discontinue when the key patents expire? Is there any possible impact from the Quantum project? The combination could reach the market in ten years, but are we looking at a potential impact from 2021 on standalone Lyxumia since you won’t have any income after 2024-25?

A: We expect no royalties after patent expiry around 2025-26. You’re right in saying that the product that’s in preclinical studies now, if it reaches the market in ten years it should not have an impact on our royalty income. If the long-acting GLP-1 agonist is on the market before, it could have an impact on the standalone GLP-1 agonist revenue but I’m not sure what it will be. So far we see the GLP-1 agonist market growing by 20-25% and the projections say the market will continue to grow significantly. Of course it’s nice to see that Sanofi sees the GLP-1 agonist market as attractive long-term.

Q: Sanofi downgraded its estimates for standalone Lyxumia. Can you comment on their commitment to it?

A: I can only comment on what they have said publicly. It’s worth noting that in their investor call they had the acceptance of the FDA file on the first page of their presentation and referred to Lyxumia as an important product in diabetes. They are committed. They haven’t so far been guiding about Lyxumia revenue, and having observed the access challenges and the environment in Europe in the countries where the product is available, I’m not so surprised about the conservativeness. More than 70% of the GLP-1 agonist market is in the US, which should be helpful to increase revenue.

--by Emily Regier and Kelly Close