D/G to HOLD, cut TP to MYR8.55

21%-owned TauRX released results for its behavioural variant frontotemporal dementia (bvFTD) study yesterday. It was unsuccessful as the drug, LMTX, did not produce statistically significant differences between treated and control groups. Our previous TP for GENT employed zero discount to SOP/sh to reflect potential monetization of LMTX. On lower probability that LMTX will be monetized, we re-ascribe a 20% discount to SOP/sh and cut our TP to MYR8.55 from MYR10.65. GENT is now a HOLD.

TRx-237-007 deemed unsuccessful

Overall, the TRx-237-007 (bvFTD) study missed its co-primary endpoints (i.e. unsuccessful). It was unsuccessful as LMTX did not produce statistically significant differences in cognitive and functional assessment or brain imaging between the treated (200mg/day) and control (8mg/day) groups. Although bvFTD is an orphan disease (<200k patients), it was an avenue for LMTX to gain ‘backdoor’ regulatory approval as an orphan drug. Therefore, the failure of TRx-237-007 is significant.

Uphill battle from here onwards

This leaves TauRX with the TRx-237-005 (mild Alzheimer’s) study due in 4Q16. While TauRX is confident that TRx-237-005 will meet its co-primary endpoints, it may not be enough as the US Food & Drug Administration typically requires two ‘persuasive’ studies before approving any drug. To be fair, this does not necessarily mean that GENT will have to write off its USD120m (~MYR500m) investment in TauRX completely as the latter may be sold. Therefore, we leave our earnings estimates unchanged.

Probability of monetization a lot lower

We opine that TauRX may be sold to Eli Lilly (LLY US, Not Rated), Johnson & Johnson (JNJ US, Not Rated) or AbbVie (ABBV US, Not Rated) as they are developing drugs that target tau proteins as well. On a worst case scenario, TauRX may execute another rights issue to fund another trial. The Phase III trial cost USD135m and took three years to complete. Either way, we doubt that LMTX will be monetized in the near future. We reascribe a 20% discount to SOP/sh, the long term mean.

Source: Maybank Research - 6 Sep 2016