Herantis Pharma initiation of coverage: Early stage drug development requires good nerves

Herantis is a drug development company focused on neurodegenerative diseases. Herantis currently has one candidate in the clinical Phase I, HER-096, which the company develops as a disease-modifying drug for Parkinson's disease. The risk level of the stock as an investment is very high, as the likelihood of successful drug development is still low due to the early development phase. As a counterbalance, the market for Parkinson’s disease is large and no disease-modifying drugs are available yet. Our DCF model suggests that the stock is attractively priced. Value creation can also materialize through a development and commercialization agreement or an acquisition. We initiate coverage with an Accumulate recommendation and a target price of EUR 2.2.

Herantis’drug development currently focuses exclusively on Parkinson’s disease

In the past, Herantis has had clinical trials outside neurodegenerative diseases, but now the company focuses solely on HER-096 for Parkinson’s disease. The Phase 1a study has so far shown that the candidate is well tolerated and passes through the blood-brain barrier to the central nervous system. We expect that Phase 1b, starting in late 2024, will continue to investigate the correct dosage, safety and tolerability, and how the candidate acts in both healthy volunteers and patients with Parkinson’s disease. If the results support further development, the clinical Phase 2 that examines the long-term safety and preliminary efficacy could begin in 2026. Herantis has announced that it aims for a development and commercialization agreement with which it would finance the development starting from Phase 2. We estimate that current cash assets will suffice until Q2’25, which should be enough for the completion of Phase 1b. We expect one share issue of around 5 MEUR that would serve as bridge funding for starting Phase 2 before the development and commercialization agreement sought by Herantis.

Significant market potential but the goal is still far away

In the absence of disease-modifying drugs, the need for new treatments for Parkinson's disease patients is high. The market for drug treatment for the disease is around 5.6 BNUSD and is expected to grow steadily by about 4% per year. The slope of growth depends on the market entry of new drug treatments, but there are only a few noteworthy candidates in late-stage clinical development. We consider the Herantis candidate promising and the development risk has already been slightly reduced due to good tolerability and passing the blood-brain barrier. However, there is no evidence of the safety of long-term use of the candidate. In addition, no data on efficacy will be available until a possible Phase 2 study is sufficiently advanced in patient follow-up, which we estimate will be in 2027. We estimate that commercialization could start in 2032 after the extensive Phase 3 study and the processing of the marketing authorization application. In the longer term, extending the indications to other neurodegenerative diseases, such as Alzheimer's disease, may bring new opportunities for the company.

Risk-adjusted DCF modeling suggests that the stock is attractively priced considering the risks

Our risk-adjusted forecasts consider the significant risk of failure in drug development, which we estimate is almost 90%. We expect royalty-based revenue to start in 2032 and peak in the late 2030s. Our DCF model suggests a value of EUR 2.2 per share indicating the attractive pricing of the stock. The value of the share may also materialize through a partnership agreement or a bid. The investment profile is characterized by a high return potential with a low probability and a high probability of loss of capital.