PepGen (PEPG): Differentiated Exposure To Growing Muscular Dystrophy Treatment Market

Investment Thesis

As the remainder of 2022 comes to a close, we continue to advise clients on their thematic healthcare positioning within equity portfolios looking into the new year. For those investors seeking niche exposure to the spectrum of healthcare segments, I should advise that a multitude of selective investment opportunities exist to efficiently allocate capital, and participate in long-term value creation of the underlying.

In our latest bodies of research and capital allocation, we have been focused on breakthrough pharmaceuticals and technologies set to provide a meaningful change to complex disease segments. With that, we turned to PepGen Inc (NASDAQ:PEPG) to gauge its recent developments in the realms of Duchenne muscular dystrophy (“DMD”), a nasty condition usually diagnosed in young males, and with equally as nasty prognosis.

There remains an unmet need for advancement in the DMD domain, and PEPG has seen notable developments in this regard. Recent headline readouts concerning its investigational PGN-EDO51 compound have naturally piqued our interest. Hence, today I’m going to share the results of our deep dive into the segment, into PEPG, and also give context on the PGN-EDO51 division.

In our opinion, any further advancements in PEPG’s DMD treatment pipeline are sure to unlock serious risk capital, and potentially attract the attention of very large players in the space not wanting to take on the pipeline risk via their own DMD studies.

Net-net, we rate PEPG a hold [it may need more time as a publicly traded company to ‘prove it’, and the fact it’s still early days for PGN-EDO51] but are incredibly constructive on this name. We encourage investors to stay focused on any announcements or developments in its growth engine.

Factors for preconsideration

Note, PEPG completed its IPO on May 10, 2022, raising gross proceeds of $122.0mm at $12/share. A terrific summary of the IPO and its particulars can be seen here, from Seeking Alpha IPO expert Donovan Jones.

Since then, its share price has lifted to $14.70 following a series of positive clinical trial updates. For now, here is where the money lies for PEPG – in its ability to advance through its pipeline studies and successfully commercialize a treatment for DMD. We are still a while from this, but early results are worth taking notice of.

NOTE: Before proceeding, investors should have a deep understanding of the following key risks to the investment debate:

• PEPG is a small-cap equity and there are inherent risks with investing in this asset class. Volatility can be extreme, and small catalysts can result in large swings in share price. You should be fully aware of this risk.
• Regulatory & pipeline risks are also abundant. Being a biotechnology company it is subject to the regulations of the FDA and other government agencies. Any changes in policy or regulations could impact the company’s performance and its stock price. Moreover, if it were to fail on any of its clinical trial updates going forward, this is a heavy downside risk to the PEPG share price.
• Competition is also heating up in the sector, which could knock PEPG off the mantlepiece. In particular, it may face competition from larger, more established players.

Each of these risks could prove to be upside or downside catalysts and must be factored in to the PEPG investment debate.

Exhibit 1. PEPG price evolution since October, 2022.

DMD: Complex condition with unmet demand in treatment market

I’ll go over the entire spectrum of DMD here, and provide context on the investment opportunity if PEPG is to continue advancing along the same growth route with its investigational compound[s].

DMD is a rare, inherited genetic disorder, characterized by progressive muscle weakness and wasting due to a deficiency of dystrophin. The pathogenesis of DMD is thus caused by a mutation in the dystrophin gene, which is located on the ‘X‘ chromosome and codes for the production of dystrophin. Hence, the condition is first observed infancy to adolescence, and almost only in males. Dystrophin itself is a 427 kDa cytoskeletal protein that is expressed in striated skeletal muscle and functions as a ‘linker’ protein between the myosin-actin cytoskeleton and the extracellular matrix. In this capacity, dystrophin provides mechanical support and protects myocytes [muscle cells] from damage during contraction, also maintaining the structural integrity of muscle cells.

It does this by interacting with several proteins, including actin, the main structural protein of a myocyte, and integrins, transmembrane receptors that mediate the attachment of muscle cells to the extracellular matrix. In patients with DMD, the dystrophin gene’s mutation leads to the production of a nonfunctional or absent dystrophin protein.

Exhibit 2. Broad systemic symptomology of DMD

Without functional dystrophin, muscle cells become susceptible to damage during contraction and are unable to repair themselves effectively. This leads to recurrent cycles of muscle injury and repair, which culminate in muscle fibrosis and replacement with adipose and connective tissue [also known as scar tissue]. The progressive muscle weakness and wasting caused by DMD can lead to difficulty walking and standing, respiratory and cardiac problems, and a shortened life span. More so, there is certainly no ability to increase physical muscle strength/power or mitigate the muscle weakness. It is a serious, neuroprogressive condition, that, to date, has no known prevention or cure. Hence, current treatment is based purely on symptom management.

Alas, there is an unmet medical and clinical need for a breakthrough in this complex disease segment. As such, the market for DMD treatment has garnered more and more attention in recent years, considering advancements in medical technology and medicine.

It’s worth noting that the global market for DMD treatments is expected to witness a notable expansion from 2022-2027, with a projected CAGR of 11.1%. A range of factors are contributing to this anticipated expansion, including a robust pipeline of clinical trials evaluating potential treatments for DMD, increased R&D efforts by major pharmaceutical firms, and technological breakthroughs that facilitate research processes. There is also a growing awareness of DMD among the general public and governments, which is increasing the demand for effective treatments and driving investment in R&D.

One particularly promising development in the DMD treatment market is the burgeoning availability of mutation-specific therapies. In fact, here is where PEPG slots into the debate. These therapies target specific genetic mutations that cause DMD. The introduction of two existing DMD treatments to the market, Exondys51 and Translarna respectively, has helped to increase the demand for treatment. However, there are limitations to both of these compounds. Exondys51 [from Sarepta Therapeutics], for example, can only be used to treat ~14% of the DMD population, and therefore doesn’t create a meaningful change to the prevalence of the disease.

PGN-EDO51 readouts provide meaningful inflection point

The key mid-term growth lever for PEPG is its PGN-EDO51 investigational compound. In September, PEPG completed its PGN-EDO51 Phase 1 clinical trial in healthy normal volunteers, demonstrating a robust safety profile, and statistically significant levels of oligonucleotide delivery and ‘exon skipping’ in muscle tissue. If you didn’t know, an exon is a segment of a gene that contains the code to be translated into a protein, along with other exons. The skipping of exons enables mutations in a dysfunctional gene to be bypassed.

PGN-EDO51 is therefore a promising investigational treatment option for patients with DMD whose mutations are amenable to exon 51 skipping. Utilizing PEPG’s enhanced delivery oligonucleotide (“EDO”) technology, PGN-EDO51 delivers a therapeutic oligonucleotide that targets the genetic cause of DMD by skipping exon 51 of the dystrophin transcript. This approach aims to restore the open reading frame, and enable the production of a functional, truncated, dystrophin protein. Although, there’s been no established causal relationship that this will transpose over to DMD patients, just yet.

Exhibit 3. PEPG clinical DMD pipeline. PGN-EDO51 leads the way.

We’d note that dosage looks to be another positive from the study readouts. In biopsies taken from the biceps brachii, PGN-EDO51 achieved mean exon 51 skipping levels of 1.4% after a single dose of 10 mg/kg, and 2.0% following a 15 mg/kg dose, significantly surpassing publicly available data and setting a new standard for DMD treatment. These results pave the way for the commencement of PEPG’s Phase 2a multiple ascending dose (“MAD”) clinical trials in DMD patients in the first half of 2023.

Exhibit 4. PEPG aims to compete on top of Sarepta Therapeutics’ Exondys51 with more promising early-stage results.

Wrapping this all together, it will be updates regarding PEPG’s pipeline that will serve as inflection points looking ahead, in our opinion. For instance, the latest announcements saw the stock jump 85% in quick succession. This is a testament to remaining active on this name, with respect to keeping on top of the planned trial announcements, and any additional available data. With this deep dive, I hope that we’ve been able to demonstrate where the potential growth pockets are within this portion of the market.

In short

The bottom line is that evidence and clinical trial momentum are mounting in the treatment of DMD. As with comparable situations, the early mover advantage often lies with the first few market entrants, especially when looking ahead to commercialization.

I’d note that there is still a long way for PEPG to go before it can say with certainty it has uncovered a breakthrough for DMD. However, if the latest study readouts are anything to go by, PEPG is absolutely a name to remain constructive on. We advise investors to keep a close eye on this company, especially with upcoming Phase 2 trials under its belt, but to have a deep understanding of the risks mentioned. Rate hold for now, but we are trigger-ready on a speculative position.