The c £25.6m (gross) investment via a placement and open offer has extended Redx Pharma’s cash runway to end-2022, ensuring ample funding to maintain strategic momentum. New monies allow Redx to capitalise on the high-quality opportunities presented by its attractive and well-balanced pipeline and its highly productive discovery platform. The clinical portfolio is focussed on genetically defined cancers and fibrotic diseases and consists of either “first in class” or “best in class” compounds which will be developed in-house to key value-inflection points. New funds will advance the two lead assets (porcupine inhibitor RXC004 in oncology; ROCK2 inhibitor RXC007 in fibrosis) into Phase II proof-of-concept trials, progress earlier stage assets, and expand discovery activities. Our updated valuation is £317.5m, equivalent to 116p/share (81p fully diluted).
| Year-end: September 30 | 2018 | 2019 | 2020E | 2021E |
| Revenues (£m) | 0.1 | 3.1 | 12.7 | 1.6 |
| Adj. PBT (£m) | (10.5) | (7.5) | (2.6) | (27.9) |
| Net Income (£m) | (8.8) | (4.3) | (2.0) | (27.4) |
| Adj. EPS (p) | (7.2) | (4.0) | (1.2) | (10.9) |
| Cash (£m) | 6.5 | (3.7) | 27.1 | 27.3 |
| EBITDA (£m) | (10.0) | (6.2) | (1.3) | (27.3) |
Update
4 January 2021
| Price | 63.5p |
| Market Cap | £173.9m |
| Enterprise Value | £146.8m |
| Shares in issue | 273.9m |
| 12 month range | 4.5p-95.0p |
| Free float | 11.1% |
| Primary exchange | AIM London |
| Other exchanges | N/A |
| Sector | Healthcare |
| Company codes | REDX |
| Corporate client | Yes |
Company description
Redx Pharma specialises in the discovery and early clinical development of small molecule therapeutics, with an emphasis on oncology and fibrotic disease. Typically, these are progressed through proof-of-concept studies and then partnered for further development. The strategy has been validated by several collaborations.
Analysts
Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043
Franc Gregori
fgregori@trinitydelta.org
+44 (0) 20 3637 5041
Table of Contents
Redx Pharma has seen a transformation in fortune over the course of 2020, with management delivering on several fronts. The issuance of >£48m in equity and convertible loan notes has provided the financial resources to deliver on its clearly defined strategy (outlined in our September 2020 Initiation) as well as validation from the involvement of knowledgeable specialist shareholders such as Redmile, Sofinnova, and Polar Capital. Collaboration deals with Jazz Pharmaceuticals and AstraZeneca have also strengthened the balance sheet and, with the latter partner, de-risked the pipeline by reducing the weight of the porcupine inhibitor class as a development risk. As Redx enters 2021, the scientific, operational, and personnel foundations are now in place to generate material value.
Redx is focused on progressing its well-balanced in-house pipeline (Exhibit 1), including delivering first clinical data from lead oncology asset RXC004, and leveraging its medicinal chemistry expertise to generate new clinical candidates (targeting the clinical entry of an average of one annually). Near-term news flow (Exhibit 2) includes RXC004 Phase I monotherapy data, initiation of a RXC007 Phase I trial, and potential progress updates and associated revenues from collaboration partners. Ahead of this, we update our valuation and model for the recent financing transactions, ascribing a £317.5m valuation, equivalent to 116p/share (81p/share fully diluted).
We update our valuation following the recent financing transactions, to reflect the changes to the company’s cash position and number of shares outstanding. Our Redx valuation is now £317.5m, equivalent to 116p per share (81p fully diluted), vs £296m or 152p per share (92p fully diluted) previously. Exhibit 3 summarises the outputs and underlying assumptions of our valuation model, while a detailed overview of our methodology is provided in our September 2020 Initiation.
Our Redx valuation comprises a sum of the parts that includes a pipeline rNPV and a discovery platform valuation, with the latter based on Redx’s output/track record and benchmarked against discovery peers. As always, we employ conservative assumptions throughout our modelling, particularly regarding market sizes and growth rates, net pricing, adoption curves, and peak market penetration.
The clinical progress of the various pipeline assets should unlock upside, as further data would prompt us to adjust the respective success probabilities that reflect the inherent clinical, commercial, and execution risks that each programme carries. Additionally, as these programmes progress, there should be more insight into the specific oncology or fibrosis patient populations that will be addressed, and this in turn would mean that peak sales (pricing, penetration) and timeline assumptions could be revisited. For example, we expect RXC004 to be developed in selected genetically defined cancers, which could support pursuit of accelerated regulatory approval pathways and command attractive pricing. Similarly, RXC007 has potential utility across a variety of fibrosis indications which have different market dynamics, from the smaller more severe indications (such as IPF) to larger indications such as NASH and diabetic nephropathy.
The Placing and Open Offer provide Redx with a cash runway through to end-2022, having bolstered its balance sheet to, we believe, pro forma cash of c £47m vs our FY20e forecast of £27m (as at end-September 2020).
New funds, coupled with a risk-adjusted forecast of potential milestones from partnered programmes (ie the AstraZeneca RXC006 out-licensing deal and Jazz Pharmaceuticals Ras/Raf/MAPK collaborations), and existing cash resources will allow the company to significantly ramp up R&D investment. We forecast R&D spend of £9.6m and £23.9m in FY20e and FY21e respectively as the discovery engine research activities and staffing return to pre-administration levels, and the pipeline progresses through late preclinical (RXC007) and early clinical (RXC004) development. G&A will also rise to support the growing research organisation, but we expect these costs (c £5-6m pa) to be controlled with more modest growth.
The Placing announcement broke down the expected use of funds as follows:
Redx’s two largest shareholders Redmile and Sofinnova participated in the Placing but not the Open Offer, and in tandem converted a c 23% of their Convertible Loan Note (CLN) holdings. As a result, Redmile holds 79.5% of Redx shares and £11.2m of CLNs, with Sofinnova holding 9.4% of outstanding shares and £5.9m in CLNs. As a reminder, the CLNs have a three-year term with 0% interest, no early repayment, an option for annual extension, and a 15.5p/share conversion price.
We have updated our financial summary (Exhibit 4) to reflect the Placing, Open Offer, and CLN conversion. FY20 results for the 12-months ending 30 September 2020 expected to report in Q121.
No changes have been made to our revenue forecasts. For FY20e, these include further collaboration revenues from Jazz Pharmaceuticals and receipt of the $10m upfront payment, as well as revenue under the AstraZeneca RXC006 deal. The latter includes $17m in early payments; we assume that this is structured with an upfront payment (broadly equivalent to that paid by Jazz) with the remainder back-end weighted and expected to be paid by the start of the first clinical trial. Our forecasts only include our assumption of the upfront, given limited visibility on the RXC006 preclinical development timeline and payment schedule. Our FY21e revenue forecast currently only includes pan-RAF collaboration revenue. Contingent on progress with the underlying programmes there is potential for receipt of the second $10m Jazz payment and further AstraZeneca milestone(s).
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