Funding secured to support next chapter of growth
Update | 4 January 2021
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|
|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)|
4 January 2021
|Shares in issue||273.9m|
|12 month range||4.5p-95.0p|
|Primary exchange||AIM London|
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.
+44 (0) 20 3637 5043
+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).
Trinity Delta Research Limited (“TDRL”; firm reference number: 725161), which trades as Trinity Delta, is an appointed representative of Equity Development Limited (“ED”). The contents of this report, which has been prepared by and is the sole responsibility of TDRL, have been reviewed, but not independently verified, by ED which is authorised and regulated by the FCA, and whose reference number is 185325.
ED is acting for TDRL and not for any other person and will not be responsible for providing the protections provided to clients of TDRL nor for advising any other person in connection with the contents of this report and, except to the extent required by applicable law, including the rules of the FCA, owes no duty of care to any other such person. No reliance may be placed on ED for advice or recommendations with respect to the contents of this report and, to the extent it may do so under applicable law, ED makes no representation or warranty to the persons reading this report with regards to the information contained in it.
In the preparation of this report TDRL has used publicly available sources and taken reasonable efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee or warranty as to the accuracy or completeness of the information or opinions contained herein, nor to provide updates should fresh information become available or opinions change.
Any person who is not a relevant person under section of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom should not act or rely on this document or any of its contents. Research on its client companies produced by TDRL is normally commissioned and paid for by those companies themselves (‘issuer financed research’) and as such is not deemed to be independent, as defined by the FCA, but is ‘objective’ in that the authors are stating their own opinions. The report should be considered a marketing communication for purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. TDRL does not hold any positions in any of the companies mentioned in the report, although directors, employees or consultants of TDRL may hold positions in the companies mentioned. TDRL does impose restrictions on personal dealings. TDRL might also provide services to companies mentioned or solicit business from them.
This report is being provided to relevant persons to provide background information about the subject matter of the note. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information that we provide is not intended to be, and should not in any manner whatsoever be, construed as personalised advice. Self-certification by investors can be completed free of charge at www.fisma.org. TDRL, its affiliates, officers, directors and employees, and ED will not be liable for any loss or damage arising from any use of this document, to the maximum extent that the law permits.
Copyright 2021 Trinity Delta Research Limited. All rights reserved.