Redx Pharma’s FY20 results are a powerful reminder of the progress made in the past year. A subsequent key event, December’s c £25.6m (gross) raise, extended the cash runway to end-2022, with three specialist funds (Redmile, Sofinnova, Polar Capital) providing tangible validation of management strategy. Its proven medicinal chemistry expertise is focussed on creating “first in class” or “best in class” compounds addressing well-defined cancers and fibrotic diseases. These are rapidly developed to key value-inflection points, typically Phase II proof-of-concept trials, ahead of partnering for the more expensive clinical phases. Despite COVID-related impacts on clinical trials, both RXC004, a porcupine inhibitor for oncology, and RXC007, a ROCK2 inhibitor for fibrosis, are set to reach important value inflection points during 2021. Our rNPV-based valuation is £326.4m, equivalent to 119p/share (84p fully diluted).
| Year-end: September 30 | 2019 | 2020 | 2021E | 2022E |
| Revenues (£m) | 3.1 | 5.7 | 10.4 | 10.7 |
| Adj. PBT (£m) | (7.5) | (9.5) | (20.1) | (21.1) |
| Net Income (£m) | (4.3) | (9.2) | (19.5) | (20.5) |
| Adj. EPS (p) | (4.0) | (5.6) | (7.8) | (7.6) |
| Cash (£m) | (3.7) | 27.5 | 32.4 | 14.3 |
| EBITDA (£m) | (6.2) | (7.5) | (19.5) | (20.7) |
Update
27 January 2021
| Price | 59.0p |
| Market Cap | £161.6m |
| Enterprise Value | £125.3m |
| 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’s FY20 results are an apt reminder of the company’s transformation over the course of the past 12 months. The successful raising of >£48m in equity and convertible loan notes provides the financial resources to progress the key assets, RXC004 (a porcupine inhibitor for oncology) and RXC007 (a ROCK2 inhibitor for fibrosis), to their next clinical value-inflection points. The 2020 raises brought on board the specialist investors Redmile, Sofinnova Partners, and Polar Capital. These are respected and supportive investors and their involvement provides valuable external validation of management’s clearly defined strategy. Similarly, the deals with AstraZeneca and Jazz Pharmaceuticals were not simply struck on attractive terms but demonstrated the active de-risking of Redx’s pipeline, notably reducing the porcupine inhibitor class as a development risk.
Redx’s strategy aims to leverage its now well-established expertise in medicinal chemistry to develop both first-in-class molecules addressing novel targets and best-in-class drugs directed at known and scientifically validated pathways. The focus is on genetically-defined oncology indications and fibrotic diseases, with the goal to achieve three IND (Investigational New Drug) applications by 2025. Selected candidates are progressed to Phase II proof of concept clinical trials before being out-licensed, with an element of commercial revenues retained; however, assets will be out-licensed earlier if the proposed returns are sufficiently attractive. Even a relatively modest delivery on this well-articulated and ambitious strategy should be transformative for the business over the medium term.
As we stated in our September 2020 Initiation, the pipeline is now well-balanced (Exhibit 2); the two in-house programmes (RXC004 and RXC007) continue to progress, two have been successfully partnered, and the earlier stage assets are showing promise. The near-term aim is to progress RXC004 and RXC007 to Phase II proof of concept trials. Around £14m of the funds raised in 2020 is directed to completion of Phase I monotherapy and immunotherapy combination trials and planned Phase II studies for RXC004; with c £11m to preclinical work, initiation of planned Phase I and Phase II trials for RXC007. Importantly for the medium-term outlook, £16m has been earmarked to expand oncology and fibrosis research and identify a next generation of similarly differentiated small molecules.
RXC004 is a highly selective and potent small molecule that targets the porcupine (Porcn) enzyme on the Wnt (Wingless type) signalling pathways. Wnt ligands play a critical role in balancing cell proliferation, differentiation, and cellular homeostasis. Dysregulation is known to drive many cancer types, particularly those that have a poor prognosis, with elevated activity resulting in drug resistance. The pathway is complex and difficult to address, with the porcupine enzyme seen as an attractive target. Comprehensive preclinical studies have shown RXC004 to have promising direct anti-tumour activity in cancer lines with upstream mutations in this pathway, for instance RNF43. Additionally, RXC004 enhances the immune response in the tumour microenvironment and hence has a possible dual mechanism of action (Exhibit 3).
RXC004 is currently in a dose escalation Phase I trial to examine its safety and tolerability. The study is set to enrol around 20 patients across five centres in the UK. Four patient cohorts have been completed successfully, with no dose limiting toxicities (DLTs), including, importantly no bone fragility fractures, and a strong target engagement detected in markers in skin tissue. The pharmacokinetics showed good oral absorption and bioavailability and support a once daily dosing. The fifth and final patient cohort as monotherapy, at a 3.0mg dose, initiated in January 2021. The study was hampered by COVID-19 restrictions, with patient recruitment suspended, but the full data are expected to be available during H121. The combination arm of the study, exploring RXC004 together with a PD-1 immune checkpoint inhibitor (CPI), is being initiated. Preclinical studies showed combination treatment had materially improved responses. Results from this arm will guide the dose selected for the Phase II study.
The Phase II programme will similarly explore both monotherapy and a CPI combination. Monotherapy studies will likely explore RXC004 in genetically-selected MSS mCRC (micro-satellite stable metastatic colorectal cancer), selected pancreatic cancer, and all biliary cancers, with the combination therapy evaluating genetically-selected MSS mCRC (at least initially). There are currently four other porcupine inhibitors known to be in clinical development, with Novartis’ WNT974 (LGK974) being arguably the most advanced. The data from the Phase I study is awaited keenly, particularly for early signals of direct efficacy. It may also provide an insight into whether RXC004 could be the better compound in terms of expected efficacy and, possibly, side-effect profile than WNT974.
The move into Phase II trials is planned for 2021 but, along with most similar clinical studies, timings may be impacted by COVID-19 factors. The Phase II data would be the prelude to out-licensing discussions.
RXC007 is a novel and highly specific small molecule that selectively targets the ROCK2 (Rho Associated Coiled-Coil Containing Protein Kinase 2) receptor. There are two kinase forms, ROCK1 and ROCK2, which have broadly similar functions (especially in fibrosis), but the simultaneous targeting of both forms appears to be more closely associated with cardiovascular effects (notably hypotension). RXC007 is set to enter clinical development this year with a healthy volunteers Phase I study, ahead of future plans for development for idiopathic pulmonary fibrosis (IPF), a progressive lung condition with a notably poor prognosis. This will be followed by broader fibrotic indications that will likely include the liver fibrosis known as Non-alcoholic Steatohepatitis (NASH).
The ROCK pathways mediate a broad range of cellular responses that involve the actin cytoskeleton and are important regulators of cellular growth, migration, metabolism, and apoptosis. Aberrant downstream signalling is known to have important roles in cardiovascular diseases, CNS disorders (including Alzheimer’s and Parkinson’s), diabetes (including insulin resistance and nephropathy), and a range of fibrotic dysfunctions.
Currently there is one other ROCK2 inhibitor in clinical development. Belumosudil (KD025) is being developed by Kadmon for chronic graft-versus-host disease (GVHD), where it completed pivotal Phase II trials, and systemic sclerosis (SSc), where a Phase II study is underway. Belumosudil met its primary endpoint in the ROCKstar (KD025-213) study with impressive data. KD025 has been granted FDA Breakthrough Therapy designation and Orphan Drug status; it has been submitted for FDA approval with the review underway (PDUFA date 30/05/21).
RXC007 has shown good ADME profiles and robust anti-fibrotic effects in preclinical models, with strong data in fibrosis disease models such as IPF, NASH, and diabetic nephropathy (DN). RXC007’s preclinical profile suggests it has several advantages over KD025, which means the Phase I data could be particularly interesting. The Phase I healthy-volunteers study is expected to initiate in H121, with a subsequent, more comprehensive, clinical trial plan in IPF being developed. As with RXC004, RXC007 is a programme that we expect will be progressed to Phase II proof-of-concept trials before being prepared for out-licensing.
Exhibit 5 shows expected news flow and catalysts over the next two years. While COVID-19 restrictions remain a sensitivity with respect to timings (impacts on patient recruitment into clinical trials is a known industry-wide consequence), we anticipate Redx Pharma will make significant strategic progress.
FY20 results provide an opportunity to update our valuation to reflect Redx’s latest cash position. Our valuation is now £326.4m, equivalent to 119p/share (84p/share fully diluted), a small upgrade to our previous £317.5m valuation, equivalent to 116p/share (81p fully diluted). Exhibit 6 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.
2020 was financially transformational for Redx Pharma. The company now has the resources to advance and grow its development pipeline and broaden its research activities. Funds raised during FY20 (year-ending 30 September 2020) and in December 2020 collectively boosted Redx’s balance sheet to c £48m (vs £27.5m at end-FY20; £3.7m at end-FY19), providing a cash runway through to end-2022, and the potential achievement of several value creating events.
Redx’s current cash resources, 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), will allow the company to significantly ramp up R&D investment. The December offering circular broke down intended FY21-FY22 investment as follows: £14m for RXC004 clinical development, £11m for RXC007 preclinical/clinical development, £16m for the research pipeline, and £12m for general working capital purposes.
Increased R&D spend was the major driver of higher operating expenses in FY20 (£14.2m vs £10.2m in FY19), reflecting preclinical and clinical pipeline progress. Investment is expected to further increase as discovery engine research activities and staffing return to pre-administration levels, and the pipeline progresses through late preclinical (RXC007) and early clinical (RXC004) development. We have restated our expenses breakdown to mirror Redx’s reporting. G&A costs appear lower in comparison as they relate solely to central/back office expenditure, while R&D includes all discovery and development-related spend, including staff. The growth of, and progress in the R&D organisation is reflected in the increasing proportion of total spend that is related to R&D in both absolute and relative terms. R&D as a percentage of total costs was 86% in FY20, up from 82% in FY19 and 70% in FY18. We forecast R&D spend of £28.0m for FY21 and £29.5m for FY22, while G&A will also rise more modestly (to above £2m) due to inflation and additional personnel to support the expanding organisation.
FY20 revenue of £5.7m (FY19: £3.1m) was solely derived from partners (licence, collaboration, or service income). Future collaboration and licencing revenues are anticipated in FY21 and FY22 from Jazz Pharmaceuticals (for Ras/Raf/MAPK and pan-RAF) and AstraZeneca (RXC006). The Jazz Pharmaceuticals $10m upfront payment was received in FY20 but will be recognised as and when performance obligations are achieved. As a result, we update our FY21 revenue expectations under this collaboration and have also reassessed potential receipts from other deals based on the disclosed headline amounts and our assumptions around likely development progress on the underlying assets. We caution that there remains limited visibility on the timelines and payment schedules, and that these potential receipts are contingent on continued progress of the underlying programmes. Changes to key forecasts are shown in Exhibit 7, with our updated financial summary in Exhibit 8.
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