Redx Pharma’s FY21 results highlight notable achievement across all development activities, progressing both the in-house and out-licensed assets. Discovery efforts centre on the proven medicinal chemistry expertise, which is being focussed on the creation of “first in class” or “best in class” compounds that address well-defined cancers and fibrotic diseases. RXC004, a porcupine inhibitor for oncology, and RXC007, a ROCK2 inhibitor for fibrosis, are progressing through Phase II and Phase I trials respectively with further value inflection expected during 2022. Milestone payments received in FY21 and post-period end from AstraZeneca and Jazz Pharmaceuticals are tangible reminders of the value inherent in Redx Pharma’s discovery platform. Our rNPV-based valuation is £434m, equivalent to 157.5p/share.
| Year-end: September 30 | 2020 | 2021 | 2022E | 2023E |
| Revenues (£m) | 5.7 | 10.0 | 12.0 | 4.4 |
| Adj. PBT (£m) | (8.8) | (15.0) | (28.2) | (44.3) |
| Net Income (£m) | (9.2) | (21.6) | (28.6) | (44.6) |
| Adj. EPS (p) | (5.2) | (5.9) | (10.1) | (15.4) |
| Cash (£m) | 27.5 | 29.6 | 14.2 | 4.6* |
| EBITDA (£m) | (7.5) | (19.1) | (27.1) | (43.8) |
Update
27 January 2022
| Price | 81.5p |
| Market Cap | £224.4m |
| Enterprise Value | £194.8m |
| Shares in issue | 275.3m |
| 12 month range | 52.0-129.9p |
| Free float | 11.5% |
| 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 development of small molecule therapeutics, with an emphasis on oncology and fibrotic diseases. It aims to initially progress them through proof-of-concept studies, before evaluating options for further development and value creation.
Analysts
Lala Gregorek
lgregorek@trinitydelta.org
+44 (0) 20 3637 5043
Franc Gregori
fgregori@trinitydelta.org
+44 (0) 20 3637 5041
Redx Pharma’s FY21 results highlight how clinical progress has reduced the company’s risk profile materially over the course of the past 12 months. Initiation of a Phase I trial by AstraZeneca for AZD5055, a porcupine inhibitor out licensed (as RXC006) in August 2020, means this is the fourth clinical stage asset discovered using Redx Pharma’s medicinal chemistry expertise. Redx Pharma also has two in-house programmes in the clinic: RXC004, a porcupine inhibitor, now in Phase II for genetically selected Wnt ligand driven cancers, and RXC007, a ROCK2 inhibitor that, following promising initial Phase I data, is expected to enter Phase II studies in 2022. The first, and most advanced, compound is pirtobrutinib, a Bruton’s tyrosine kinase (BTK) inhibitor that as RXC005 (later LOXO-305) was sold in 2017 to Loxo Oncology (acquired by Eli Lilly in 2019).
The impressive track record is tangible evidence of the quality of Redx Pharma’s discovery platform. This is underpinned by the strength of its medicinal chemistry expertise, where it has proven its ability to solve complex targeting issues. The aim is to create either best-in-class or first-in-class small molecules addressing clear, and commercially significant, medical needs. The pipeline is well-balanced, with two clinical in-house programmes and two late preclinical/early clinical assets out-licenced (to AstraZeneca and Jazz Pharmaceuticals). In-house development is focussed on highly selective small molecules, directed at known and scientifically validated pathways, for the treatment of genetically defined tumours and poorly treated fibrotic diseases.
RXC004 is a highly selective and potent small molecule that targets the porcupine (Porcn) enzyme on the Wnt (Wingless type) signalling pathways. It is under evaluation as both monotherapy and in combination with checkpoint inhibitors (CPIs) in various solid tumours. The 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 proven to be difficult to address; within this the porcupine enzyme is seen as an attractive target as it is a strategic node (all tumour cells that are dependent on Wnt ligands would be sensitive to Porcn inhibition).
Preclinical studies have shown RXC004 has a 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 micro-environment and hence has a possible dual mechanism of action (Exhibit 2).
RXC004 is completing a Phase I programme, which consists of three modules in an all-comers population each evaluating a different setting (Exhibit 2). Module 1 is monotherapy with continuous dosing; Module 2 is in combination with the PD-1 checkpoint inhibitor nivolumab (Opdivo, Bristol Myers Squibb); and Module 3 will explore intermittent dosing schedules. Successful outcomes have already supported the initiation of Phase II monotherapy proof of concept studies in patients with Wnt ligand driven tumours.
The first clinical results from this programme presented at ESMO 2021, detailed in our September 2021 Update, confirmed that RXC004 has a useful therapeutic window and is safe and well tolerated at the selected Phase II dose. Treatment associated adverse events were dose-related and in line with the expected profile for Porcupine inhibition. Additionally, there were early indications of activity in genetically selected Wnt ligand driven tumours.
These study patients were not selected for Wnt ligand driven tumours; however, this was analysed retrospectively. In total, 18 patients had RECIST evaluable disease, of which seven patients had Wnt ligand dependent tumours, six had Wnt ligand independent tumours, and the remaining five, tumours of unknown status. With the caveats that the study was small, the patients were not genetically selected, and they were also heavily pre-treated, there were encouraging signs of stable disease. Five of seven Wnt ligand dependent patients showed a durable disease control. In contrast, the eleven patients with unknown or Wnt ligand independent disease showed progressive disease. Median treatment duration for the Wnt ligand dependent tumours was 13.1 weeks (range: 8.4 to 25.4 weeks) vs 6.6 weeks (5.4 to 7.3) for the unknown or Wnt ligand independent tumours.
Exhibit 4 summarises the study conclusions. Again, with the caveat that this is a small study and comparisons across different studies are fraught with difficulties, the results of the Phase I Rodon study of WNT974 (covered in more detail in our September 2021 Update) coupled with supporting preclinical evidence suggest that RXC004 may be a better compound in terms of expected efficacy, dosing, and, possibly, side-effect profile.
The Phase II programme similarly explores both monotherapy (patient enrolment started in Q421) and a CPI combination (expected to begin during H122, COVID permitting). Two multi-arm Phase II studies are planned: PORCUPINE in genetically selected MSS mCRC includes a RXC004 monotherapy arm and a combination arm with anti-PD1 agent nivolumb; and PORCUPINE2, a monotherapy trial with two arms, one in genetically selected metastatic pancreatic cancer and the second in unselected biliary cancer.
The PORCUPINE study will recruit c 40 RNF43 and/or RSPO fusion selected patients with aberrant microsatellite stable (MSS) metastatic colorectal cancer (mCRC) that have progressed following current standard of care treatment. This follows an open label, multi-centre, multi-arm format and includes a monotherapy arm (recruitment underway) and a combination arm with nivolumab (due to begin enrolling in H122). The dosing for the combination will be confirmed once the Phase I study has reported. Each arm will aim to have c 20 evaluable patients. Baseline and on-treatment biopsies, as well as ctDNA testing and FDG PET scans, will be used to assess changes to tumour and immune micro-environment. Again, all patients will have prophylaxis with denosumab to avert possible bone toxicity. Initial results could become available during H123.
The PORCUPINE2 monotherapy trial is an open label, multi-centre, multi-arm, study to evaluate efficacy and safety of a 2mg once daily dose of RXC004 in c 30 patients with Wnt ligand driven tumours. The first arm will recruit patients with RNF43 loss of function (LoF) mutation-positive pancreatic ductal adenocarcinoma (PDAC). The second arm will recruit patients with biliary tract cancer (BTC), where selection will not be required as BTC typically has a high Wnt ligand dependency (>70% of cases). All patients will receive denosumab prophylaxis to avert possible bone toxicity. The aim is to have c 15 evaluable patients enrolled in each arm. These tumour types have limited treatment options and poor five-year survival rates (<3% for biliary tract and pancreatic cancer).
RXC007 is a novel and highly specific small molecule that selectively targets the ROCK2 (Rho Associated Coiled-Coil Containing Protein Kinase 2) receptor. These pathways mediate a broad range of cellular responses that involve the actin cytoskeleton and are important regulators of growth, metabolism, and apoptosis. ROCK is a biologically validated target that sits at a nodal point in a cell signalling pathway, where it modulates inflammatory response and fibrotic processes (Exhibit 5). The two kinase forms, ROCK1 and ROCK2, have similar functions (especially in fibrosis), but the simultaneous targeting of both appears to be associated with cardiovascular effects (notably hypotension).
Historically addressing ROCK without encountering safety issues has proven difficult. For context, Kadmon’s Rezurock (belumosudil) is the only approved ROCK2 inhibitor, for chronic graft-versus-host disease (cGVHD). Its approval in July 2021 established a clear regulatory pathway that, in our view, materially de-risks RXC007’s development process. It is worth noting that Sanofi acquired Kadmon for $1.9bn in September 2021.
RXC007 is a particularly promising asset. Preclinical data has shown good ADME profiles and robust anti-fibrotic effects, with strong data in fibrosis disease models such as idiopathic pulmonary fibrosis (IPF), non-alcoholic steatohepatitis (NASH), and diabetic nephropathy (DN). The preclinical profile suggests RXC007 has the prospect of being disease modifying. The first Phase I healthy volunteers study began in June 2021. Interim results were presented at Redx Pharma’s October 2021 R&D day and confirmed the preclinical pharmacokinetics, with no adverse effects seen from a single dose ranging from 2mg to 40mg. Dose escalation continues, with an expected H122 read out. These data will guide dosing and structure of the RXC007 Phase II programme, expected to start in 2022.
The first Phase II study follows a staged design in IPF, a progressive lung condition with a poor prognosis despite two approved drugs. This consists of a Phase IIa safety and tolerability study in IPF with and without standard of care (SoC) that will inform the Phase IIb dose. The 12-month Phase IIb trial will then evaluate RXC007 plus SoC with forced vital capacity (FVC) lung function as a primary endpoint. If successful here, other fibrotic indications could be explored.
AZN5055, previously known as RXC006, is partnered with AstraZeneca through an August 2020 deal that consists of an upfront fee and early development milestones totalling $17m, further development milestones worth up to $360m, and tiered mid-single digit royalties on any eventual sales. Several milestones have since been achieved, with a $4m milestone paid in June 2021 on the progress of AZN5055 towards the clinic, and a further $9m triggered in December 2021 on the initiation of first-in-human Phase I studies. AZN5055 is the fourth compound originated by Redx Pharma’s discovery platform to successfully progress into clinical development.
AZN5055 is a potent, highly selective small molecule of the porcupine receptor in development for fibrosis indications. Although targeting similar Wnt pathways to RXC004, the focus is the critical elements that maintain adult cell homeostasis, which includes wound healing and repair functions. Here the target is the increased proliferation and attenuated apoptosis of myofibroblasts, which results in the excessive synthesis, remodelling, and contraction of extracellular matrix. AZD5055 belongs to a different chemical class to RXC004, with an independent family of patents. The porcupine route also represents a different approach to fibrosis to the ROCK pathways that are being progressed in-house with RXC007.
AZN5055’s clinical programme is starting with a two-part Phase I study involving 104 patients. The primary indication appears to be IPF, which, if these early studies are supportive, we expect will be broadened into other fibrosis indications.
Out-licensing of AZD5055 was a strategic move to lessen Redx Pharma’s exposure to the Porcupine class. Deal terms are attractive for a preclinical asset, retaining material financial upside if clinical development progresses as hoped.
Redx Pharma is working with Jazz Pharmaceuticals to develop a pan-RAF inhibitor programme (known as JPZ815) for RAS and RAF mutant tumours. The aim is to overcome the resistance mechanisms that are seen with clinically approved B-RAF selective drugs. The RAF kinases are an integral part of the RAS-RAF-MAPK pathway, with B-RAF mutations commonly seen in the clinic. This deal was agreed in July 2019, with Jazz Pharmaceuticals paying an upfront fee of $3.5m, and Redx Pharma eligible for a further $203m in success-based development, regulatory, and commercial milestones, and mid-single digit royalties on eventual sales.
A $3m milestone was triggered in September 2021 on initiation of IND-enabling studies, with the next milestone due on IND submission to the FDA (potentially in 2022). Jazz Pharmaceuticals is funding the necessary preclinical work to prepare the IND submission, although Redx Pharma has a separate collaboration agreement, signed in parallel, to perform research and preclinical development services to completion of IND-enabling studies.
Redx Pharma’s relationship with Jazz Pharmaceuticals was reinforced through a further research collaboration (September 2020) to discover and develop drug candidates for two oncology targets on the Ras/Raf/MAPK pathway. Economics of this deal include a $10m upfront payment and a further $10m in the following 12 months (triggered in December 2021 reflecting continued progress), with up to a further $400m in development, commercial, and regulatory milestones split equally between the two programmes, and tiered mid-single digit royalties on net sales. Redx Pharma is responsible for research and preclinical development up to IND submission, which will trigger the first milestone.
Management aims to have three further wholly owned assets progressing through clinical development by 2025. The research focus remains on the attractive pathways that impact selected oncology and fibrosis indications. Aside from the known, and sizeable, clinical disease areas, there is a growing industry interest in how fibrosis may be implicated in tumour resistance to treatment. For instance, various fibrosis pathways have been associated with the stabilisation of a tumour extracellular matrix. These can act as effective functional barriers against agents, including immuno-oncology therapies, and their disruption could materially improve treatment outcomes both directly and as part of a combination approach. These pathways are known to be complex and difficult to model, hence present opportune themes for deploying Redx Pharma’s medical chemistry expertise.
The earlier programmes are known to include a second in-house ROCK programme, referred to as GI-targeted ROCK. This is at the research stage but has shown interesting preliminary data that lends itself to addressing inflammation and fibrosis of the gastrointestinal tract. The compound selected is a pan-ROCK inhibitor designed to only work locally in the gut wall and, as it is quickly degraded by metabolic enzymes, to have a short half-life once absorbed. The aim is to avoid the systemic side-effects, notably cardiovascular (smooth muscle relaxation of systemic vasculature leading to hypotension), that are associated with simultaneous inhibition of ROCK1 and ROCK2. A preclinical development candidate is expected to be chosen in 2022.
Management has disclosed that it has a research-stage DDR (discoidin domain receptor) inhibitor programme, with lead optimisation the next expected milestone. There are two discoidin domain receptors, DDR1 and DDR2, which sit at the intersection of two important receptor families, the extracellular matrix (ECM) and tyrosine kinase receptors (TKI), that are actively involved in normal development and tissue homeostasis. Their role in important aspects of cell behaviour, including proliferation, migration, adhesion, and ECM remodelling, has recently brought them to investor attention for solid tumour indications. For example, in November 2021 Parthenon Therapeutics raised a $65m Series A round to fund its preclinical research into reprogramming the tumour microenvironment and progressing its lead asset, DDR1 inhibitor PRTH-101.
DDRs differ from other kinase enzymes in acting on collagen, both fibrillar and non-fibrillar, and are the only TKIs that are directly activated upon contact of cells with their collagenous matrix. Both receptors recognise collagen as their ligands but DDR1 will bind and signal in response to both fibrillar and non-fibrillar collagens, whereas DDR2 is mostly activated by fibrillar collagens. The role of these receptors is still being explored, but DDR1 is expressed widely in developing and adult tissues, particularly in the epithelia of skin, lung, liver, kidney, gut, colon, and brain, whereas DDR2 shows higher expression in mesenchymal tissues such as heart, muscle, and connective tissues.
Once bound to collagen, DDRs undergo autophosphorylation (which is unusually slow, taking hours rather than the more typical seconds) and initiate several signalling pathways involving the ECM and control adhesion and cell motility. The interactions are complex and varied, regulating key cellular processes including protease production, cytokine secretion, cell migration, immune cell recruitment, and matrix production. In fibrosis the expression of DDRs, mainly DDR1, is up regulated and results in the initiation and progression of fibrosis (notably in lung and kidney diseases). DDR mediated signalling also appears to have an important role in several fast-growing invasive tumours, where they are key drivers of proliferation and stromal invasion.
Redx Pharma has developed a number of potent and selective DDR inhibitors that are undergoing lead optimisation with preclinical studies ongoing. These are initially being explored in models of fibrotic disease and offer the potential of disease modifying activities. Currently there is little public information available but, once again, management has demonstrated its ability to successfully address difficult and complex pathways with attractive small molecules.
Exhibit 6 shows expected news flow and catalysts over calendar 2022. 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.
FY21 results provide an opportunity to update our valuation to reflect clinical progress and Redx Pharma’s latest cash position. Our valuation is now £433.6m ($564m), equivalent to 157.5p per share, which is a 23.6% upgrade to our prior £350.7m, equivalent to 128p per share. Exhibit 7 summarises the outputs and underlying assumptions of our valuation model. 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.
2021 was a year of delivery for Redx Pharma, with both in-house and partnered programmes progressing through their respective development phases. At end-FY21 (30 September 2021) the company’s cash position was £29.6m (end-FY20: £27.5m) having been boosted by the £25.7m (gross) proceeds from the Placing and Open Offer in December 2020, plus milestone receipts of £2.8m ($4m) and £2.2m ($3m) received during the period from partners AstraZeneca and Jazz Pharmaceuticals. Post-period end, a further £7.3m ($10m) was received from Jazz Pharmaceuticals and £6.5m ($9m) from AstraZeneca as key milestones were achieved. The level of investment in RXC004 and RXC007, as they continue their Phase II trials, means current cash provides a runway through Q4 calendar year 2022 (Q1 FY23).
FY21 revenue of £10.0m (FY20: £5.7m) consisted mainly of milestone receipts (£5m), collaboration revenues (£2.75m) and payments for research and preclinical development services (£2.28m). Milestones from AstraZeneca are recognised on receipt (as they relate to contingent consideration on the license previously granted), whereas payments from the Jazz Pharmaceuticals collaborations (predominantly related to the underlying development services) have a deferred recognition element and are recognised as each stage is completed.
R&D expenditure was £24.4m (FY20: £10.5m), with the increase driven mainly by progress of the two in-house programmes (RXC004 and RXC007) through early clinical trials. R&D costs are expected to rise materially if the data supports continuing clinical development as each successive stage is costlier. Despite the increase in staff numbers and investment in support infrastructure, G&A expenses increased more modestly to £6.5m in FY21 (FY20: £4.2m). Finance costs were £1.7m (FY20; £1.0m). This translated into an FY21 net loss of £21.6m (FY20: loss of £9.2m), with loss per share of 8.4p (FY20: 5.4p). The cash outflow for the period was £21.4m vs a £0.4m inflow for FY20.
Looking ahead, we expect FY22 revenue of £12.0m. This is comprised of the $9m (£7.6m) AstraZeneca milestone receipt and recognition of £4.4m in revenues under the Jazz Pharmaceuticals Ras/Raf/MAPK collaboration (a similar amount is expected to be recognised in FY23). We do not currently include in our forecasts the anticipated milestone from Jazz Pharmaceuticals in connection with JZP815 IND submission with the FDA: this may potentially be triggered in 2022.
As indicated earlier, increased R&D investment will be the major driver of higher operating expenses in FY22 and FY23. We model R&D spend of £34.2m and £42.4m respectively. Changes to our forecasts are shown in Exhibit 8, with a financial summary presented in Exhibit 9.
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