Avacta: still well placed to prosper

Avacta is exploiting its proprietary technology platforms across Therapeutic and Diagnostic applications. The COVID-19 LTF (lateral flow test) opportunities placed the Diagnostics business firmly in the limelight; however, industry-wide developments, coupled with altering test sensitivities as the Omicron variant emerged, meant many investors’ expectations were dashed. We had viewed COVID-19 revenues as meaningful but short-lived, and valued them accordingly, with the Therapeutic opportunities being the real driver of longer-term value. AVA6000, the lead pre|CISION programme, is progressing through a Phase I dose escalation study, with the dose expansion stage due to start mid-2022. These results, if successful, should be the trailblazer for an extensive pipeline of additional products. The first of these, AVA3996, a tumour-activated prodrug of a protease inhibitor (Velcade) is completing preclinical development, with potential for Phase I to start in 2023. We update our valuation model for FY21 results, COVID-19 developments, and AVA600 progress, which results in a new valuation of £557m, equivalent to 219p per share.

Avacta has two technology platforms with broad applicability: pre|CISION allows for the selective and precise activation of chemotherapy drugs within a tumour, offering the potential to enhance efficacy and, importantly, reduce systemic toxicities for many commonly used cancer therapies; and Affimer proteins are next-generation antibody mimetic protein scaffolds that offer enhanced attributes to the equivalent antibodies across therapeutic and diagnostic applications, with characteristics such as better stability, greater versatility, and ease of production.

Two highly versatile and complementary technologies

The pre|CISION platform is a tumour targeting technology particularly suited to oncology indications. It uses a substrate which is specifically cleaved by an enzyme that is selectively found on the surface of tumour cells. Fibroblast activation protein (FAPα) is a protease that is highly upregulated in over 90% of solid tumours compared with healthy tissues (10x to 100x more). When the pre|CISION substrate is attached to a chemotherapeutic agent it creates a prodrug that is inert (the chemotoxin is inactivated) until it reaches the tumour microenvironment (TME). There it encounters FAP, which removes the substrate and activates the prodrug into its chemotoxic form and so kills the target tumour cells. This means that systemic exposure can be reduced considerably, offering the opportunity to improve therapeutic efficacy with fewer toxicities.

Affimers are a class of small proteins that can mimic the properties of antibodies, such as specific binding to a target molecule or protein, but, due to their small size and simple structures, can bypass many of the issues and limitations of antibodies. The exquisite specificity of antibodies means they are widely used as diagnostics, with thousands of antibody-based tests and assays, and as therapeutics, with monoclonal antibodies (mAbs) representing some of the most potent, and best-selling, drugs. The commercial success of antibodies belies their many limitations, including their large relative size limiting tissue penetration, complex architecture, cost of manufacture, pH and temperature stability, and difficulty in ensuring batch to batch consistency.

Advances in protein engineering led to the search for antibody mimetics, families of protein-based structures that have the desired specificity and affinity but with improved physical characteristics. Affimers are an apt example and are, arguably, the best in class across a number of key parameters (Exhibit 1). Other types of antibody mimetics include adnectins, affibodies, affitins, anticalins, avimers, DARPins, fynomers, knottins, monobodies, and nanobodies. These mimetics typically contain a stable scaffold that holds the molecule together and a variable arm that binds to the specific target.

Exhibit 1: Affimer platform offers multiple advantages over antibodies

Source: Avacta, Trinity Delta

The pre|CISION and Affimer platforms can be combined to produce novel synergistic combinations, such as tumour microenvironment-activated drug conjugates (TMAC). These conjugates are highly flexible, for instance combining an Affimer molecule that provides immune checkpoint blockade with a cytotoxic payload for direct tumour cell killing, coupled with selective activation within the tumour itself.

The value, and potential, of these technologies will be demonstrated by AVA6000, an innovative pre|CISION-based doxorubicin FAPα activated chemotherapy that is in Phase I clinical trials, and for Affimers it was the rapid creation of the AffiDX SARS-CoV-2 point-of-care COVID LFT. If AVA6000 generates positive clinical data, it would lead to a portfolio of similarly acting oncology prodrugs. The use of Affimers for clinical applications is currently being progressed mainly through partnerships and collaborations, although in-house programmes will be developed over time.

Optimising Affimers in diagnostic applications is, arguably, more straightforward. Despite the frustrations, the COVID-19 opportunity not only demonstrated the viability of Affimer-based tests but accelerated the creation of a fully integrated operational structure, with in-house product development expertise and an ISO134585 certified quality management system, as well as securing a first CE mark approval. In our view, one of the issues facing management is how to capitalise on these skills and abilities in a timely manner to crystalise value.

Therapeutics: solving well known oncology issues

Avacta became a clinical-stage drug development company in August 2021 when the first patient enrolled in a Phase I study of its lead asset, AVA6000 pro-doxorubicin. AVA6000 employs pre|CISION chemistry to create a FAPα activated version of doxorubicin that is only activated at the tumour site, thereby minimising systemic toxicities. Successful clinical outcomes would open up a whole array of established and effective compounds to which pre|CISION could be applied to similarly reduce toxicities and improve efficacy.

Likewise, the Affimer platform is particularly well suited to oncology indications and could be applied to a similarly broad range of tumour types as with antibodies. Management has focussed its Affimer-based therapeutic development efforts into bi-specifics, TMACs, combinations with pre|CISION chemotherapies, and novel tumour microenvironment-activated drug conjugates (TMACs). The leading Affimer-based programmes are progressing through preclinical development. Exhibit 2 summarises Avacta’s known pipeline.

Exhibit 2: Wholly owned pipeline and fully funded partnerships

Source: Avacta

The primary indications for the pre|CISION platform are cytotoxic regimens where, despite proven efficacy, their utility is hampered by debilitating side-effects. Many well characterised and effective treatments are limited by systemic toxicities, for example the anthracylines cause cardiotoxicity, proteasome inhibitors cause peripheral neuropathy, and taxanes cause neutropenia and peripheral neuropathy. The ability to selectively activate prodrugs of these molecules only at the tumour site could result in a re-evaluation of their role as part of combination regimens (as a component of tailored immune-based drug cocktails). We view an important role of AVA6000 as effectively acting as proof of concept for the use of the pre|CISION platform in therapeutics.

AVA6000 employs the pre|CISION substrate to create a prodrug of doxorubicin, which is still widely used to treat many solid tumours (including breast, lung, gastric, and ovarian) due to its efficacy. This is especially notable in metastatic breast cancer (MBC) and advanced soft tissue sarcoma (ASTS), and means that doxorubicin is a component of many cytotoxic regimens.

A major limitation with doxorubicin is life-threatening cardiotoxicity, with mortality of c 50% once congestive heart failure develops. Pegylated and liposomal formulations have been developed to help minimise side effects, but cardiotoxicities still occur. As cardiomyopathy is dependent on cumulative doxorubicin dose, this effectively limits treatment to only six cycles (typically 60-75mg/m² every three weeks until 450mg/m² is reached). Animal studies have shown that AVA6000 is selectively activated in cancer sites, with 18x more doxorubicin present in the tumour tissues than in heart tissues.

Exhibit 3 illustrates the design and expected timelines for the Phase I trial. The first part (Part A) is a typical open-label, multi-centre dose escalation (3+3 design) study exploring safety, although some efficacy signals may be noted. The study started in August 2021 at UK centres and examines 15 to 20 patients with a variety of locally advanced or metastatic solid tumours. The second dose cohort is currently underway. In addition, Avacta has an open US IND which allows enrolment of eligible patients into clinical trial sites in the US once these have been initiated. Assuming a successful outcome, the recommended dose would be taken into Part B, in which 30 to 40 patients will be evaluated to confirm safety and tolerability and explore preliminary anti-tumour activity. Top-line data from Part A of the study could be available by mid-2022, with preliminary results from Part B in mid-2023.

Exhibit 3: AVA6000 Phase I trial design and timeline

Source: Avacta   Note: MTD = Maximum Tolerated Dose

Despite its cardiotoxicity limitations and largely generic status, doxorubicin consistently posts global sales >$1bn annually. An external commercial evaluation, Globe Life Sciences (March 2020), estimated AVA6000’s market opportunity as monotherapy in three cancer indications (ASTS, MBC, and selected ovarian cancer) at $1.5bn (US and Top Five Europe). Depending on the clinical stage at which it occurs, successful out-licensing should result in an attractive upfront payment, royalties on net sales, plus potential development, regulatory and commercialisation milestones.

Once AVA6000 has established the clinical proof of concept, we expect increased industry interest in the pre|CISION platform. Avacta has been exploring other single-agent chemotherapies whose clinical utility would similarly benefit from improved efficacy and reduced toxicities. The most advanced is a FAP-activated proteasome inhibitor, AVA3996, a prodrug of an analogue of Takeda’s Velcade (bortezomib), which is commonly used for multiple myeloma. AVA3996 offers the prospect of reducing the dose limiting toxicities, principally peripheral neuropathy and thrombocytopenia, that constrain Velcade use to multiple myeloma and mantle cell lymphoma.

Velcade’s efficacy, particularly when used in combination regimens, could broaden its use into additional hard-to-treat indications, such as pancreatic cancers. Animal studies have shown encouraging results, with selective drug delivery to tumour sites and reduced systemic exposure. Despite approaching patent expiry in 2022 and limited clinical indications, Velcade continues to post blockbuster sales of c $1bn. Similarly, the overall protease inhibitor market is expected to post an 8.4% CAGR growth and reach $2.3bn in 2026. Avacta has earmarked funds from the June 2020 raise to complete the preclinical package and is on track to start the first-in-human Phase I clinical trial in H223.

As antibody mimetics, Affimers can be employed in wide ranging applications in immuno-oncology, inflammatory conditions, and ocular diseases. The most advanced known Affimer-based therapeutic programme is AVA004, a PD-L1 checkpoint inhibitor. It has demonstrated a competitive profile in animal studies when compared to existing well-characterised PD-L1 products.

Given the breadth of potential applications, Avacta has entered into multiple collaborations that exploit the Affimer platform’s versatility. These are fully funded, represent additional or incremental indications, provide expertise relevant to in-house programmes and, importantly, are useful external validation of the platforms’ potential. These span from developing Affimer-based drugs (with LG Chem Life Sciences) to establishing the AffyXell Therapeutics joint venture with Daewoong Pharmaceuticals.

Diagnostics: clearly positioned for future action

It is difficult to not be disappointed with the outcome of the AffiDX SARS-CoV-2 LFT (January 2022 Lighthouse). The knowledge that other diagnostic players, ranging from significantly larger companies to much smaller businesses, were also impacted in the same way does little to assuage the frustrations felt. Similarly, the knowledge that we had viewed any COVID-19 related income streams as likely to be short-lived, valuing them accordingly, does not placate the sense of annoyance at how the whole of the LFT scenario has played out.

As we have said previously, the Diagnostic division has come of age during the COVID-19 pandemic. The pressing need for accurate diagnostics, particularly point-of-care (POC) tests, was clear and entered public consciousness. Avacta, among many others, responded promptly and, once the SARS-CoV-2 structure was made public, identified, and generated Affimer-based reagents within five weeks. A number of different approaches were tried, but soon the bulk of internal resources were directed to develop what became AffiDX SARS-CoV-2.

Partnerships with appropriately skilled players such as Mologic, which was instrumental in creating the appropriate LFT architecture, and Global Access Diagnostics (GAD), to ensure that production and kit assembly were consistent with scaling up to commercial manufacture, saw the creation of an LFT that had a competitive profile with potentially class leading clinical performance. The altered clinical needs with the emergence of viral variants, coupled with uncertain market dynamics, saw these efforts thwarted and AffiDX SARS-CoV-2 sidelined.

Although of scant consolation to many investors, the pandemic has seen the Diagnostics business turn an important corner. The infrastructure has been developed rapidly and the scientific, operational, and personnel foundations are now in place to create a meaningful business. The properties of Affimers mean they offer an attractive and viable alternative to antibodies across a range of diagnostic indications.

Affimers can be combined easily with each other, antibodies, or other biomolecules by simple, rapid, and proven methods to design the desired molecule or complex. Importantly, their novelty means a full and unencumbered patent estate has been established, so there is freedom to operate even when addressing targets that are covered by specific and robust antibody patents. This means they can be employed across key life sciences areas such as biomedical immunoassays, bioprocessing, and imaging. Avacta has chosen to focus on clinical and consumer diagnostics, which offer sizeable commercial opportunities and can more readily realise the benefits of Affimer reagents.

The Diagnostics business aims to employ the technical benefits of Affimer reagents to develop a comprehensive array of in vitro diagnostic (IVD) tests that address existing limitations. Because Affimer reagents can be produced readily through E. coli systems, they can be developed rapidly, cheaply, with consistently high quality and no batch-to-batch variation. Their inherent flexibility means Affimer binders can be generated to almost any protein target, including those that would be impossible through traditional antibody manufacture. Their specificity is also high, with the ability to differentiate between targets that differ by as little as a single amino acid.

Pre-COVID-19 the approach to build awareness of the utility of Affimer reagents consisted of two complementary strategies:

• Paid-for evaluations: where prospective strategic partners or customers explore the use of Affimer reagents in a variety of potential applications. The aim is to embed the relevant Affimer molecule into their commercial diagnostic portfolio and strike a royalty bearing licensing agreement. While revenue generating, these third-party evaluations are thorough and lengthy, usually taking several years to complete.
• In-house development: a more recent activity, reflecting the desire to secure licensing deals more rapidly. This proactive approach involves the generation of selected diagnostic applications, complete with the supporting regulatory data packages, and then out-licensing when this work is complete. A pipeline is being created, with the goal of developing two commercially relevant assays per annum.

There is an argument that the Diagnostics operations have moved beyond this approach and a more comprehensive strategy should be explored addressing a broader range of potential opportunities (Exhibit 4). Avacta is now focussed on developing a pipeline of new IVD products in four key areas: respiratory infectious diseases, cardiovascular disease, cancer, and general health and well-being.

Exhibit 4: Diagnostics opportunities

Source: Avacta

The diagnostic testing industry is experiencing a period of structural growth accelerated by the COVID-19 pandemic. This has emphasised the importance of testing and, specifically, LFTs which is providing a catalyst for growth. LFTs are cost-effective, rapid and can be used outside a laboratory and therefore can be a critical part of testing strategies globally.

For context, the diagnostics market is large, growing, and very diverse. Laboratory testing still accounts for the highest volume but point of care (POC) or near-patient tests are becoming increasingly prevalent. Greater automation is driving changes within central laboratories, with larger players such as Abbott and Roche providing advanced flexible platforms that are capable of multiple operations. The major players are also active in POC but this segment is more diverse with certain segments better suited to the smaller, and arguably more nimble, companies.

The global POC market is estimated to be worth $29.57bn and is forecast to grow at 11.4% CAGR to $50.64bn in 2025. Until the COVID-19 pandemic upended the dynamics, this was dominated by home glucose testing (principally Type I diabetics) and pregnancy tests (one of the earliest examples of consumer LFTs). The US again dominates, representing 39.3% of global share and growing at 12.1% CAGR, but POC uptake has only really gained traction in recent years. The picture across Europe is not uniform, with strong adoption in countries such as Germany, the Netherlands, and Scandinavia, offset by low penetration in countries like France and the UK.

Exhibit 5: Diagnostics value chain – typical value gained across the process

Source: MarketsandMarkets – Point of Care & Rapid Diagnostics Market January 2021

Exhibit 5 details the typical value chain for POC diagnostics and illustrates where the greatest commercial opportunities lie. Some players, and the recently listed Aptamer Group is an apt example, are focussed exclusively as service providers of novel reagents and components. The larger players tend to operate across the board, as Avacta now can, with fully integrated operations. Given these market dynamics and the breadth of potential opportunities, both across the value chain and by end use, it will be interesting to see how management intends to position its post-pandemic Diagnostics business.

Valuation

FY21 results provide an opportunity to update our valuation to reflect COVID-19 realities, the clinical progress of AVA6000, and Avacta’s latest cash position. Our valuation is now £557m, equivalent to 219p per share, vs £710m or 280p per share previously. The largest change relates to the removal of the AffiDX SARS-CoV-2 LFT contribution of £124m, from our model. Although this may be considered overly cautious, we had always considered these revenues to be relatively short-term in nature and, importantly, is in line with our practice of employing conservative assumptions. Exhibit 6 shows the updated outputs and underlying assumptions of our valuation model. An overview of our methodology is provided in our June 2021 Initiation.

Exhibit 6: Avacta sum of the parts valuation

Source: Trinity Delta   Note: assumptions include a 12.5% discount factor, £/$ FX rate of 1.30

We have calculated the rNPV of the lead development project, AVA6000, and attributed indicative values to the pre|CISION and Affimer (including both Therapeutic and Diagnostic programmes) platforms. Typically, with clinical stage programmes their commercial prospects are assessed, and success probabilities adjusted for the inherent clinical, commercial, and execution risks each carry. For the remainder of the platforms, we calculate an aggregate rNPV, employing conservative assumptions throughout. Successful outcomes in the clinical studies for the lead programmes would materially de-risk each platform and result in sizeable upside. Hence, for example, positive study outcomes with AVA600 would act as validation for the pre|CISION platform. The updated valuation for AVA6000 is £51.9m, equivalent to 20.4p per share, with an additional £261.2m, 102.7p per share, for the other pre|CISION portfolio.

Avacta’s Diagnostics business has come of age during the COVID pandemic, demonstrating laudable technical abilities, speed of response, integrated development, and the ability to work with multiple partners. Irrespective of the eventual outcome of the AffiDX SARS-CoV-2 LFT, this business has matured into a true diagnostics player. Nonetheless, AffiDX SARS-CoV-2 was a major value contributor within our model, representing £124m (49.1p/share).

As previously mentioned, the forecasting visibility was low and our confidence in AffiDX SARS-CoV-2’s contribution reflected that. We had attempted to address diverse factors ranging from macro (such as the political and scientific arguments for point of care testing with LFTs), to micro (e.g. how does AffiDX SARS-CoV-2 really compare to alternative LFTs?), and pragmatic (e.g. will Avacta be able to make sufficient tests to satisfy expected demand?). Whilst a COVID-19 LFT may still make a meaningful sales contribution, we believe the prudent approach is to remove it from our models until a degree of visibility and confidence is in place.

Consequently, the valuation we assign to the Affimer platform (including both Diagnostics and Therapeutic applications) is now £252m, or 99p a share. This reflects the relative lack of visibility for future revenue streams. Clearly there is a great deal of value inherent in this platform and management must have plans to realise this. We would argue this is an area that, once management plans are articulated, could see a material uplift in our valuation.

Updating the calculations for the two platforms and netting against costs and net cash generates a new Avacta valuation of £557m, equivalent to 219p per share. We envisage revisiting our models as news flow on AVA600’s clinical progress is released and, importantly, as the plans for the Diagnostics business are revealed.

Financials

Avacta reported FY21 revenues of £2.94m (FY20: £2.14m) for its continuing operations, with Diagnostics contributing £0.78m (FY20: £0.52m) with the Astrea Bioseparations licensing agreement (£0.5m) offsetting the lower number of custom Affimer projects, impacted by customers’ working restrictions. Therapeutics posted revenue of £2.16m (FY20: £1.63m), reflecting further milestone payments from the LG Chem collaboration and a licensing agreement with POINT Biopharma, as well as payments for FTE funded research with LG Chem and AffyXell. Total revenues for the period were £4.55m (FY20: £3.64m) as Animal Health contributed revenue of £1.6m (FY20: £1.5m). The Animal Health division was subsequently divested in March 2022 to Vimian Group AB for an upfront payment of £0.88m and an additional performance-related deferred consideration of up to £1.43m.

FY21 operating costs were £31.1m (FY20: £20.0m) with expensed R&D costs of £13.5m (FY20: £8.9m) as reflecting increased spend in both Diagnostics and Therapeutics development. A further £0.8m (FY20: £0.8m) was amortisation of previously capitalised spend. Manufacturing costs of £2.1m (FY20: nil) relates to expensed costs of pre-production and production AffiDx SARS-CoV-2 LFTs given the decision in January 2022 to pause sales. SG&A costs increase to £8.1m (FY20: £5.9m) due to operational scale up of the Diagnostics division and in support of the transition of the Therapeutics business into a clinical stage business. Loss before taxation was £29.2m (FY20: £18.9m), with a net loss of £26.3m (FY20: £18.9m).

The R&D tax credit of £2.8m was comparable to FY20 (tax credit of £2.5m). Cash and equivalents at end December 2021 stood at £26.2m (£47.9m at end December 2020), with receipt of a £2.75m R&D tax credit expected during H222.

The last fund raise in June 2020 provided resources to scale up the Diagnostics business (£10m), including the COVID-19 opportunity as well as expansion of in-house diagnostics product development capabilities and acceleration of the broader diagnostics product pipeline and commercial partnerships, and to accelerate the expansion of the Therapeutics pipeline (£35m).

Exhibit 7: Summary of financials

Source: Company, Trinity Delta Note: Due to restatement of accounts FY19 relates to 17 month period ended 31 December 2019 and FY20 to 12 month period ended 31 December 2020, and FY20 and FY21 statements relate to continuing operations (ex-Animal Health). Revenue forecasts do not include products that have not yet been approved or launched. Short-term debt in FY23 is our assessment of the company’s funding requirement.