Redx Pharma: All eyes on pipeline data this year

Redx Pharma’s differentiated medicinal chemistry expertise has been proven by its consistent track record, having discovered and developed five molecules which are now in the clinic, including two wholly-owned assets in Phase II trials. The strategy is to partner certain assets, sometimes as early as preclinical, and deals are already in place with AstraZeneca and Jazz Pharmaceuticals; meanwhile, selected in-house programmes are being developed to key value-inflection points. This has led to a well-balanced and diverse pipeline. The proprietary lead assets focus on selected oncology indications, with RXC004 in development in solid tumours, and broader fibrosis diseases, and with RXC007 being examined in lung fibrosis (IPF) and with potential to be expanded to the broader immune mediated interstitial lung diseases (ILDs). These lead compounds are progressing through Phase II clinical trials, with data due to be released throughout the coming 12-24 months and key insights expected during H223. Our Redx Pharma rNPV based valuation is £461m ($553m) equivalent to 138p per share.

Redx Pharma has two wholly-owned assets in Phase II trials: RXC004 in Wnt-dependent solid tumours, and RXC007 in IPF, a fibrotic lung disorder. Key data for both are expected during 2023, notably during H223, with details outlined below. In addition, gastro-intestinal pan-ROCK inhibitor RXC008, potentially for fibrostenotic Crohn’s disease, is expected to be submitted for IND/CTA clearance for progression into the clinic by end-2023, with patient enrolment starting in 2024. Redx Pharma is aiming to generate three INDs, including RXC008, by the end of 2025. A summary of Redx Pharma’s pipeline is shown in Exhibit 1.

Exhibit 1: Redx Pharma pipeline

Source: Redx Pharma   Note: DDR = discoidin domain receptor; GI = gastrointestinal; IND = investigational new drug application; IPF = idiopathic pulmonary fibrosis; MAPK = mitogen-activated protein kinase; MSS mCRC = microsatellite stable metastatic colorectal cancer; RAF = rapidly accelerated fibrosarcoma; ROCK = Rho associated protein kinase

RXC004: Combination data will be key

RXC004 is an innovative porcupine inhibitor for Wnt-ligand dependent cancers. Two Phase II trials are ongoing (Exhibit 2): PORCUPINE in genetically selected microsatellite stable metastatic colorectal cancer (MSS mCRC) and PORCUPINE2 in genetically selected pancreatic and unselected biliary cancer. For a detailed overview of RXC004, including the role of Wnt signalling and prior Phase I data, please refer to our February 2022 Outlook.

Exhibit 2: RXC004 Phase II programme and timings for top-line data

Source: Redx Pharma   Note: DCR = disease control rate; DoR = duration of response; ORR = overall response rate; OS = overall survival; PFS = progression free survival

The first data expected during 2023 from the Phase II RXC004 programme are top-line results from the monotherapy biliary cancer arm of PORCUPINE2, which are anticipated during H123. Other RXC004 monotherapy data include from the genetically selected pancreatic cancer arm of PORCUPINE2 and from PORCUPINE, both of which are expected during H223.

Key data from the monotherapy arms of the Phase II programme will be toxicity and tolerance, rather than efficacy, in our view. This is owing to patients having advanced, hard-to-treat disease, in addition to RXC004’s mechanism which, on its own, is cytostatic (slows cell growth) rather than cytotoxic (kills tumours). Hence, at best we expect to see evidence of disease stabilisation rather than improving outcomes (as measured by responses). A similar outcome was observed in the Phase I study of Novartis’ Wnt inhibitor WNT974, where 16% of patients had stable disease but there were no responses. Therefore, we only expect responses in the monotherapy arms (partial or complete) if there is some residual synergistic effect from prior treatment regimens, notably checkpoint inhibitors (CPIs).

The true indication of RXC004’s potential efficacy, and likely the biggest commercial opportunity, will therefore arise from combination studies with CPIs, with data expected H223 from both PORCUPINE2 in biliary cancer (+ Keytruda, Merck) and PORCUPINE (+ Opdivo, Bristol Myers Squibb). The combination with CPIs is important as RXC004 also has an immune-enhancing effect which turns non-responsive “cold” tumours to “hot”, and hence could act synergistically with PD-1/PD-L1 inhibitors, such as Keytruda and Opdivo, which are generally ineffective in “cold” tumours. We note that Keytruda is on-track to deliver >$20bn in global sales in 2022, even though only around 15-20% of patients achieve durable responses with immunotherapy. Thus, there could be significant commercial potential for any agent(s) that can improve immunotherapy outcomes.

RXC007: Initial focus on IPF with plans to expand to ILD

RXC007 is a novel and highly specific small molecule that targets the ROCK2 (Rho Associated Coiled-Coil Containing Protein Kinase 2) receptor. A Phase IIa trial (Exhibit 3) in idiopathic pulmonary fibrosis (IPF) started in October 2022. For more details on RXC007, its mechanism, previous preclinical data which suggest the potential to be disease modifying, and prior Phase I results, please see our October 2022 Update.

Exhibit 3: RXC007 Phase IIa study design

Source: Redx Pharma   Note: DLCO = carbon monoxide diffusion coefficient; FVC = forced vital capacity; HRCT = high resolution computerised tomography; Pbo = placebo

The ongoing Phase IIa trial will investigate escalating doses of RXC007, both with and without standard of care (SoC) in IPF (nintedanib or pirfenidone) over 12 weeks, and will assess early efficacy signals, safety, and tolerability. Initial top-line data are expected during H223. If positive, these data will inform dosing and the design of a larger 12-month Phase IIb trial, which will likely explore RXC007 plus SoC over 12 months in IPF with lung function (FVC) as a primary endpoint.

Pending initial Phase IIa data, the future Phase IIb trial could also expand development to include interstitial lung diseases (ILD). This is a much broader indication, with IPF representing only around 20-50% of ILDs. This is supported by preclinical data in models of GVHD (Graft vs Host disease) which suggest RXC007 could have an impact on immune-mediated fibrotic diseases such as ILD, in addition to systemic sclerosis.

Valuation

We value Redx Pharma as a classic drug discovery and development play, with our sum of the parts rNPV-based model generating a valuation of £461m ($553m), equivalent to 138p per share. Exhibit 4 summarises the outputs and underlying assumptions of our valuation model. Our February 2022 Outlook provides a detailed overview of our valuation methodology.

Exhibit 4: rNPV-based valuation of Redx Pharma

Source: Trinity Delta   Note: The rNPV of RXC004 and RXC007 includes a deal success factor of 80%, and of 75% for GI-targeted ROCK; other valuation assumptions include a 12.5% discount factor, £/$ FX rate of 1.20, and 10% taxation from 2028 (UK patent box).

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 similarly successful 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.

Financials

End-September 2022 cash was £53.9m (31 March 2022: £31.6m; 30 September 2021: £29.6m), which includes proceeds from the June 2022 £34.3m (gross) equity placement and a total of $24m (£18.1m) in milestones received during the fiscal period to end-September 2022, including a $5m milestone from partner Jazz Pharmaceuticals in June 2022. Management has outlined that these funds, plus modest risk-adjusted milestones, should be sufficient to fund planned operations through key data points across the clinical pipeline into 2024, which includes the focus data readouts for RXC004 and RXC007 during H223.

FY22 revenues increased to £18.7m (FY21: £10.0m) owing to both higher milestone related revenue of £10.7m (FY21: £5.0m) and research collaboration income of £6.9m (FY21: £2.8m). During FY22 Redx Pharma received $24m (£18.1m) of cash as milestones, including: (1) $10m (£7.4m) from Jazz Pharmaceuticals in December 2021 for progress in the MAPK collaboration; (2) $9m (£6.7m) from AstraZeneca in December 2021 on Phase I initiation for RXC006 (AZD5055); and (3) $5m (£4m) from Jazz Pharmaceuticals in June 2022 for IND clearance for JPZ815, with a Phase I trial subsequently initiated in November 2022. AstraZeneca milestones (eg the $9m in December 2021) are recognised on receipt as they relate to contingent consideration on the license previously granted, whereas payments from the Jazz collaborations (predominantly related to the underlying development services) have a deferred recognition element and are recognised as each stage is completed. Future milestone receipts are not expected to be as frequent as partnered candidates advance to later, and therefore longer, studies.

R&D costs remained tightly controlled at £28.6m (FY21: £24.4m) despite continued pipeline progress and advancement. We anticipate a material increase in R&D spend given Phase II programmes are now ongoing for two candidates and forecast £40.0m in FY23e and £42m in FY24e. G&A also increased to £10.2m (FY21: £6.5m). This led to a FY22 operating loss of £16.3m (FY21: loss of £19.7m) and a net loss of £18.0m (FY21: loss of £21.6m).

Our future revenue forecasts do not include any unknown and/or uncertain milestones, hence we only include remaining deferred revenue recognition of previously received milestones of £3.9m in FY23e and £973k in FY24e, which relate to the Jazz Pharmaceuticals collaboration. While future potential milestone receipts are significant (c $800m in aggregate) there is limited visibility on timings as they are linked to the clinical development progress of AZD5055 and JZP815 which are under the control of their respective licensors.

Exhibit 5: Summary of financials

Source: Company, Trinity Delta    Note: Short-term debt in CY23/FY24e is indicative of our view of Redx Pharma’s funding requirement. Redmile/Sofinnova Convertible Loan Note has August 2023 conversion date, with a 15.5p conversion price, equating to a potential 110.3m of new shares. Revenue forecasts do not include any contribution from milestone payments yet to be received.