Momentum and execution continue in H121
Update | 8 June 2021
Redx Pharma’s H121 results highlight continued momentum and delivery against expectations, despite COVID headwinds on clinical studies. The start of the Phase I study of RXC007, a ROCK2 inhibitor for fibrosis, means the company now has two distinctly different in-house assets in the clinic. Lead in-house programme RXC004, a porcupine inhibitor for genetically selected solid tumours, is completing Phase I studies and set to enter Phase II trials during H221. The solid cash position of £39.9m supports increased R&D investment through to end-2022, covering several important value inflection points. Our updated rNPV-based valuation is £350.7m, equivalent to 128p/share (86p fully diluted).
|Year-end: September 30||2019||2020||2021E||2022E|
|Adj. PBT (£m)||(7.5)||(9.5)||(19.9)||(26.2)|
|Net Income (£m)||(4.3)||(9.2)||(20.5)||(26.8)|
|Adj. EPS (p)||(4.0)||(5.6)||(7.7)||(9.4)|
8 June 2021
|Shares in issue||273.9m|
|12 month range||11.7-95.0p|
|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.
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The key message from Redx Pharma’s H121 results is the continued delivery of management against our, and the market’s, expectations. The recently announced start of a Phase I study with RXC007, a selective ROCK2 inhibitor, means that the company now has two in-house programmes in clinical development. The lead asset, porcupine inhibitor RXC004, is completing the fifth and final cohort (3.0mg) of the Phase I dose escalation study with results expected during H221. In addition, a Phase I study of RXC004 in combination with nivolumab (Bristol Myers Squibb’s PD-1 checkpoint inhibitor Opdivo), is underway with preliminary data expected in late-H221. Several RXC004 Phase II trials, in various oncology indications, are expected to start during H221.
Redx Pharma is well funded, with ample resources to achieve multiple value inflection points. Development progress with the lead assets during H121 lifted R&D investment to £10.3m (H120: £3.2m), similarly increasing operating costs from £5.2m to £12.6m. R&D spend is set to increase further as the clinical programmes progress, with the forecast cash runway extending through 2022.
The cash balance of £39.9m at end-March 2021 was a sizeable improvement on the £1.9m figure a year earlier, reflecting the company’s refinancing in summer 2020 and its most recent successful £25.7m (gross) fund raise in December 2020. During H121, £5.1m of the £22.2m outstanding loan note held by majority shareholder Redmile Group was converted into equity. The 2020 raises added specialist investors Redmile, Sofinnova Partners, and Polar Capital to the shareholder register. The involvement of these respected and supportive investors provides valuable external validation of management’s clearly defined strategy.
Redx Pharma is focused on developing innovative small molecule pharmaceuticals, with the aim of creating best- or first-in-class compounds. Its medicinal chemistry expertise underpins the discovery platform, which has a growing industry-wide reputation and a proven ability to generate clinically, and commercially, attractive products. Management is actively addressing complex biological pathways, for instance the Wnt/β-catenin pathway, , where its insights have resulted in generating novel small molecules such as its family of porcupine inhibitors (eg RXC004 and RXC006, partnered with AstraZeneca).
Under new (current) management Redx Pharma firmly put a tempestuous period in its history (2017-2018) behind it; however, we reference its previous lead asset RXC005, a Bruton’s tyrosine kinase (BTK) inhibitor, as it provides a blueprint for its discovery strategy. Somewhat ironically, RXC005 was sold for $40m (£30.2m) to Loxo Oncology in 2017 to salvage Redx Pharma out of administration (forced by Liverpool City Council to recover a £2m development loan). In 2019, RXC005 (now LOXO-305) was cited as one of the key desired programmes when Loxo was acquired by Eli Lilly for $8bn. LOXO-305 (pirtobrutinib) is currently completing an extensive Phase III trial programme, with first regulatory filings expected shortly.
The recent initiation of the RXC007 Phase I trial means that Redx Pharma’s two most advanced assets are now in clinical development. The company’s pipeline (Exhibit 2) is well-balanced, with two in-house clinical programmes (RXC004 and RXC007), two preclinical programmes which have been successfully partnered, and earlier stage drug candidates that are showing promise. The partnership deals with AstraZeneca (porcupine inhibitor RXC006) and Jazz Pharmaceuticals (pan-RAF inhibitor, and other oncology/fibrosis research targets) were not simply financially attractive but demonstrated the active de-risking of Redx Pharma’s pipeline, notably reducing the porcupine inhibitor class as a development risk.
The focus of Redx Pharma’s pipeline is on genetically-defined oncology indications and fibrotic diseases, with a goal of achieving three further IND applications by 2025. The strategy is to progress selected candidates to Phase II proof of concept clinical trials with the data supporting out-licencing, with an element of downstream development and commercial economics retained; however, assets will be out-licensed earlier if the proposed returns are sufficiently attractive.
RXC004 is a highly selective and potent porcupine (Porcn) inhibitor under evaluation as both monotherapy and in combination with checkpoint inhibitors in various solid tumours. It is completing the final stage of a 21-patient dose escalation Phase I monotherapy trial to examine its safety and tolerability. 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, at a 3.0mg dose, was initiated in January 2021 after a six month delay due to COVID-related restrictions on patient recruitment. The results of this monotherapy study are expected to be available during H221.
The porcupine enzyme is seen as an attractive target in the Wnt (Wingless type) signalling pathways, dysregulation of which is a driver of many tumour types, particularly those with a poor prognosis, as elevated activity results in drug resistance. Preclinical studies have shown that RXC004 has promising direct anti-tumour activity in cancer lines with upstream mutations in the Wnt pathway, for instance RNF43 (Ring finger protein 43) or RSPO (R-spondin) fusions. Additionally, RXC004 enhances the immune response in the tumour microenvironment and hence has a possible dual mechanism of action. This data, and the role of the Wnt pathway in both tumour growth and in tumour immune system evasion, supports evaluation of a porcupine inhibitor plus checkpoint inhibitor (CPI) combination. The hypothesis is that such a combination could result both increase the rate of response to the CPI (which typically only benefit around a third of patients when used as monotherapy due to innate or acquired resistance) and delay development of resistance in patients who do already respond.
In April 2021 the first patient was dosed in the Phase I study of RXC004 in combination with PD-1 checkpoint inhibitor nivolumab (Opdivo, Bristol Myers Squibb). This aim of this study is principally to examine the safety of RXC004 when used in combination although some efficacy signals may become apparent. Study completion is expected during H221, with results known shortly after.
Phase I results will inform plans for Phase II proof of concept studies in multiple settings with high unmet need. A 40-patient RXC004 Phase II study, both as monotherapy and in combination with nivolumab, is set to initiate in early H221 (COVID restrictions permitting). This is an open label, multi-centre, multi-arm, study to evaluate efficacy and safety in patients with RNF43 or RSPO aberrated microsatellite stable (MSS) colorectal cancer that have progressed following current standard of care treatment. The study is likely to complete by end-2023, in our view. Additional studies in genetically selected pancreatic and all-comers biliary cancers are also being considered; biliary tract cancers are heavily Wnt-driven (>70% of patients have high Wnt ligand expression) and so will not include patient selection. We expect the availability of Phase II data would be the prelude to out-licensing discussions.
RXC007, a novel and highly specific small molecule that selectively targets the ROCK2 (Rho Associated Coiled-Coil Containing Protein Kinase 2) receptor, initiated patient enrolment in its first Phase I study in June 2021. The study, in healthy volunteers, will explore RXC007’s safety profile and is expected to render results in H122. These data will guide the dosing and structure of the RXC007 Phase II programme. Future development will initially be for idiopathic pulmonary fibrosis (IPF), a progressive lung condition with a notably poor prognosis. This will likely be followed by broader fibrotic indications, potentially including liver fibrotic indications such as Non-Alcoholic Steatohepatitis (NASH).
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. ROCK2 is a biologically validated target that has been shown to sit at a nodal point in a cell signalling pathway, thought to be central to fibrosis. RXC007 has shown promising results in preclinical models of a number of fibrotic diseases. IPF has been selected as the lead indication because of the clear clinical need, limited treatment options, and sizeable market opportunity (Globaldata estimates it will be worth $3.6bn by 2029).
RXC007 is the second ROCK2 inhibitor in clinical development. The first, belumosudil (Kadmon) has completed pivotal Phase II trials in chronic graft-versus-host disease (GVHD) and is in a Phase II study in systemic sclerosis (SSc). Belumosudil met its primary endpoint in the GVHD ROCKstar (KD025-213) study with impressive data and has been granted FDA Breakthrough Therapy designation and Orphan Drug status. It was submitted for a priority review in November 2020; however, its PDUFA date was extended to 30/08/21 following a request for additional data.
Exhibit 3 shows expected news flow and catalysts over the next 18 months. 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 exhibit continued momentum and make significant strategic progress.
We update our valuation following H121 results with the latest cash position and increase our success probability for RXC007 from 10% to 15% to reflect its clinical progress. Our new valuation is £350.7m, equivalent to 128p/share (86p/share fully diluted), and compares to our previous valuation of £326.4m, equivalent to 119p/share (84p/share fully diluted). Exhibit 4 summarises the outputs and underlying assumptions of our valuation model, while a detailed overview of our methodology is provided in our September 2020 Initiation.
Redx Pharma H121 revenues of £2.1m (H120: £1.17m) were derived from collaboration partners, demonstrating progress under these deals. Higher operating expenses of £12.6m (H120: £5.2m) were driven by increased R&D investment (£10.3m vs £3.2m in H120) as pipeline assets advanced through preclinical and clinical development. Consequently, the H121 net loss grew from £4.0m in H120 to £12.7m.
R&D investment is expected to further increase as RXC004 and RXC007 proceed to their next clinical value-inflection points, earlier stage assets approach IND filing, and discovery engine research activities ramp up. For FY21 we forecast R&D spend of £28.0m and £34.6m for FY22, with G&A rising more modestly due to inflation and an expanding organisation. On our forecasts Redx Pharma’s £39.9m in cash provides a runway through 2022. Importantly, this will fund completion of RXC004 Phase I monotherapy and immunotherapy combination trials and planned Phase II studies, initiation of planned Phase I and Phase II trials for RXC007, as well as expansion of oncology and fibrosis research and identification of suitable next wave development candidates.
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