Redmile funding releases the brakes
Update | 17 November 2020
Scancell’s outlook has been transformed by the recent investment by Redmile of a further £12.1m in equity and £17.9m in Convertible Loan Notes (CLN). These funds, together with an over-subscribed £3m Open Offer, boost Scancell’s cash to c £48m. After a sustained period of being under-resourced, attention now turns to execution and delivery. The additional funds will be used to progress and broaden the ImmunoBody and Moditope portfolios and further develop the Avidimab platform. The onus will inevitably shift to timely progress across a broader front, including clinical data for SCIB1, Modi-1, and COVIDITY and, in time, material commercial partnerships for Avidimab. We update our valuation to £144m (17.7p per share).
|Year-end: April 30||2019||2020||2021E||2022E|
|Adj. PBT (£m)||(6.7)||(6.8)||(9.1)||(18.1)|
|Net Income (£m)||(5.6)||(5.5)||(7.6)||(14.3)|
|Adj. EPS (p)||(1.5)||(1.2)||(0.9)||(1.8)|
17 November 2020
|Shares in issue||815.2m|
|12 month range||4.15-20.90p|
|Primary exchange||AIM London|
Scancell is a clinical-stage immuno-oncology specialist that is developing three innovative and flexible therapeutic vaccine platforms. ImmunoBody and Moditope induce high avidity cytotoxic CD8 and CD4 responses, respectively, with the potential to treat various cancers.
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Scancell’s financial position has been transformed during 2020. Redmile, the specialist US healthcare fund, invested an initial £10m in August, following this with a further £30m in October/November. This, coupled with two over-subscribed Open Offers totalling £5m, results in ample resources of nearly £50m. This means that management is finally able to plan properly the progression of its three technology platforms. The August raise allowed Scancell to fund the SCIB1 Phase II trial and the Modi-1 Phase I/II study. The additional £33m will be used to broaden the Immunobody pipeline, probably taking SCIB2 or a derivative into the clinic, complete preclinical work on Modi-2, and perform additional preclinical evaluations of the Avidimab and TaG programmes. It also allows planning for the COVIDITY programme to be undertaken without concerns about the timing of further Innovate UK funds.
The FY20 results to end-April 2020 (reported in October) were in line with expectations, albeit with slightly lower R&D expenses as COVID-19 curtailed the SCIB1 clinical trial. The operating loss was flat at £6.78m, against £6.73m in FY19. R&D spend rose to £4.67m (FY19: £4.15m) due to manufacturing of SCIB1 and Modi-1 clinical trial material but was lower than expected given the COVID-19 related pause in the SCIB1 study. Administrative expenses were £2.12m, against FY19’s £2.58m that included a one-off license fee. FY20 loss before tax was £6.77m (FY19: loss of £6.71m), with an increased R&D tax credit of £1.26m, reflecting the higher spend, resulting in net losses of £5.51m, vs FY19’s £5.63m. Scancell’s end-April 2020 cash position was £3.58m, we had forecast £3.5m, compared to £4.56m the prior April.
Key events happened post-period end. In August, £15.0m (£14.1m net) was raised at 5.5p a share. Vulpes, the existing cornerstone investor, invested a total of £2m (£1m in equity and £1m as a Convertible Loan Note, CLN) and new investor Redmile, invested a total of £10m (£5m equity and £5m as a CLN), coupled with an over-subscribed Open Offer of £2m and an additional £1m through an equity placement. Subsequently, in October, Vulpes fully converted its CLN into equity at 6.1p per share; in November, Redmile converted c £3.25m of its CLN into equity at the same price, leaving c £1.75m of August 2020 CLNs outstanding. This was followed in October/November by a further investment, at 13p a share, by Redmile of £12.1m in equity coupled with an additional £17.9m CLN, and a £3m Open Offer (again over-subscribed). Innovate UK has also awarded a c £2m grant to initiate the Phase I COVIDITY study of the COVID-19 vaccine programme.
These inflows, following eventual shareholder approval for the Redmile CLN and November Open Offer, swell cash resources to c £48m. This should enable management to finally progress all key elements of the development pipeline in a timely manner, and to extend the utility of the three technology platforms. In terms of proposed use of funds, the first raise sought to progress SCIB1 and Modi-1 through their next clinical trial stages as well as performing the preparatory work for COVIDITY, whilst the second raise allows the broader development of the Immunobody and Moditope programmes and, importantly, the progression of the AvidiMab and TaG platform to a greater value inflection point. A stated aim is to build the resources and capabilities to be able to undertake a number of clinical programmes in parallel.
ImmunoBody employs the body’s immune system to induce potent cytotoxic CD8 T cell responses through a unique dual mechanism of action. These are DNA vaccines that encode a human antibody framework, but parts of the antibody that normally bind to the target protein, the complementarity determining regions (CDRs), are replaced with carefully selected cytotoxic T lymphocyte (CTL) and helper T cell epitopes from a cancer antigen. These elegant vaccines generate high avidity T-cells capable of a broad and sustained anti-tumour effect and can be directed to highly specific targets. Currently there are two programmes: SCIB1, which is directed towards melanoma, and SCIB2 for NSCLC (non-small cell lung cancer) and other solid tumours.
COVIDITY, the second generation COVID-19 vaccine programme, employs elements of the ImmunoBody vaccine construct to address coronavirus and produce long-lasting T cell responses and virus neutralising antibodies (VNAbs). The vaccine targets the SARS-CoV-2 nucleocapsid (N) protein and the key receptor-binding domain of the spike (S) protein; since the N protein is highly conserved among coronaviruses the vaccine should remain active even if SARS-CoV-2 were to evolve significantly (as well as being active against other related coronaviruses). In October, Cobra Biologics was contracted to manufacture material (expected to be ready in H121) for the Phase I trial that is scheduled to start in H221. The programme is a collaboration between Scancell, the University of Nottingham, and Nottingham Trent University, and has received funding from Innovate UK (of which Scancell received c £2m).
Moditope is a unique approach that targets a new class of tumour antigens termed siPTMs (stress induced post-translational modifications). These stimulate the production of CD4 cytotoxic T-cells and the strength of the anti-tumour response in preclinical studies has been impressive. The potency of the anti-tumour response seen suggests that tumours have limited defences against an attack from cytotoxic CD4 T-cells, unlike one from cytotoxic CD8 T-cells.
Avidimab and TaG antibodies are the key elements of Scancell’s third platform. TaG (tumour associated glycans) antibodies are unusual as they target the sugar motifs that are added to proteins and lipids in a post-translational modification known as glycosylation. These glycans are often over-expressed on the surface of tumour cells and are increasingly recognised as essential co-accessory molecules for key cell survival pathways. TaGs are potentially novel targets that could offer improved selectivity and affinity. Avidimab consists of modifications to the Fc domain of an antibody that confers increased avidity and a direct-killing ability. This approach can be used to increase the potency and avidity of any antibody.
Scancell is exploring the use of TaG antibodies either alone or with Avidimab potentiation. Three early non-exclusive collaborations were established last year with companies from Europe, the US, and China to evaluate the platform. A commercial deal is known to have been close to completion; however, the fact that a deal has not yet closed allows additional preclinical data to be generated in-house which would support more attractive financial terms. It is worth highlighting that further development of the Avidimab platform and TaG antibodies is cited as one of the key uses of funds from Redmile’s second investment. Preclinical work of this nature would be expected to take at least a year; hence we would expect little (if any) deal news flow in the near-term.
Interestingly, some of the Fc modifications that were developed as part of the Avidimab programme were applied to the ImmunoBody constructs and resulted in improved T-cell responses. These modifications will be made across the platform and form the basis of a new patent application that could materially extend the intellectual property protection for ImmunoBody.
Redmile has built a 29.11% holding in Scancell since its initial £10m investment (£5m equity, £5m CLN) in August, at 5.5p per share (6.2p for the CLN) which gave it a 14.5% stake. In October, it invested a further £12.1m (at 13p per share) through a subscription for 93.1m new shares; with an additional investment of £17.9m as a CLN (at 13p per share) which closed in November. The latter CLNs carry a modest interest rate of 3% and are not be convertible for two years unless Scancell is subject to a takeover or a NASDAQ listing.
Redmile’s second investment coupled with the over-subscribed £3m Open Offer generated total gross proceeds of £33m, which supplement the £15.1m cash balance at end-September 2020 and the £2m UKRI grant, providing management with the resources to achieve several near- and medium-term value inflection points. The August raise is directed towards progressing SCIB-1 through the 25-pt Phase II melanoma trial, and the Modi-1 Phase I/II study. The stated use of funds for the November raise is to extend the utility of Scancell’s three technology platforms (ImmunoBody, Moditope, and Avidimab/TaG antibody), to accelerate and broaden the R&D pipeline (including SCIB2 or a derivative), and to maintain momentum with the COVID-19 DNA vaccine programme.
Valuing Scancell has never been as straightforward as for other similar stage companies, with an element of subjectivity and several judgement calls required. However, these were always based on conservative assumptions and well-established valuation parameters and resulted in, arguably, a good proxy for the inherent value. Historically we have been vocal in expressing our belief that Scancell would have benefitted from better funding to enable clearer planning and faster progress to be achieved. Hence there is a delicious irony that now that the funding that we advocated for is in place, we cannot employ our models to appropriately value the opportunities that Scancell can now develop.
The issues lie with the fact that our rNPV models place a greater weight on clinical programmes than preclinical activities, with the later stages of development understandably carrying greater value. We do flex the success probabilities and risk adjustments, reflecting the progress seen with competitive programmes and experiences of related technologies, which is where our judgement calls come into play in order to provide an appropriate valuation that is not simply formulaic. However, the timings mean that until the funds are deployed effectively and value inflection points (such as initiation of trials or a maiden deal) are achieved, then our valuation will lag what we believe the inherent value to be.
This is particularly the case with the AvidiMab and TaG platform; we can see the clear rationale for undertaking additional in-house activities and progressing to a demonstration of potential clinical worth, but any calculation of likely future deal structures and sizes would be little more than guesswork until there is greater visibility. The value of this platform should not be underestimated. Nonetheless, for the time being our approach means we cannot ascribe an explicit valuation.
We continue to value Scancell using a DCF model, where the rNPV of each of the three most advanced oncology projects (adjusted for likely success probabilities) is summed and netted against the costs of running the operation. Success probabilities are based on standard industry criteria for the respective stage of the clinical development process but, as explained above, are flexed to reflect the inherent risks of individual programmes, indications targeted, and trial design.
Hence, we have updated our Scancell model following the latest funding and are raising our valuation from £83.7m, equivalent to 13.3p/share or 11.5p/share fully diluted, to £144m, equivalent to 17.7p/share or 14.6p/share fully diluted. The two key changes to our model are the inclusion of the completed October/November £33.0m gross capital raise (ie cash position, number of shares), and an indicative valuation of the COVID-19 vaccine now that the programme is funded, manufacture of clinical trial material is underway, and the Phase I trial targeted to start in 2021. We highlight that our fully diluted valuation includes outstanding share options and CLNs, assuming that only those with an exercise price lower than our undiluted per share value are exercised. The various components of the valuation are summarised in Exhibit 1.
We emphasise that although we have attempted to put a value on the COVIDITY programme it is fraught with uncertainties due to the limited information we have to date on the asset, and also the rapidly evolving competitive landscape for COVID-19 vaccines and therapeutics. The intention is not to be one of the first vaccines available but rather a “second generation” product that offers material benefits for an as yet unknown target population.
Using extremely broad assumptions, we can estimate peak sales at, say, $1bn per annum but we assume these would likely only accrue until “herd immunity” or some as yet unknown breakthrough is achieved. We acknowledge that a different scenario, such as COVID-19 becoming endemic and thus requiring annual vaccination of high-risk populations such as with flu, could be a possibility.
The early stage of development, coupled with there being no tangible read across from the ImmunoBody oncology trials as no anti-infective efficacy has been demonstrated to date, means the success probabilities would be low, say 10% to 15%. However, we do see positive read across for COVIDITY’s mechanism of action from the recent Pfizer/BioNTech vaccine announcement which provides first evidence that inducing an antibody response to the SARS-CoV-2 spike protein can confer protection. Using these basic assumptions, the rNPV would be around £30.9m, equivalent to 3.8p per share, or 3.1p fully diluted.
It is clear the second Redmile funding provides explicit demonstration of belief in Scancell’s technology platforms, particularly the potential of Avidimab. In contrast, we are of the view that at this stage we simply do not have enough information to construct a credible valuation for Avidimab, with any figure we arrive at having no basis on publicly known facts and being little more than informed guesswork. With that large caveat, we would suggest that from 2022 onwards Scancell should have sufficient preclinical data to support more meaningful commercial deals.
In FY20 the R&D spend increased from £4.2m to £4.7m, as the manufacture of the SCIB1 clinical trial material was completed and the GMP processes for producing the three elements of the Modi-1 vaccine were progressed. Spend was lower than expected as the SCIB1 002 clinical study was paused due to COVID-19 restrictions. G&A costs dropped from £2.6m to £2.1m reflecting the inclusion of a one-time licence fee in FY19. As a result, the operating loss was broadly flat at £6.8m against £6.7m the prior year. The larger R&D tax credit of £1.3m, vs £1.1m for FY19, saw the loss for the year reduce from £5.6m to £5.5m.
New funding secured in FY21 means that that expenditure will rise materially, particularly during H221, and more realistically, for FY22. The investment in laboratory infrastructure and resources, coupled with costs of performing multiple clinical trials, will increase R&D spend, with FY21 growing from our previous £5.6m estimate to £6.5m, and a FY22 forecast of c £15.0m. This level of investment is expected to be sustained and will rise further as assets progress to more sizeable and costly stages of clinical development. G&A expenditure is also expected to grow as the back office functions are appropriately sized to support the larger R&D activities, albeit with modest rises from £2.0m to £2.1m for FY21 and c £2.7m for FY22. We expect the operating loss is expected to widen from £7.7m to £8.6m for FY21 with £17.7m being pencilled in for FY22. The benefit of the greater R&D tax credit will be felt in later years, with the loss for FY21 expected to rise from £6.4m to £7.6m and for FY22 to be around £14.3m.
With anticipated capex of c £500k in both FY21 and FY22, we expect Scancell to end-FY21 with cash of c £42m. We also note that November Redmile CLNs carry an interest rate of 3% per annum but Scancell has the option to pay this as shares. Our forecasts suggest that, assuming the outstanding CLNs are converted into equity on or before November 2022, the cash runway extends through to the end of calendar year 2023. The caveat being that if clinical and/or development progress is promising then management may accelerate its spending plans.
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