Investment case

Avacta is developing diagnostic reagents with its proprietary Affimer platform but the larger commercial opportunity lies in using these synthetic antibody mimetics as therapeutic products. A second platform, pre|CISION, seeks to improve efficacy and reduce cancer drug toxicities by only activating them once inside the tumour mass. The scientific premise underlying these platforms will soon be tested in the clinic, where success would be transformational. Avacta listed on AIM in 2006 as an instrumentation and reagents provider, with the acquisition of the Affimer technology in 2012 creating the current business. In-licensing of pre|CISION from Tufts University in 2018 added a versatile, attractive, and lower risk platform that is being initially developed with known, proven molecules. The near-term focus is to create a profitable Affimer-based diagnostic business, whilst progressing both platforms through to proof-of-concept Phase Ib/II clinical trials. Since 2021, Avacta has raised c £116m, most recently £48m in June 2020. The company employs 120 across two main UK sites: Cambridge (therapeutics) and Wetherby (diagnostics).

Valuation

Our model aims to capture the value of the two technology platforms and their use in diagnostic and therapeutic applications. For the diagnostic indications we employ a three-phase DCF, for the therapeutic portfolio an rNPV of the known programmes. In line with our house style, we employ conservative assumptions throughout. We value Avacta at £710m or 280p/share. Of this: Diagnostics contributes £133m, 52p per share; Therapeutics is £559m, 221p per share; with cash and expenses netting out at £48m and £-30m respectively.

Financials

Avacta raised £48m (£45.4m net) in June 2020, following an earlier raise of £5.8m (£5.4m net) in April. Despite investment in the Diagnostic business, mainly on COVID test development, and Therapeutics, resulting in approval for human clinical trials for AVA6000, cash resources at FY20 year-end were £47.9m (FY19 year-end: £8.8m). Near-term financials are heavily dependent on the commercial uptake of the COVID LFT (lateral flow test). Even a minor success could be material for Avacta, both in terms of revenue and industry reputation.

Sensitivities

Avacta faces uncertainties in both its businesses. Diagnostics has reached a pivotal point where its COVID LFT could determine its near-term outlook. The Therapeutic applications of the platforms face typical industry risks associated with clinical trial results, navigating regulatory hurdles, ensuring timely and sufficient financing is in place, partnering discussions and, eventually, pricing/reimbursement and commercialisation. The main unknowns centre on platform performance in human clinical trials, since animal studies, no matter how promising, may not always be replicated in the clinic. However, the sizeable potential upsides are precisely the investment logic underlying such businesses.

Avacta: Ambitious, nimble and ever more credible

Avacta is exploiting its proprietary technology platforms across Therapeutic and Diagnostic applications. Both of which are progressing swiftly towards value inflection points, with first-in-human studies for AVA6000 and COVID AffiDX LFT (lateral flow test) commercialisation respectively. The need for rapid and accurate tests in response to the COVID pandemic has highlighted Avacta’s skills and abilities. The commercial execution of AffiDX should translate into a material uplift in near-term revenues; however, we view the Therapeutic opportunities as the real driver of longer-term value. Proof of concept with AVA6000, the lead pre|CISION programme, should be the trailblazer for an extensive pipeline of potential products. Similar success with AVA004-100, the lead TMAC (tumour microenvironment-activated drug conjugate) programme, will broaden the pipeline further. Our valuation model suggests the scope and depth of Avacta’s investment case is not reflected in the share price.

Avacta has two technology platforms with broad applicability across Therapeutic and Diagnostic uses: Affimer proteins are antibody mimetic protein scaffolds that offer equivalent attributes, albeit with better stability, greater versatility, and ease of production; pre|CISION allows for the precise activation of chemotherapy drugs within a tumour, offering the potential to enhance efficacy and reduce systemic toxicities for many commonly used cancer therapies. The value, and potential, of Affimer technology is set to be demonstrated by the commercial availability of Avacta’s AffiDX SARS-CoV-2 point-of-care COVID LFT; whilst lead pre|CISION programme AVA6000, an innovative doxorubicin prodrug, is on the cusp of entry into human clinical trials and is the prototype for a broad portfolio of related pro-drug opportunities.

We would argue that Avacta has historically been under-resourced, financially and operationally, curtailing management’s ability to progress its opportunities in as timely a manner as desired. Last June’s £45.4m (net) raise has transformed its outlook; £10m was allocated to rapidly scale-up the Diagnostics operations and ensure delivery of AffiDX SARS-CoV-2, but the £35m earmarked to accelerate development of the Therapeutics pipeline, notably establishing proof-of-concept for the pre|CISION platform and initiating human studies with the Affimer platform will, in our view, drive greater long-term value. The improved funding means management can focus on execution and delivery.

The myriad opportunities available mean collaborating with larger or specialist partners is essential, especially within Therapeutics. To date, Avacta has established five collaborations that represent incremental indications, bring additional expertise, and, importantly, provide useful external validation. These span from developing Affimer-based drugs (with LG Chem), to producing multiple Affimer-drug conjugates (ADC Therapeutics), through to establishing the AffyXell Therapeutics joint venture with Daewoong Pharmaceuticals. These research efforts are funded by the partners, with potential upside from clinical milestones and, assuming success, royalties on sales.

We believe Avacta has turned an important corner; the scientific, operational, and personnel foundations are now in place to generate material value. Ahead of a steady stream of news flow into 2022, our valuation is £710m or 280p/share.

Two complimentary and highly flexible platforms

Avacta has two proprietary technology platforms with broad commercial applicability. The first, Affimer, acquired in 2012, is an engineered alternative to antibodies that can be employed as both reagents for diagnostics or as drugs in therapeutic applications. The second, pre|CISION, was in-licensed exclusively in 2018 from Tufts University and offers the prospect of targeting cytotoxic drugs specifically to a tumour, minimising toxicities, and increasing the tolerated doses. These 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.

Affimer proteins: engineered to be better than antibodies

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. Antibodies are complex Y-shaped proteins that form the backbone of the immune response, and are triggered on encountering an antigen, typically a foreign protein (bacterial or viral) but also allergens or, in certain cases, the body’s own proteins. Their specificity 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 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).

Exhibit 1: Affimer platform comparator technologies

Source: Avacta

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.

Avacta has two scaffold families within its Affimer platform: the first is based on the human protease inhibitor Stefin A and is particularly well suited for therapeutic applications; and the second is based on a sequence of Cystatin A, derived from a number of plant species, which is ideal for use in reagents and diagnostics. Interestingly, they are virtually identical in structure despite their different origins. Both can be used where antibodies and aptamers have limitations and can be employed to detect difficult targets, are easily formatted for a wide range of applications, and can be manufactured simply and cost effectively.

The scaffolds typically have two nine amino acid loops that create a large and flexible binding surface. These can be engineered to be very highly specific, being able to discriminate between even closely related targets. They are also robust and very stable, both chemically and thermally, which means, for instance, they can be easily employed across a broad range of analytical settings. The biophysical properties mean it is relatively straightforward to attach a wide variety of molecule classes and yet still retain ease of manufacture (typically in microbial and yeast systems, such as E. coli or Pichia, that are scalable and GMP-compliant). Aside from the cost implications, such simple production means that security of supply is straightforward to establish. As an aside, from the ethical point of view and in contrast to antibodies, animals are not required for their production.

Exhibit 2: Affimer platform offers multiple advantages over antibodies

Source: Avacta, Trinity Delta

Exhibit 2 highlights some of the key attributes of the Affimer platform. These properties mean that Affimer molecules offer an attractive and viable alternative to antibodies across a range of therapeutic, diagnostic, or research indications. Affimer-based therapeutics 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.

With such broad opportunities, the initial focus had been to address life sciences research tools, which are minimally regulated, but now the focus is on the higher value diagnostic applications, which usually require CE certification in Europe and FDA device approvals in the US. Although therapeutic applications offer significantly larger market opportunities, the development process is more onerous, time consuming, and costly. The strategy here is to progress a select number of high-profile therapeutic programmes in-house to demonstrate proof of concept and use this to attract partners to develop a broader portfolio of partnered drug candidates.

Pre|CISION: targeted tumour therapies

The pre|CISION platform is the result of a collaboration with Tufts University in Boston and is based on drug conjugate technology developed by Prof. William Bachovchin. 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 pro-drug 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 pro-drug 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.

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 pro-drugs 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). Management is progressing AVA-6000 (a pro-drug of doxorubicin, an anthracycline) as the lead compound to act as proof of concept. Dosing of first patients in a Phase I trial is expected early in H221. If the initial data, expected by end-2022, are supportive then a pipeline of promising pro-drugs is in the wings.

TMAC: addressing the emerging oncology therapy needs

A clinically exciting, and probably commercially larger, opportunity lies in the combination of the two technologies to create drug conjugates that could be tailored to exert specific effects within the tumour environment (Exhibit 3). Incorporating a FAPα sensitive pre|CISION chemical group within a linker to attach an appropriate Affimer molecule to a known chemotherapeutic creates a tumour-microenvironment activated drug conjugate or TMAC. These TMACs will only release their toxic payload in the tumour microenvironment when they encounter FAPα. Such TMACs can be tailored precisely to overcome a particular limitation or shortcoming seen with established or proposed Antibody-Drug Conjugates (ADC).

Exhibit 3: Avacta’s Therapeutics platforms

Source: Avacta

ADCs are themselves very flexible and typically consist of a three-component system. An ADC delivers a highly potent cytotoxic agent to cancer cells which is joined to a targeting monoclonal antibody (mAb) by stable linkers and can discriminate between cancer and normal tissue. The mAb binds to specific markers (antigens or receptors) at the surface of the cancer cell, then the whole ADC is internalised within the cancer cell and the active drug released. However, any cell that internalises the ADC will be killed, leading to possible unwanted toxicity issues. Currently, all approved ADCs rely on internalisation once they have bound to their respective cell surface receptors that are expressed on the tumour cell.

Another limitation of ADCs is that the monoclonal antibody only plays a targeting role and has no therapeutic benefit itself because it needs to be internalised to be exposed to the intracellular enzymes that release the cytotoxin. Therapeutic targets such as checkpoint inhibitors (eg PD-L1) are not rapidly internalised so cannot be used as targets for traditional ADCs.

With TMAC the FAP-selective linker releases the active drug components in the extracellular space of tumour. These elements can be tailored to range from simple cytotoxins to drugs that promote local inflammation (turning a “cold” tumour “hot”) or to more specific actions. Importantly, the antibody or Affimer component can remain outside the cell and so address receptors that reside on a tumour cell surface, of which the current area of interest is checkpoint inhibition and, in particular, the targeting of the PD-1 receptor. This extracellular mechanism of action of a drug conjugate is novel and Avacta has patented all aspects.

Therapeutics: making a difference in oncology

Avacta will soon, probably around mid-2021, become a clinical stage drug development company. In February 2021 it received Medicines and Healthcare Products Regulatory Agency (MHRA) clearance for its Clinical Trial Authorisation (CTA) for a Phase I study of its lead programme, AVA6000 pro-doxorubicin. AVA6000 employs pre|CISION chemistry to create a prodrug 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.

In common with pre|CISION, the second proprietary technology platform, Affimer, is particularly well suited to oncology indications. The Affimer platform could be employed in a similarly broad range of indications as antibodies. Management has focussed its Affimer-based therapeutic development efforts into bi-specifics, antibody drug conjugates (ADCs), combinations with pre|CISION chemotherapies, and novel tumour microenvironment-activated drug conjugates (TMACs). The leading Affimer-based programmes are progressing through preclinical development. Exhibit 4 summarises Avacta’s known development pipeline. The discovery pipeline is exploring several checkpoint inhibition mechanisms, with or without various relevant co-stimulatory pathways. Additional programmes are partnered; with undisclosed targets for ADC Therapeutics, and LG Chem Life Sciences, and gene and cell therapies with Daewoong Pharmaceuticals.

Exhibit 4: Wholly owned pipeline and fully funded partnerships

Source: Avacta

pre|CISION: rejuvenating proven chemotherapies

The tumour microenvironment (TME) plays a central role in mediating cancer progression and the development of resistance to treatment. A TME is extremely complex and can be highly heterogenous; however, there are key, and consistent, differences from the normal healthy tissue environment. pre|CISION exploits the fact that the FAPα (fibroblast activation protein alpha) protease enzyme is highly upregulated in over 90% of solid tumours, yet its expression is very low in most healthy adult tissues. By employing a substrate that is sensitive to cleavage by FAPα, a drug can be modified so that it is only activated selectively in the TME. Hence the resulting inert prodrug has no (or little) systemic effect, minimising unwanted toxicities, instead only becoming active when FAPα selective enzymatic cleavage happens within tumour sites.

The pre|CISION platform is flexible and can create prodrugs of a variety of therapeutics: the initial focus is on small molecule chemotherapies to act as proof of concept. However, interesting novel combinations with Affimer molecules (and potentially antibodies) are also being developed (known as TME-activated Drug Conjugates or TMACs). These offer the possibility of highly specific delivery, low systemic toxicities, and potent anti-tumour activity through complementary modes of action. The pre|CISION and TMAC applications are being devised in conjunction with Tufts University, which is eligible for modest milestone payments and royalties on eventual commercial revenues.

AVA6000: starting clinical trials is a major step forward

AVA6000 employs the pre|CISION substrate to create a prodrug of doxorubicin. This is a well-characterised oncolytic that, despite first approval in the 1970s, is still widely used to treat many solid tumours (including breast, lung, gastric, and ovarian), as well as several haematological cancers due to its efficacy. This efficacy 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. Concentration in tumour sites, with corresponding sparing of cardiac tissue, would allow more treatment cycles to be carried out before the cumulative cardiotoxic dose is reached. Animal studies in HEK-mFAP-tumour bearing mouse xenograft models have confirmed AVA6000 shrinks tumour volumes and increases survival significantly better than the maximum tolerated dose of doxorubicin. The strength of the preclinical package supported the CTA filed with MHRA in December 2020 and subsequently approved in February 2021.

The first part (Part A) of the Phase I trial is a typical open-label, multi-centre dose escalation (3+3 design) study exploring safety, although some efficacy signals may be noted. It is expected to start in mid-2021 at UK centres, and will enrol 15 to 20 patients with a variety of locally advanced or metastatic solid tumours. 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 5 illustrates the design and expected timelines for the study.

Exhibit 5: 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 of over $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 and commercialisation milestones.

Beyond AVA6000: expanding the pre|CISION portfolio

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. Within an extensive “opportunity list”, 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. Two programmes that are at the lead selection stage include a FAP-activated taxane (prodrug of paclitaxel) and a FAP-activated platin (prodrug of oxaliplatin). A number of other opportunities, such as AKT inhibitors, PARP inhibitors, and TKIs, are being evaluated through early stage preclinical work.

AVA3996 offers the prospect of reducing the dose limiting toxicities, principally peripheral neuropathy and thrombocytopenia, that constrain the use of Velcade 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. Avacta has earmarked funds from the June 2020 raise to complete the preclinical package with the aim of filing a CTA for AVA3996 in 2022.

Affimer: forming the backbone of combination drugs

As antibody mimetics, Affimers can be employed in wide ranging applications in immuno-oncology, inflammatory conditions, and ocular diseases. The most advanced 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. These include Tecentriq (atezolizumab, Roche), Imfinzi (durvalumab, Medimmune/AstraZeneca) and Bavencio (avelumab, Merck/Pfizer). The intention is not to develop AVA004 as a monotherapy; it has played a key role in demonstrating the capabilities of the Affimer platform and will form the basis of future combination treatments such as bi-specifics, fusion proteins, Affimer-drug conjugates, and the TMAC platform.

AVA004-VbP is a TME-activated drug conjugate (TMAC) that combines the AVA004 PD-L1 acting Affimer molecule with the I-DASH inhibitor Val-boroPro (talabostat). I-DASH proteins play important roles in the immune system with involvement in quiescence, proliferation, antigen‐presenting, co‐stimulation, T cell activation, differentiation, signal transduction, and tissue remodelling. Their inhibition induces broad T-cell activation and recruits elements of the innate immune response to exert both direct and indirect anti-tumour responses. Tufts University is actively involved with I-DASH, having generated substantial preclinical data on its use as a cytotoxin.

AVA004-VbP is the first TMAC drug conjugate: it uses a pre|CISION (FAPα) cleavable linker to join the PD-L1 Affimer molecule to the I-DASH warhead so that it is only released in the tumour. This not only avoids the acute toxicities that have beset talabostat, but the two components combine to maximise the anti-tumour immunological responses. Interestingly, the local inflammation acts to turn “cold” tumours “hot”, so attracting further anti-tumour immune responses. Animal models of a number of solid tumours have shown promising results. Preclinical studies will continue with the aim of selecting a lead candidate during 2022.

Other early-stage programmes under evaluation include Affimer-drug conjugates that combine a PD-L1 inhibitory Affimer linked to a variety of other anti-tumour groups, such as STING agonists, TRL7/8 agonists, and PBD and Auristatin toxins. Other internal programmes explore potentially commercially attractive combinations with the aim of selecting the most promising to take into preclinical development.

Collaborations: providing valuable external validation

Given the breadth of potential applications, Avacta has entered into multiple collaborations that exploit the versatility of the Affimer platform. 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’ propositions. Currently there are five active programmes:

LG Chem Life Sciences

LG Chem Life Sciences partnered with Avacta in December 2018, to develop several therapeutic Affimer proteins for undisclosed targets. Avacta is responsible for generating the Affimer molecules and for early optimisation work before both parties collaborate to progress through to drug candidate selection. LG Chem then assumes responsibility for all preclinical and clinical development through to global marketing. Deal terms include an upfront payment of $2.5m, near-term milestone payments of $5.5m and later-stage clinical milestones of $180m.

The collaboration was expanded in August 2020 to include two additional targets: the first is a new therapeutic and the second uses Affimer XT technology to extend systemic half-life. This brings a further potential $98.5m in preclinical and other development milestones. Avacta would also receive royalties on any future sales. Affimer candidates against the first three targets have been generated, with the possible trigger of up to $5m in preclinical milestones during 2021-2022. An IND filing, triggering an undisclosed payment, could also happen by end-2022.

ADC Therapeutics

Avacta entered into a collaboration with ADC Therapeutics in October 2019, to develop multiple Affimer-drug conjugates. The aim is to generate Affimer binders for three undisclosed cancer targets and combine them with ADC’s proven pyrrolobenzodiazepine (PBD) dimer warhead and linker technology. The original PBD technology was in-licensed from AstraZeneca who continue to hold a significant equity stake. The deal sees ADC cover all reasonable research costs with the option to obtain exclusive licenses on a target-by-target basis.

Avacta is responsible for developing and selecting the Affimer molecules, with ADC then responsible for all preclinical research and development. If successful, Avacta receives option fees, development and commercial milestones, and single-digit royalties. Candidates against the first target were generated and characterised in H220, with further candidates expected to be explored in the coming 12 months. A decision on which Affimer candidates to take into preclinical development will be made then, triggering undisclosed milestone payments.

Moderna Therapeutics

Avacta entered into its first Moderna partnership in May 2015, in a deal which underpinned Avacta’s creation of a therapeutics business. Moderna funded Avacta’s R&D expenses for preclinical work in return for exclusive access to Affimer technology for certain undisclosed targets. Moderna has the right to extend the partnership to other targets and, in February 2019, took an exclusive licence, on pre-agreed terms, for a number of Affimer based candidates directed against one of the undisclosed therapeutic targets. Progress would trigger preclinical and clinical milestones and royalties on any future sales. Moderna is believed to be completing IND studies but no further details are available.

Daewoong Pharmaceutical Co

AffyXell Therapeutics is a joint venture between Daewoong Pharmaceuticals and Avacta that aims to develop new cell and gene therapies employing Affimer proteins produced, and secreted, by mesenchymal stem cells (MSCs). The JV, of which Avacta now owns c 12%, was created in January 2020. In February 2021 AffyXell successfully raised $7.3m in a Series A round. The new investors include Samsung Venture Investment Corporation, Shinhan Venture Investment, Smilegate Investment, Shinhan Investment Corporation, Kolon Investment, Stonebridge Ventures, and Gyeongnam Venture Investment.

We expect Avacta’s share of AffyXell to fluctuate reflecting the additional equity earned by Avacta as development Affimer candidates, and the related IP, are transferred into the JV. However, we anticipate that this would be offset by the dilutive impact of potential further funding rounds to advance the programmes through clinical development. For our modelling we have assumed that Avacta owns c 25% of AffyXell over a cycle; however, the early stage of development means we currently attribute no material value in our valuation model.

The initial focus of the JV is on inflammatory and autoimmune diseases, later addressing oncology indications if these are successful. Avacta will be responsible for the characterisation and creation of the Affimer candidates, with appropriate reimbursement from AffyXell. Avacta retains rights to use any these outside of the field of cell therapies. Affimers against the first three targets have been delivered to AffyXell for incorporation into their established banks of MSCs. Daewoong has proprietary technology for generating “off-the-shelf” allogeneic MSC therapies.

POINT Biopharma

In January 2021 POINT Biopharma entered into a license agreement to employ pre|CISION technology to develop tumour-activated radio-pharmaceuticals. The aim is to modify a radioligand complex such that, much like a pharmaceutical prodrug, it is only activated at the site of the tumour. The improved targeting and better toxicity profile should differentiate these radioligands from existing radio-pharmaceuticals. POINT Biopharma is eligible to an exclusive licence for the first product it develops and has non-exclusive rights to any subsequent products. Deal terms include $9.5m in upfront and development milestones, with a further $8.5m for additional programmes, and royalties on sales and/or a share of sublicensing income. The structure and scope of this agreement suggests Avacta is open to out-licencing access to its platforms for areas outside its own therapeutic areas of interest.

Affimer peers: antibody mimetic alternatives

The goal of creating compounds that are capable of outperforming antibodies or antibody mimetics, whether in terms of binding affinities, cellular or tumour penetration, large-scale production, or even simply temperature and pH stability, has spurred numerous approaches. Typically, this revolves around a flexible protein scaffold that is then optimised to create the desired properties. Various companies have evolved suitable platforms and are developing clinical products and commercialising diagnostics. We detail some of the more interesting ones:

Ablynx (acquired by Sanofi)

Ablynx is developing its Nanobody platform as alternatives to conventional antibodies. The first product, Cablivi (caplacizumab) for the treatment of acquired thrombotic thrombocytopenic purpura (TTP), was launched in Germany in October 2018. The development portfolio targets four disease areas: inflammation, haematology, respiratory disease, and immuno-oncology. Nanobodies are single-domain antibody fragments that contain the structural and functional properties of naturally occurring heavy chain only antibodies. They are based on the unique features of Camelidae (camel and llama) antibodies that are fully functioning but only have a heavy chain (the light chain is lacking). Their smaller size and simpler structures offer similar properties to antibodies but with lower manufacturing costs and greater flexibility. Ablynx was acquired by Sanofi for €3.9bn ($4.8bn) in January 2018, after the Ablynx board had rejected NovoNordisk’s earlier €2.6bn offer.

Bicycle Therapeutics (NASDAQ: BCYC)

Bicycle Therapeutics ($726m market cap) is a clinical stage company with a development pipeline based on its pioneering bicycle technology. Bicycles are short synthetic peptides that are constrained to form two loops that stabilise their structure and form regions for binding. Its pipeline is split into bicycle conjugates, mainly toxins and immune activators, and immuno-oncology, T-cell and NK cell activators. Partners include AstraZeneca and Genentech, with certain programmes sponsored by Cancer Research UK. In oncology, BT1718 (MT1-MMP) is in Phase II studies, with two other programmes, BT5528 (EphA2) and BT8009 (Nectin 4) in Phase I. Four bi-valent/multi-valent programmes are in late-stage preclinical studies. Management aims to deploy its cash resources ($196m at end-March 2021) to develop first-in-class or best-in-class compounds to clinical value-inflection points.

Molecular Partners (SWX / NASDAQ: MOLN)

Molecular Partners (market cap: CHF548m / $612m) is a Swiss clinical stage company that is developing its DARPin platform. These are based on Designed Ankyrin Repeat Proteins, hence the acronym. Six programmes are in clinical trials, four of which are partnered with Abbvie, Amgen, and Novartis. The two in-house programmes are MP0250, a VEGF and HGF combination in multiple myeloma, and MP0274, for HER2+ve MBC. Several other programmes are nearing human clinical trials, among these are a family of potential compounds that employ the FAP pathways as tumour localisers. The most advanced is MP0310 (FAP x 4-1BB), a novel immunotherapy that only activates at the tumour site, which is partnered with Amgen and is in Phase I studies. MPO317 (FAP x CD-40) is an in-house programme completing preclinical work, it employs FAP to localise and CD-40 to activate “cold” tumours and stimulate an immune response.

Pieris Pharmaceuticals (NASDAQ: PIRS)

Pieris Pharmaceuticals (market cap: $223m) is a clinical stage company developing a proprietary Anticalin platform. This platform is based on lipocalins, which are naturally occurring proteins found in plasma and other body fluids. It is targeting immuno-oncology and respiratory indications, driven by partnerships with Servier (4-1BB/PD-L1 bispecific) and AstraZeneca (IL4Ra) respectively. Other partnerships are actively sought. The most advanced in-house programme, PRS-343, is a 4-1BB/HER2 bispecific that is in Phase I clinical trials. Management intends to build a fully integrated pharmaceutical company, either through retaining commercialisation rights in major markets in partnered programmes or developing in-house programmes to approval.

Affibody (private)

Affibody is a Swedish-based clinical stage private company which is developing a broad pipeline of compounds with three in clinical trials. Two are therapeutic programmes targeting psoriatic arthritis (ABY-035) and B-cell driven autoimmune diseases (ABY-039, although this appears to be terminated). The third is a diagnostic imaging programme (ABY-025) for metastatic breast cancer. An undisclosed number are nearing or filing for INDs following successful preclinical studies. The focus is on using the Affibody scaffolds (which are only six kDA in size and have no Fc domain) to create bi- and multi-specific next-generation compounds. Commercial relationships and collaborations are in place with AbClon, Alexion, Biotest, Daewoong, Daiichi Sankyo, GE Healthcare, and Swedish Orphan Biovitrum.

Affilogic (private)

Affilogic is a Nantes, France based private company developing its Nanofitins platform for therapeutic and selected diagnostic applications. These scaffolds originate from extremely thermally stable proteins discovered in 1974 in Yellowstone National Park geysers. Their flexibility is being explored in radio-imaging and a variety of other complex conjugates. Collaborations are in place with Takeda and Sanofi, but the targets and status are not disclosed.

Diagnostics: coming of age

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. These can range from incremental improvements, such as better sensitivity, specificity, robustness, speed of development, and security of supply, right though to broader opportunities, such as offering the freedom to operate through not encroaching on existing intellectual property (IP). Affimer properties mean they can be employed widely in 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.

Antibodies are affinity binders that are highly specific in recognising and binding to specific biomarkers of disease. Their selectively and flexibility has revolutionised the diagnostics industry and they underpin many of the established gold standards of diagnostic assessments (eg ELISA and Flow Cytometry). However, as testing needs become more sophisticated, so the limitations embodied by antibodies are increasingly apparent. As a result, numerous alternatives have been proposed, including antibody fragments, nucleic acid aptamers, and engineered non-antibody protein scaffolds. Affimer scaffolds are, arguably, the best-in-class of these alternatives and can be used in all typical antibody applications.

Affimers can overcome many antibody-related issues

The Affimer reagents used in diagnostic applications are small, single domain binding proteins which are based on the plant-derived Cystatin A engineered scaffold. (The Stefin A based Affimer protein is fully human and therefore well suited to, and reserved for, the therapeutic application). The scaffold is robust and highly stable, physically and biochemically, with very flexible binding surfaces, two loops that are each nine protein residues long. Since they are around 10x smaller than the equivalent antibodies, they can be packed more densely. Their surface orientation can be optimised and the disease biomarker brought closer to the capture surface, allowing the diagnostic sensor performance to be optimised. These are important properties as effective immobilisation onto a solid support is necessary for many advanced, multiplexed assays such as microarray or bead-based detection, and for biosensor and diagnostic assays.

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. A publication describing Affimer properties and their comparison to antibodies, engineered antibody fragments, aptamers, and non-antibody protein scaffolds (such as Affibody, DARPin, and Nanobody) is available on Avacta’s website.

Initially, management built awareness of the utility of Affimer reagents in diagnostic applications through providing custom services, with each project typically worth around £40,000, with small recurring fees based on use thereafter. Here the focus was addressing a customer’s specific need, creating bespoke Affimer reagents to suit a particular application that is not easily addressable through other means, or where an Affimer simply performs better. Examples include supporting PK (pharmacokinetic) analysis of serum samples in pharmaceutical clinical trials.

This has now evolved into and been replaced by two complementary strategies to develop and establish Affimer proteins as diagnostics:

• 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 progress the striking of 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.

The steps required to evaluate a diagnostic test can be described as design, development, validation, verification, and implementation. These third-party reviews are thorough but, due to the various sequential phases, also time-consuming; as context the New England Biolabs (NEB) licensing evaluation took over two years to complete.

This protracted process has led management to seek to accelerate partner uptake by developing a suite of assays in-house. The initial focus has been on clinically, and commercially, relevant applications such as sepsis/cardiovascular (TRAIL), inflammation (CRP), fertility (oestradiol), thrombosis (D-dimer), and anaemia (Vit B12). Producing the SARS-CoV-2 test followed a similar pathway and has become a poster child for Avacta’s skills, demonstrating the value of the platform and its technical competence.

COVID-19 has showcased Avacta’s technical skills

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 even entered public consciousness. Avacta responded promptly and, once the SARS-CoV-2 structure was made public, identified and generated Affimer-based reagents within five weeks. The initial efforts were directed quite broadly, for example a collaboration with Adeptrix and Bruker Corporation to develop a test based on mass spectrometry. The aim was to relieve pressure on other systems, such as PCR, by exploiting the existing, and wide, installed base of spectrometers to create additional testing capacity. However, the real longer-term opportunity lay in developing an accurate and accessible lateral flow test (LFT) that was able to be used anywhere and by anyone.

Much has been written about the importance of testing, with the key message that accurate, rapid, and easy-to-use diagnostic tests play a central role in controlling a pandemic (and even a more straightforward epidemic). Their use is extensive, ranging from triage of pre-symptomatic patients, through confirmatory testing, differential diagnosis, to surveillance and local disease monitoring. Essentially two types of tests are available: viral tests and antibody tests. Viral tests are direct tests designed to detect the virus (usually antigen based) and reflect current infection. Antibody tests are indirect tests; they do not detect the virus but can distinguish whether antibodies to the virus have been generated, thus reflecting whether an individual has established seroconversion to prior infection or has early seroconversion to an ongoing infection.

Real-time PCR (reverse transcription polymerase chain reaction) is seen as the “gold standard” and is still the most widely used test. Despite being highly accurate, PCR testing is overly sensitive and capable of detecting viral shedding both before and long after the infectious period (about nine days), with individuals continuing to test positive for a mean of 17 days (Exhibit 6). While these results are technically correct, these are not infectious individuals and do not require quarantine. Rapid antigen LFTs offer a “real world” alternative; their lower cost and ease of use allow more frequent testing and their sensitivity is more relevant to the time-period over which an individual is likely to be infectious. Hence, despite a lower analytical sensitivity, high frequency lateral flow testing is more likely to detect infectious individuals during the transmission window.

Exhibit 6: The use of rapid testing technologies for COVID-19 containment

Source: Crozier et al, BMJ 2021; 372: n208 updated from Mina, M et al NEJM November 2020; 383: e120

The merits and pitfalls of mass testing, especially its effectiveness, feasibility, opportunity costs, and the ethics of doing so, are fiercely debated. Whatever the eventual outcome, LFTs are expected to play an important role in emerging from this pandemic. An important factor being explored is viral load and its role in transmissibility rates, often measured as cycle threshold (Ct). A low Ct indicating a high viral load is associated with high risk of infectivity; conversely a high Ct indicating a low viral load is associated with a lower risk of infectivity. Although Ct is known to be subject to significant test variability, a Ct value less than 27 (Ct<27) has been suggested as a useful threshold of infectious viral load. Clearly all tests, especially the less sensitive LFTs, should be required to detect viral loads down to this level.

Active collaborations produce AffiDX SARS-CoV-2 LFT

Avacta has partnered with several specialist diagnostic development, manufacturing, and commercialisation companies to produce its AffiDX SARS-CoV-2 antigen test. The close collaboration with Mologic was instrumental in creating the appropriate LFT architecture, with related company Global Access Diagnostics (GAD) working to ensure that production and kit assembly were consistent with scaling up to commercial manufacture. The quality of the working relationship underpins its expansion with Avacta and Mologic looking to generate a pipeline of further tests across a range of disease areas.

Avacta is confident that access to Affimer reagent will not be a limiting factor, which it is able to produce in-house in significant volume and has arrangements in place for outsourced manufacturing for even higher volumes. Manufacture of the LFT itself and assembly of the various elements of testing kit remains a potential bottleneck given currently available UK capacity, but additional resources are being put in place.

GAD has a high-volume LFT production facility based in Thurleigh, Bedfordshire, and is one of three companies selected by the UK’s Department of Health for investment to produce up to two million LFTs per day by May 2021. This public funding reflects the UK Government’s apparent keenness to reduce its reliance on US (Innova Medical Group) and Chinese sourced LFT (understandable given the FDA’s recent pronouncement). GAD has also helped further production partners, notably with Abingdon Health, to prepare for scale up of AffiDX SARS-CoV-2 LFT manufacture. The aim is to achieve a combined initial five million tests per month, with an increase to up to 30 million per month if access to Government funded capacity can be gained. Avacta is also seeking manufacturing capacity overseas.

AffiDX SARS-CoV-2 LFT shows promising clinical results

There is an increasing focus on the importance of the accuracy achieved by LFTs. Meaningful interpretation of any test requires knowledge of its sensitivity[1], the proportion of infected people who test positive, and specificity[2], the proportion of non-infected people who test negative. LFTs typically produce few false positive results, and in a low COVID-19 prevalence setting these can be detected by confirmatory PCR testing. False negative results are more concerning. Besides technical errors, they can arise in people tested during the five-to-seven day incubation period before the viral antigen is shed in sufficient enough levels in the nose to be detected, usually one to two days before symptom onset.

In some now debatable testing, the UK’s most frequently used LFTs (the Innova SARS-CoV-2 Antigen Rapid Qualitative Test) showed an overall sensitivity of 76.8%, rising to over 95% in cases with high viral loads. The overall specificity of the test was reported as 99.7%, meaning a false positive rate of 0.32%. However, the results showed large variability depending on user expertise; for example, specialist laboratory scientists achieved a sensitivity of 79%, trained healthcare staff saw 73%, but even with well trained “track and trace” members it dropped to 58%. Leaving the accuracy of these tests, and the merits or otherwise of Public Health England (PHE) and PHE Porton Down’s protocol, the testing performance is expected to rise with experience. However, the one constant problem identified was the difficulty (and discomfort) of swabbing a virus sample consistently from the nasopharyngeal area (between the nasal passage and the top of the throat).

Avacta’s AffiDX SARS-CoV-2 antigen LFT is classed as a qualitative in vitro diagnostic (IVD) test to detect SARS-CoV-2 antigen in human anterior nasal swab samples (just inside the nostrils); not specifically just the nasopharyngeal area. As noted above, this is an important differentiator that should lead to more consistent, and actionable, in-field outcomes. The results show a very high analytical sensitivity and excellent specificity at 20 minutes, with an impressive and consistent response even at 10 minutes, (using a simple visual read) across all test users. Initially it will be available for professional use, the MRHA and European authorities confirmed registration in June. Registration for consumer self-testing is expected to follow but management has issued no guidance regarding likely timings.

Laboratory tests suggest AffiDX may be the most sensitive S1 spike protein LFT available to date and shows no cross-reactivity with the S1 spike proteins from closely related coronaviruses (such as MERS-CoV S1, SARS-CoV-1 S1, HCoV-229E S1, HCoV-HKU1 S1, HCoV-NL63 S1, or HCoV-OC43 S1). Two evaluations of clinical samples have been performed so far. The first was a lab-based assessment (February 2021) that tested 30 known positive samples with Ct values of 26 and lower (half in the 22 to 26 range) and AffiDX LFT identified 29/30 of these correctly. With the 26 known negative samples, AffiDX LFT identified all 26 correctly as negative. This indicates a sensitivity of 96.7% and a specificity of 100% for samples with a Ct value <26.

The second evaluation (April 2021), a representative clinical assessment, tested 98 known positive samples (31 with Ct<26; 65 with Ct 26-30 and two with Ct 30-31). AffiDX LFT identified 96 of these correctly. Of 102 known negative samples tested, AffiDX LFT correctly identified 101. The results were obtained with a visual 20 minutes read time. These result in a sensitivity of 98.0% and a specificity of 99.0%, despite involving samples that had low viral loads. The details of the results are shown in Exhibit 7.

Exhibit 7: AffiDX SARS-CoV-2 antigen lateral flow test clinical performance

Source: Avacta   Note: ¹ = Applied Biosystems TaqPath COVID-19 CE-IVD RT-PCR kit

Commercialisation of AffiDX SARS-CoV-2 LFT imminent

As mentioned, there has been much scientific and political discussion surrounding the merits and pitfalls of widespread population testing. Whatever the outcome, LFTs are expected to play an important role in emerging from this pandemic. They have the advantage of generating a rapid result (usually in 30 minutes or less), are easy to use, and convenient. Such point-of-care (POC) tests are not simply useful in outbreak management but will likely form the key plank of any post-restriction control strategy. Despite the advent of successful vaccination programmes, it is clear a significant need for testing will continue for the foreseeable future (say three to five years).

Although the data to date suggests Avacta’s AffiDX LFT has potentially class-leading clinical performance, for our modelling we have conservatively assumed that its profile is competitive with best existing and forthcoming tests. We have only forecast material sales from mid-2021 through to end-2023, with revenues beyond this period decreasing markedly. Any improvement on this conservative scenario would represent upside. Realistically, likely level of demand, irrespective of the timing of CE Marking for consumer self-test, means volumes will be capped by available production capacity rather than marketing prowess. Management has confirmed the lowest UK capacity it has secured is five million tests per month, whilst it is hopeful that this can be increased to 30 million if access to Government funded capacity is granted. Additional capacity is being negotiated.

In terms of pricing, the days of being able to charge more than €10 per test are long gone. Similarly, more rational purchasing suggests margins will no longer be as generous. Despite the potential performance benefits, we assume pricing will be comparable to other LFTs so a unit price of €4 (current market prices per test appear to be €3.50 to €5.00) seems realistic. Distribution costs are expected to be a significant element, especially with the consumer testing sales. Including the profit attributable to the various players in the supply chain, we estimate these will account for from €1 to as much as €2 per test (with the higher cost level until volume economies are achieved). Although management has not articulated its expected manufacturing costs, we estimate them to be c €2 per test initially and, once the inevitable initial production issues are resolved and economies of scale are achieved, could drop to c €1.5 per test. Hence, we anticipate Avacta will receive c 30% of overall test revenues. Exhibit 8 details our base case revenue and profit expectations. It is clear that Avacta’s income will initially be driven by the production levels achieved, hence this will be a priority; thus, at this stage we have not factored in any benefits from eventual economies of scale. We intend to update our models as visibility improves on manufacturing capacity, clinical performance, and market uptake.

Exhibit 8: Revenue and gross profit forecasts for AffiDX SARS-CoV-2 LFT

Source: Trinity Delta

Other diagnostic opportunities

Avacta has also applied its Affimer technology to develop alternative COVID testing methods. A collaboration, first signed in May 2020, with Adeptrix and Bruker Corporation has developed a test based on Adeptrix’s BAMS magnetic bead-based assay for mass spectrometers. The aim was to increase COVID testing capacity by using the sizeable installed base of mass spectrometers already in place in clinical microbiology laboratories. The rapid ramp up in PCR-based capacity in most pandemic affected countries has effectively nullified the need to find additional testing capability. Nonetheless, the collaboration was fruitful and Affimer reagents are being considered for a wider range of BAMS based tests.

Outside of Avacta’s targeted diagnostic areas, a collaboration with Astrea Bioseparations is exploring the use of the Affimer platform for affinity chromatography and bioprocessing. The deal, signed in December 2020, allows Astrea to generate and develop Affimer reagents that it can employ for affinity purification of highly specific biological products from complex mixtures. The attraction is that Affimer-based reagents are sufficiently robust and stable to withstand repeated use in relatively harsh conditions. Deal terms included a £0.5m upfront for a non-exclusive license, with future royalties on any relevant sales. If certain criteria are met, there is an option to convert into an exclusive agreement, for an undisclosed fee.

Sensitivities

Typically with innovative healthcare companies the three main sensitivities relate to clinical and regulatory aspects, commercial execution, and the financial resources required to accomplish these. More specifically for Avacta, the key near- and medium-term sensitivities relate to the steps required to create a profitable diagnostics business and to demonstrate that both the Affimer and pre|CISION platforms can be developed into attractive therapeutic assets.

COVID has placed Avacta into the spotlight, with the flexibility and speed of identifying and developing Affimer-based point-of-care diagnostics being a key talking point. However, the need for suitable COVID treatments and diagnostics has attracted a multitude of providers in the arena, ranging from global multi-nationals to domestic players. The winners may not necessarily offer the best technology but likely have better resources, faster timelines, and greater political goodwill/connections. With such expectations on the success of the Affimer based SARS-CoV-2 rapid antigen test, there is a material risk that regulatory delays and/or poor uptake may result in lower than expected commercial returns.

Diagnostics should offer the more rapid and simpler route to market for Affimer based reagents and tests. However, as with other antibody mimetic platforms, there has been a reluctance for leading diagnostic players and laboratories to explore these options. A number have undertaken exploratory trials but, as yet, no third-party has launched an Affimer based diagnostic. Similarly, no Affimer based product has yet been subject to review by a regulatory body. Although such a process should be relatively straightforward, it remains as an uncertainty.

The strategy for therapeutics is to employ the Affimer and pre|CISION platforms to develop a range of small molecules and larger complexes that are either first-in-class or best-in-class. Addressing highly novel targets is commercially more attractive but also, clearly, carries a greater risk. Whilst the preclinical studies, particularly the animal models, have generated impressive data, to date none of the programmes have been tested in humans. Whilst the likelihood of encountering unexpected problems is small, the impact on the prospects of the platform affected would be material. The first compound from pre|CISION, AVA6000, is expected to enter the clinic mid-year with results by year-end.

Management has successfully struck several deals and partnerships; these are useful external validation of the attractiveness of the proprietary technologies. However, it will be the development, approval, and market launch of the first products that will provide tangible evidence of the ability of these platforms to generate commercially attractive targets.

Financing is a perennial element to any innovative research-based company and Avacta is no exception. The £48m raised in June 2020 has materially strengthened its balance sheet and, on our forecasts, is sufficient to fund progress in both the diagnostic and therapeutic divisions through several value inflection points.

Valuation

Avacta is seeking to create value from its two proprietary platforms. Affimer proteins are synthetic antibody mimetics which have applications in both diagnostic and therapeutic indications, whereas pre|CISION is applied to improving the clinical profiles of oncology compounds. The nature of diagnostics means creation of a commercially viable operation can be accomplished in a timely manner, whereas the nature of clinical trials inevitably involves more protracted timelines. Hence, we employ an rNPV model for the therapeutic indications, a feature of which is to attribute most value to later stage clinical compounds and less to earlier stage programmes, and a more straightforward DCF for the diagnostic opportunities.

Therapeutics: rNPV indicates £559m, 221p per share

We calculate the rNPV of the lead development projects from the two platforms, AVA6000 from pre|CISION and AVA004-VbP from Affimer/TMAC. Their commercial prospects are assessed and success probabilities adjusted for the inherent clinical, commercial, and execution risks each carry. We also calculate an aggregate rNPV for the remainder of the platforms, employing conservative assumptions throughout. The success probabilities are based on standard industry criteria for the respective stage of clinical development but, importantly, flexed to reflect the inherent risks of platforms that are as yet unproven in human studies. Successful outcomes in the clinical studies for the two lead programmes would materially de-risk each platform and result in sizeable upside.

Even though we would envisage the out-licensing of at least some programmes before the later, and more expensive, stages of clinical development, we allow for commercial and execution risks as we view these as integral to any asset’s intrinsic value. As stated, we employ conservative assumptions throughout our modelling, particularly regarding market sizes and growth rates, net pricing, adoption curves, and peak market penetration. Exhibit 9 summarises the outcomes.

Diagnostics: DCF suggests £133m, 52p per share

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 commercial outcome of its Affimer-based COVID LFT, AffiDX SARS-CoV-2, this business has matured into a true diagnostics player. Nonetheless, AffiDX SARS-CoV-2 is a major value contributor within our model. Forecasting likely revenues is fraught with difficulties; with diverse factors ranging from macro (such as the political and scientific arguments for point of care testing with LFTs), to micro (eg how does AffiDX SARS-CoV-2 really compare to alternative LFTs), and pragmatic (eg will Avacta be able to make sufficient tests to satisfy expected demand).

Unfortunately, we do not see the forecasting visibility improving in the near-term and, exploring the numerous variables, the greatest impact for us is the ability to manufacture at scale at the appropriate quality standard and in time. Management has secured five million per month capacity, with the expectation that it may access additional capacity from Government funded facilities to boost this to 30 million per month. Additional supply agreements are also being sought in Europe.

For our model we assume five million LFTs per month at a unit price of €4, and a net margin of 30% in FY21. We assume a rapid roll-out in 2021, peak sales in 2022 as more capacity is brought on stream, with a steady decline in demand over the four years to 2026. We also assume that AffiDX SARS-CoV-2 is not differentiated in a meaningful way from its competitor LFTs, with material upside available should it be able to do demonstrate this and payors perceive this as relevant. Exhibit 9 details our expectations for AffiDX SARS-CoV-2, plus an additional DCF stream for the non-COVID diagnostic applications.

Exhibit 9: Avacta sum of the parts valuation

Source: Trinity Delta   Note: assumptions include a 12.5% discount factor, £/$ FX rate of 1.30, and 10% taxation from 2028 (UK patent box).

Summing the two calculations, DCF for Diagnostics and rNPV for Therapeutics, results in an Avacta valuation of £710m, equivalent to 280p per share. It is worth noting that, for expediency, we have allocated all operational costs and cash resources to the Therapeutics rNPV.

Reality check: peer group is valued similarly

To provide context and act as a reality check, we have collated data from peers with similar business models and, for the Therapeutics operations, a comparable R&D pipeline in terms of disease focus, size, and, where possible, maturity (Exhibit 10), and similarly for Diagnostics (Exhibit 11) comparable UK-quoted businesses operating in the same field.

For Therapeutics (Exhibit 10), we have selected the three listed companies that are developing antibody mimetics as drugs: Bicycle Therapeutics, Molecular Partners, and Pieris Pharmaceuticals. We also consider CytomX as it is targeting tumour activated compounds and IgM as an alternative approach to classic antibodies. Their valuation range is wide (c$220m to $2.7bn); but centres around £500m, suggesting our valuation of Avacta’s Therapeutic operations is realistic.

Exhibit 10: Avacta’s Therapeutic peers

Source: Trinity Delta, Company websites  Note: Priced as at close on 28/6/21; USD:GBP FX rate of 1.38

For the Diagnostic peer group, we have selected two UK public companies that operate directly in the LFT space, and two as proxy for the diagnostic sector. Abingdon Health, a recently AIM listed business, specialises in the contract manufacture of diagnostic tests, notably LFTs and has a valuation (c £44m market cap) that reflects its status as a CMO rather than an owner of products and the relevant IP. Immunodiagnostic Systems was acquired by Perkin Elmer in May 2021 for £110m (50% premium to prior market cap). Omega Diagnostics is a respected UK diagnostic player well placed to service Covid LFT demand, with a valuation that is, in our view, a good proxy for the implicit value of Avacta’s Diagnostic operations. Novocyt’s valuation has, again in our view, a speculative element to it and represents a geared play on sustained testing becoming the norm. As further context, BBI Group, a private spin-out from Alere (formerly Abbott) in 2015, was acquired by Novo Holdings (the investment arm of Novo Nordisk) in June 2021 for over £400m.

Exhibit 11: Avacta’s Diagnostic peers

Source: Trinity Delta, Company websites   Note: POC: point of care; LFT: lateral flow test; IVD: in vitro diagnostic; LDC: lab developed test; PCR: polymerase chain reaction; UK-RTC: UK Rapid Test Consortium. Priced as at close on 28/6/21

Financials

Avacta reported FY20 revenues of £3.6m (FY19 17-month period: £5.5m), with Diagnostics contributing £0.52m (FY19-17m: £0.81m) as custom Affimer projects were impacted by customers’ working restrictions and internal focus shifted to developing the COVID-19 LFT and other test programmes. Therapeutics posted revenue of £1.63m (FY19 [17m]: £2.5m), reflecting smaller payments from the LG Chem collaboration and reduced payments for the FTE funded research as COVID-related restrictions limited laboratory work. Animal Health revenues of £1.5m (FY19 [17m]: £2.2m) was due to a year of two halves: the first lockdowns saw most veterinary practices closed and sales effectively halt, but with a rebound to near-normal activities later in the period.

FY20 operating costs were £23.5m (FY19 [17m]: £22.1m) with expensed R&D costs of £9.0m (FY19 [17m]: 7.9m) as spend in both Diagnostics and Therapeutics development continued. A further £1.0m (FY19 [17m]: £2.2m) was amortisation of previously capitalised spend; with £0.2m FY19 [17m]: £1.9m) capitalised for future amortisation. First-time inclusion of losses from the AffyXell JV was £0.2m. The £1.7m impairment charge against intangible assets relates to the Animal Health division. SG&A expenses fell to £7.3m (FY19 [17m]: £10.1m), with depreciation of £1.1m (FY19 [17m]: £1.6m). Loss before taxation was £21.3m (FY19 [17m]: £18.1m), with a net loss of £18.9m (FY19 [17m]: £15.6m).

The R&D tax credit of £2.5m was at a similar level to FY19 [17m] (tax credit of £2.4m). Cash and equivalents at end December 2020 stood at £47.9m (£8.8m at end December 2019) with the two fund raises, in April and June, bringing in £5.8m gross (£5.4m net) and £48.0m (£45.4m net) respectively. Receipt of an R&D tax credit of £2.2m is expected during H221. At the June 2020 placing the use of funds was earmarked as follows:

• £10m to rapidly scale-up the Diagnostics business; with working capital for the COVID-19 testing opportunity, expansion of in-house diagnostics product development capabilities, and acceleration of the broader diagnostics product pipeline and commercial partnerships.
• £35m to accelerate expansion of the Therapeutics pipeline; grow the pre|CISION preclinical pipeline and deliver preclinical packages (bortezomib, paclitaxel and oxaliplatin), expand the Affimer immunotherapy pipeline (PDL1-TGFβ inhibitor and PDL1-cytokine bispecifics), achieve IND/CTA filings for one or more Affimer immunotherapies (TMAC drug conjugate [PDL1-IDASH] or first bispecific candidate) and one or more pre|CISION pro-drugs, and obtain first-in-human data for the Affimer platform.

The funding for the UK phase I clinical trial for AVA6000 pro-doxorubicin is covered by the previous funding round, in April, but the June raise is expected to also fund AVA6000’s IND filing. Avacta’s balance sheet provides it with the resources to progress both its diagnostics and therapeutics pipelines, and as such we expect R&D investment to ramp up significantly to £14.9m in FY21 and £15.7m in FY22. Our base business model (ex-COVID revenues) assumes a cash runway into 2023.

Exhibit 12: Summary of financials

Source: Company, Trinity Delta  Note: Due to restatement of accounts FY18 relates to 12 month period ended 31 July 2018; FY19 to 17 month period ended 31 December 2019; and FY20 to 12 month period ended 31 December 2020. Revenue forecasts do not include products that have not yet been approved or launched.

[1] Sensitivity (also called the true positive rate) measures the proportion of positives that are correctly identified. Put another way, if, for instance, a disease test is highly sensitive and the test result is negative you can be nearly certain that disease is not present.

[2] Specificity (also known as the true negative rate) measures the proportion of negatives that are correctly identified. In other terms, if the disease test result for a highly specific test is positive you can be nearly certain that disease is present.

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