A marked decline in the value of AIM-listed healthcare stocks over the past two-and-a-half years belies the significant progress being made behind the scenes at these innovative companies.
A case in point is C4X Discovery, which has two licensing agreements under its belt with blue-chip partners, has sold an asset and, crucially, is funded for the foreseeable future.
The latter point is important as it means there is zero near-term risk of a highly dilutive fundraiser, which puts it in a small minority of companies listed on the junior market.
When I meet Clive Dix and Nick Ray, respectively CEO and chief scientific officer of C4XD, it is just before the drug developer’s annual meeting.
C4X Discovery, which has two licensing agreements under its belt with blue-chip partners, has sold an asset and, crucially, is funded for the foreseeable future.
Progress, but little reward
In more ordinary circumstances, the AGM would have been a valedictory affair, given the company’s achievements over the last 12 months.
However, it’s fair to say these milestones have been scantly rewarded by the markets. The payment of £8.7 million ($11 million) under its deal with AstraZeneca just over a month ago did see the stock start to motor only to quickly retrace its footsteps.
Otherwise, it has been tricky to gain recognition for the notable progress it has made – though it’s not alone in this regard as the AIM healthcare index has collapsed to levels last seen almost a decade ago.
CEO Dix believes the issue is more than a purely cyclical one, citing the poor and deteriorating analyst coverage of the sector, a lack of liquidity and reduced access to growth capital as compounding the problem. He says government support, financial, legislative, and regulatory, has been sorely lacking too.
‘The ideal world at the moment for anybody in biotech is private. There’s lots of VC [venture capital] money, lots of opportunity to grow and develop,’ Dix adds.
A must-have?
If we do see a recovery of quoted healthcare companies from current depressed levels, then the Manchester-based drug developer is probably a ‘must-have’ on any watch list.
As mentioned above, it is well financed with a cash runway of around two years thanks to a recent influx of funds from a licensing deal and an asset disposal.
Its area of expertise is primarily, though not exclusively on inflammation, and its dedication to small-molecule discoveries offers treatments that are not only more versatile and affordable than their biologic counterparts but also potentially more accessible due to oral administration.
‘The cost of goods for a biologic means it is never going to be like first- or second-line therapy,’ explains chief scientific officer Ray.
For that reason, physicians, particularly in the area of inflammation, are likely to rattle through a series of less expensive treatments on a trial-and-error basis before prescribing a biologic drug, which has the additional downside of requiring an injection.
‘A biologic [drug] is the last thing you get. A small molecule [drug] is likely to be something [doctors] can get to quicker, it will be cheaper, and as such the patient population should be bigger.’
Different approach
C4XD distinguishes itself through its business model, focusing on the discovery and development of assets for out-licensing before clinical trials— a deviation from industry norms.
Operating as a virtual drug company, the business outsources many of its R&D functions, thus maintaining a lean operational structure.
Its approach has borne fruit, as evidenced by agreements with industry giants Sanofi and AZ worth up to a combined £650 million, which respectively, have taken over the development of the company’s oral IL-17A inhibitor and NRF2 activator programmes.
An out-licensing agreement with Indivior, meanwhile, morphed into the outright sale of its Orexin-1 receptor antagonist asset for substance use disorder, netting £16 million in the process.
Strong pipeline
Its current pipeline includes promising treatments for inflammatory bowel disease and cancer.
Its strategy of securing partners before incurring the substantial costs associated with clinical trials underscores the company’s innovative and pragmatic approach.
However, Ray told Proactive he may be tempted to take the α4β7 programme for inflammatory bowel disease down the more traditional route.
He said: ‘This would be a good one [to take into the clinic]. But it is always about the right project, right time and right efficacy.’
He also confirmed there had been some ‘general interest’ around its MALT-1 inhibitor programme in oncology. Given the company’s focus on inflammation and the competitive market for nascent cancer treatments, it wouldn’t be a surprise to see this asset quickly out-licensed.
Listed in the US, there is no doubt C4X would be worth significantly more than the £30million valuation it commands listed on AIM. It is not alone in being so lowly rated. There are scores more companies caught in the valuation trap described earlier.
Westward migration
For now, a westerly migration to markets such as Nasdaq or NYSE looks unlikely. It is generally accepted that a £400 million ($500 million) market capitalisation is the minimum required to transfer from London to New York. At present, very few of AIM’s healthcare innovators reach this minimum threshold.
It’s difficult to know what will happen over the year to 18 months. We are already seeing private equity picking at the margins – although the PE has trained its sights on buy-and-build pharma services stories such as Instem and Ergomed. And before that, it was revenue-generating stocks such as Clinigen, and Amryt Pharma.
Consolidation may take hold or, heaven forfend, the risk-off attitude towards the life science featherweights finally turns as the cash taps are turned back on. But, ultimately, something has to give.
Investors in companies such as C4XD, and similarly overlooked and underappreciated stocks, will hope that dam breaks sooner rather than later.
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