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C4X Discovery
Initiation of coverage
Safer, better, faster
Pharma & biotech
5 January 2016
C4X Discovery’s (C4XD) proprietary drug discovery platform allows the
accurate measurement of molecular shapes in solution enabling improved
and accelerated drug discovery. It has five programmes targeting validated
clinical targets, with plans to add substantially to these in the next couple
Price
of years. The Orexin programme’s lead candidate, a selective OX1
antagonist, is in formal preclinical studies with clinical development
anticipated by mid-2017. We suggest that the potential of this programme
alone largely supports the current valuation, indicating that significant
potential upside value is not yet ascribed.
Net cash (£m) at 31 July 2015
Year end
Revenue (£m)
PBT* (£m)
EPS* (p)
DPS (p)
P/E (x)
Yield (%)
07/14
0.62
(1.3)
N/A
N/A
N/A
N/A
07/15
0.31
(3.8)
(10.8)
0.0
N/A
N/A
07/16e
0.47
(4.3)
(14.0)
0.0
N/A
N/A
07/17e
0.66
(5.2)
(16.9)
0.0
N/A
N/A
Market cap
£33m
7.5
Shares in issue
31.0m
Free float
22%
Code
C4XD
Primary exchange
AIM
Secondary exchange
N/A
Share price performance
120
100
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items.
80
60
Data-driven rational drug design
40
C4XD’s nuclear magnetic resonance-based technology platform can identify
conformational features of drug molecules that are critical to target binding and can
be optimised to improve drug potency and to reduce liability to off-target effects
through enhanced selectivity. This should aid the selection of drug candidates with
superior properties. Moreover, the speed at which the information is generated
(days to weeks) could accelerate drug development with associated cost savings.
107.5p
20
0
Jan
Mar
May
%
Jul
Sep
3m
12m
Abs
39.6
59.3
20.8
Rel (local)
42.6
59.4
26.4
52-week high/low
The potential time and cost-savings offered by C4XD’s platform is likely to appeal to
Business description
Transitioning to the clinic
C4XD now has five drug programmes in the early stages of drug discovery and
development. The lead programme is targeting the Orexin system (an important
pathway in addiction and reward processes, and a critical regulator of sleep/wake
states) for the treatment of addiction. Its lead candidate, a selective OX1 receptor
antagonist, should enter Phase I by mid-2017. Other programmes are focused on
clinically validated targets, such as GPR142 and NRF-2. C4XD is evaluating other
targets, aiming to have 15-20 development programmes in a couple of years’ time.
Modest £25.5m EV does not reflect upside potential
The unique nature of C4XD’s discovery platform means that a fundamental DCFbased valuation is not appropriate at this stage. However, to illustrate that
significant upside potential exists, an rNPV of £21m for the Orexin programme
alone largely supports the current share price and EV. Our financial model suggests
a current cash runway to end FY16 (end-FY15 cash £7.5m).
Jan
1m
Global industry appeal
the global pharmaceutical industry, as it strives to improve R&D productivity, while
also facing growing furore over rising drug prices. Existing collaborations (Evotec,
AstraZeneca and Takeda), and the recently announced collaboration with the
Structural Genomics Consortium, provide external endorsement of the technology.
Nov
113.5p
67.5p
C4X Discovery (C4XD) is a UK-based business
using its proprietary NMR-based technology to
solve the dynamic 3D structures of biomolecules in
solution. The resulting information can then be
used for rational drug design, ensuring safer and
better drug candidate selection, with significant
time and cost savings.
Next events
Proof-of-concept data from the
inflammation and diabetes programmes
H116
Orexin programme: filing of Clinical Trial
Application to enable human studies
H216
Analyst
Christian Glennie
+44 (0)20 3077 5727
[email protected]
Edison profile page
C4X Discovery is a research client
of Edison Investment Research
Limited
Investment summary
Company description: Rational drug discovery and design
C4XD is a Manchester-based leader in NMR-based drug discovery and design. Established as
Conformetrix as a spin-out from the University of Manchester in January 2008 by the founders, Dr
Andrew Almond and Dr Charles Blundell, it was renamed C4X Discovery in 2013. The company
employs 21 people. To date the company has raised £14.5m, including £11m gross proceeds from
its IPO on AIM in October 2014 (at 100p/share). The company’s proprietary NMR-based technology
can be used to solve the 3-D conformations of biomolecules in solution. C4XD believes that this will
enable data-driven rational design of superior drug candidates, on a significantly faster timescale
than conventional techniques, as observed in the selection of a lead candidate from the Orexin
programme. C4XD aims to become a highly efficient and productive discovery R&D engine,
targeting c. 15-20 new development programmes within two years. Dr Clive Dix became executive
chairman in November 2015, with a proven track record in licensing and M&A activity.
Valuation: £25.5m EV does not capture upside potential
Assigning a fundamental valuation to C4XD necessitates consideration of the inherent value of the
technology platform, pipeline candidates and potential future partnership deals. However, with a
unique platform and multiple early-stage candidates, this is not appropriate at this stage. The
experience with the candidate selection for the Orexin programme suggests the platform’s potential
to significantly shorten the drug discovery stage, although this will require repetition against more
than one target. Whether the technology will also lead to the selection of safer and more efficacious
drugs for use in humans has yet to be proven. However, an illustrative valuation of the lead Orexin
programme gives an rNPV of £21m, suggesting that this one programme alone largely supports the
current share price, leaving significant room for upside when the earlier-stage programmes and the
inherent value of the technology platform are considered.
Sensitivities: Clinical validation required
C4XD is subject to the usual risks associated with drug development, including clinical development
delays or failures, IP protection, regulatory risks, competitor successes, partnering setbacks, and
financing and commercial risks. The biggest near-term sensitivity is the successful transition of the
Orexin programme from preclinical to clinical development, and its subsequent partnering; this will
provide validation of the drug discovery platform, influencing C4XD’s negotiating position with future
partners for this programme and others in development. Likewise, repetition of the time and cost
savings for lead candidate selection in the other programmes will confirm the findings with the
Orexin programme, validating the platform’s premise that it can substantially accelerate the drug
discovery stage of drug development. C4XD’s current development pipeline is focused on targets
that have previously been validated clinically, therefore reducing the risk profile to a certain extent.
Financials: Funded through to end-FY16
C4XD raised gross proceeds of £11m when it listed In AIM in October 2014. We believe net cash of
£7.5m at end-July 2015 should be sufficient to fund operations through to end-FY16. We forecast
£3m of illustrative financing included nominally as long-term debt on the balance sheet in 2017 (as
per our policy). We forecast that collaborations will continue to provide stable, but modest revenues
in FY16e and FY17e. Costs will increase as the Orexin programme enters early-stage clinical trials,
earlier-stage programmes progress into preclinical and clinical development and discovery work
ramps up. We forecast R&D spend of £3.8m in FY16e and £4.8m in FY17e (FY15: £3.2m). For
G&A we forecast spend of £0.95m in FY16e and £1m in FY17e (FY15: £0.9m). Consequently, we
forecast net loss will increase to £4.3m in 2016e (from £3.1m in 2015).
C4X Discovery | 5 January 2016
2
Outlook: Aiming to transform drug discovery
Management believes that its proprietary nuclear magnetic resonance (NMR)-based technology
enables improved and accelerated drug discovery based on conformational design of solution
structures. This potentially disruptive technology could transform small molecule drug discovery.
Better, safer, faster
Management believes that its technology enables novel small molecule drug candidates to be
generated on a significantly accelerated timeline. The company estimates that selection of the lead
candidate for the Orexin programme was achieved in less than 50% of the time taken for traditional
drug discovery techniques, with estimated overall cost-savings of up to 90% (c $10m). This databased empirical approach can be used in combination with existing techniques such as x-ray
crystallography, and also for targets where the use of x-ray crystallography is limited (eg certain
receptor types). The conformational information it provides should enable the selection and rational
design of candidates with superior properties compared with current ‘best-in-class’ alternatives. For
example, developing a lead candidate for the Orexin programme that is over 10x more selective for
the OX1 receptor than other described OX1-antagonists, could equate to a more efficacious
compound with reduced side-effects. It stands to reason that this improved candidate selection
could increase the chance of clinical success, resulting in further time and cost savings.
Potentially disruptive technology with global industry appeal
The fact that C4XD’s data so far indicate that the technology is able to significantly accelerate the
drug discovery phase, at a substantial cost saving, is likely to be of considerable appeal to the
global pharmaceutical industry as it battles to improve R&D productivity. If the approach is also
shown to lead to the selection of safer and better novel leads, with a consequent reduction in R&D
attrition rates, the appeal would grow further. C4XD is already collaborating with a number of
pharmaceutical companies, including AstraZeneca.
Building up a pipeline of development programmes
C4XD’s investment in its platform has paid off, and it now has a database of 3D bioactive structures
that can be used to increase the efficiency with which it maps new drug conformations. Five drug
development programmes are in the early stages of development (Exhibit 1). The lead programme
is targeting the Orexin system for the treatment of stress-related addictive disorders (initially bingeeating disorder and smoking cessation). It is now in formal preclinical development, including safety
and toxicology studies, with plans to file a clinical trial application by end-2016. C4XD plans to add
to this pipeline, aiming for at least 15-20 development programmes in a few years’ time; these will
either be out-licensed after early clinical studies or C4XD will continue development in house.
Exhibit 1: Development pipeline
Indication
Addiction
Stage
Preclinical
COPD
Discovery
(Inflammation)
Diabetes –
prog 1
Diabetes –
prog 2
Inflammation/
autoimmune
diseases
Discovery
Discovery
Discovery
Target
OX1
inhibition
Notes
Lead candidate, a selective OX1 antagonist, is in preclinical development for the treatment of addictive disorders. It has
>1000-fold selectivity for OX1 (vs 50-60-fold best literature profile). High selectivity for the OX1 receptor is required to
avoid sedative side-effects via the OX2 receptor. Clinical development expected to commence by mid-2017.
NRF-2
Impaired NRF2 function has been implicated in numerous diseases including COPD, multiple sclerosis (MS) and
activation cancer. The NRF2 pathway is the target for the approved MS drug Tecfidera. C4XD believes that it has rationally
designed selective, reversible NRF-2 activators that may offer improved safety and efficacy.
GPR124 GPR142 receptor mediates enhanced glucose-stimulated insulin secretion. Novel lead molecules identified that activate
activation GPR124, aiming to avoid the hypoglycaemia risk associated with many diabetes therapies.
GLP-1
Current marketed GLP-1 receptor agonists, including Victoza, are all injectable. C4XD has developed orally available
activation compounds, which it believes will be both efficacious and have reduced side-effects.
IL-17
IL-17 is implicated in multiple inflammatory and autoimmune diseases. Most products in development are antibodies,
inhibition which require injection. C4XD has identified small molecules that can selectively block IL-17’s interaction with its
receptor with high potency, which would allow oral and/or topical delivery.
Source: C4X Discovery, Edison Investment Research
C4X Discovery | 5 January 2016
3
Rational, accelerated structural design
Structure-based drug design (directed by the 3D structure of the drug target) is one tool used to
improve the rate and success of drug development. Nuclear Magnetic Resonance (NMR) has been
used to understand molecular structures for many years; data from the experiments can be used to
provide 2D and some 3D structural information to aid rational drug design. C4XD has developed
fundamentally new methods that exploit NMR data to determine not only the 3D shape of a drug
molecule, but also the dynamic range of shapes that the molecule adopts in solution.
Shape drives value
The shape, or conformation, of a drug molecule is a determinant of if, and how, it binds to a target,
and therefore whether it will have the desired biological effect. Where the gold-standard X-ray
crystallography enables the bioactive (or bound) 3D structures of molecules to be determined,
C4XD’s platform can be used to provide additional information regarding the conformation change
of the drug upon binding – a determinant of the binding affinity. Further, it is able to do this under
the same physiological conditions as the drug molecules encounter in the human body (such as
1
temperature and pH). This information can be used to design molecules with better affinity. This is
important as drug molecules that are not highly optimised to bind to a particular target often interact
with many different receptors or enzymes, which can give unpredictable side-effects and a narrow
therapeutic window. Increasing the specificity, and so the affinity of a ligand for a particular target
generally minimises off-target effects, so reducing side-effects and meaning that any toxicities only
appear at doses well above the therapeutic level. Thus, an understanding of both the free and
bound shapes of the drug molecule is vital to optimising the rational drug design.
C4XD believes it provides the only empirical method that can accurately measure the free dynamic
3D-structures of drug molecules, offering a unique approach. As far as we are aware, C4XD is the
only company able to generate this level of experimentally-derived conformational data, and can do
so in a matter of days (X-ray crystallography takes 6-18 months to generate). This information can
then be used in conjunction with existing rational design technologies, and importantly, when X-ray
crystallography for the drug target is not routinely available (eg G-protein coupled receptors, such
as the OX1/2 receptors, and ion channels).
Potential to improve R&D productivity
Drug development faces enormous challenges. It is time consuming, with developing a new
medicine now taking on average 11 years, and high attrition rates mean that the probability of a
Phase I product reaching the market is just 12% (and this does not even include the failure rate of
2
the discovery and preclinical stages). As a consequence, it is extremely expensive: when costs of
failed programmes are accounted for, the cost to get a drug to market has been estimated to be as
2
high as $2.6bn. Thus, there is an obvious need, and desire, to improve R&D productivity.
3
R&D productivity can be considered to consist of two dimensions: efficiency and effectiveness.
Using its technology in the lead Orexin programme, C4XD was able to improve R&D efficiency by
significantly accelerating the ‘hit to lead’ and ‘lead optimisation’ stages of drug discovery, at a
substantial cost saving (90% in the addiction programme). If this can be externally validated and
repeated, it is likely to considerably interest the global pharmaceutical industry. However, if C4XD’s
data-driven rational design leads to the selection of more selective, and therefore safer and better,
1
Blundell CD (2013). Quantification of free ligand conformational preferences by NMR and their relationship to
bioactive conformation. Bioorg. Med. Chem. 21:4976-4987.
2
Tufts Center for the Study of Drug Development: Cost Study 2014. Available at:
http://csdd.tufts.edu/files/uploads/Tufts_CSDD_briefing_on_RD_cost_study_-_Nov_18,_2014..pdf.
Paul SM et al. (2010), How to improve R&D productivity: the pharmaceutical industry’s grand challenge. Nat
Rev Drug Discov. 9:203-214.
3
C4X Discovery | 5 January 2016
4
novel leads, this could also improve R&D effectiveness by reducing attrition in both discovery and
development stages, and the eventual approval of drugs with superior properties. Such a
technology could potentially revolutionise drug discovery.
Risk somewhat reduced compared to conventional approaches
C4XD’s approach mainly involves pursuing existing, clinically validated, therapeutic targets. The
technology can be used to solve the solution structures of the current best-in-class drug molecules
for these targets, or other development-stage drug candidates, or indeed conduct more novel work
on naturally occurring ‘endogenous’ ligands (such as peptide hormones), ie there are multiple
potential starting points to develop safer and more effective compounds. This information is then
used to design multiple molecules with better affinity and selectivity, from which a lead candidate, or
indeed multiple candidates, can be selected. This approach results in the time savings, but is also
de-risked compared to conventional drug discovery where the target may initially be unknown,
and/or the clinical sequelae of acting on it are not apparent until clinical studies. The speed at which
C4XD is able to deliver this capability means it has potential to become a sought-after R&D engine,
producing multiple candidates against various targets, from which partners can then select for
further development, all at a fraction of conventional costs. C4XD believes that selecting multiple
candidates per target should enable the development of a portfolio of potentially complimentary
therapies, as well as back-up options should the lead candidate falter.
Building up a substantial drug discovery pipeline
C4XD plans to continue to build on the momentum of the last 12 months by adding to its pipeline of
drug discovery programmes. Key to this is the recently announced collaboration with the University
of Oxford’s Structural Genomics Consortium (SGC-Oxford). SGC-Oxford is part of the Nuffield
Department of Clinical Medicine and consists of c 100 scientists who collaborate widely with major
pharmaceutical companies and the worldwide academic network, combining world-class expertise
in therapeutic target validation, protein expression, assay development and protein structural
information. As part of the collaboration, C4XD will be granted access to structural, biological and
therapeutic information that SGC-Oxford holds in relation to various therapeutic targets and related
assays, as well as initial ‘hit’ molecules that SGC-Oxford has identified against these targets.
C4XD’s technology will be used in combination with SGC-Oxford’s expertise in conventional
techniques to identify new and improved hit molecules against the SGC-Oxford targets. However,
C4XD will retain ownership of any new compounds it independently identifies as part of the
collaboration, thus forming the starting point for C4XD’s future drug discovery projects. C4XD is
aiming to have 15-20 projects, with multiple candidates per project, in development in the next
couple of years; some of which it will develop itself and others it will partner.
Big pharma deals in place, but aiming for more strategic tie-ups
Over the last three years, C4XD has forged fee-for-service collaborations with AstraZeneca, Takeda
and Evotec; while this provides important external validation of the platform and a modest revenue
stream, the longer-term goal is to seek more strategic collaborations with big pharma/biotech
companies. Securing the right blend of partnerships to advance/fund certain programmes, while
retaining and developing other projects in house, will be key toC4XD’s long-term success.
Application throughout the product life cycle
C4XD’s technology is also applicable throughout the life cycle of drugs. Polymorphism, the ability of
a solid material to exist in more than one form, is important in the pharmaceutical industry for two
reasons. Firstly, for IP reasons, it is important to identify all potential polymorphs of a drug.
Secondly, although chemically identical, the different polymorphs can have significant differences in
their physical properties, which may affect their pharmacological profile. In turn, this can affect
development, manufacturing, product quality and product stability. C4XD’s technology can be used
C4X Discovery | 5 January 2016
5
to predict and control the different polymorphs small molecules are able to adopt, information that is
4
essential throughout the product life cycle and to ensure sufficient IP protection.
Transitioning to the clinic
C4XD is developing novel small molecules to act on drug targets in areas of unmet clinical need. It
believes its technology will enable the selection of candidates that have substantially safer and
better properties compared with current ‘best-in-class’ alternatives. The most advanced programme
is in stress-related addiction disorders; earlier programmes are directed at validated targets in
inflammation, diabetes and autoimmune diseases. C4XD intends to advance the pipeline into early
clinical trials, after which it will seek partnerships for development and commercialisation.
Stress-related addiction – best-in-class potential
C4XD is targeting the Orexin system for the treatment of stress-related addictive disorders. Orexins
are neuropeptides produced in the lateral hypothalamus that regulate the sleep-wake cycle and
appetite via the OX2 receptor. Belsomra (Merck & Co) is a dual OX1/OX2 antagonist approved for
the treatment of insomnia. Via their action on the OX1 receptor, orexins also play a critical role in
addiction and reward-related behaviours, making OX1 receptor a key target for the treatment of
5
addictive disorders. Indeed, in a large number of preclinical studies, OX1 antagonists have
6
effectively blocked addiction-related behaviours. However, a high degree of selectivity of the OX1
receptor is required. With the best reported literature selectivity for OX1 of 50-60-fold, off-target
2,7
activity at the OX2 receptor may result in sedative side-effects, which may limit use.
The C4XD solution
C4XD has used its technology to solve the structures of existing OX1 and OX2 inhibitors to identify
the active groups required for OX1-selective inhibition. Once identified, multiple suitable cores were
selected that work with the active groups, creating novel molecules with the desired conformation
and selectivity. This has added IP benefits, whereby the ability to change cores enables C4XD to
move outside of any existing patents.
Exhibit 2: Potency of C4XD candidates at OX1 receptor vs three described OX1 antagonists
Source: C4X Discovery
4
Bauer JF. (Autumn 2008). Polymorphism – a critical consideration in pharmaceutical development,
manufacturing and stability. Journal of Validation Technology, 15-23.
Mahler SV, et al. (2012) Multiple roles for orexin/hypocretin in addiction. Prog Brain Res. 198:79-121.
6
Yeoh, et al. (2014). Orexin antagonists for neuropsychiatric disease: progress and potential pitfalls. Front
Neurosci.8:36.
7
Piccoli L, et al. (2012). Role of Orexin-1 receptor mechanisms on compulsive food consumption in a model of
binge eating in female rats. Neuropsychopharmacology. 37:1999-2011.
5
C4X Discovery | 5 January 2016
6
C4XD has developed a number of distinct novel OX1 antagonists, which are over 1000-fold more
selective for OX1 over OX2. Exhibit 2 illustrates how the C4XD candidate sits well within the target
area (shaded in light green) of high OX1 potency and low OX2 potency, compared with three
described OX1 antagonists. A lead candidate has been selected for clinical development. C4XD
was able to achieve this in less than 50% of the time taken for the traditional drug discovery
techniques (c three to five years); with estimated overall cost-savings of up to 90% (industry
3
standard $10-14m).
The lead candidate is currently in formal preclinical studies, with plans to file the clinical trial
application by the end of 2016, and begin clinical development by mid-2017. C4XD is also working
with Evotec to identify and develop follow-up compounds, aiming to create a complementary
portfolio of agents to treat addiction. This will also increase the attractiveness of the addiction
portfolio to any pharmaceutical companies that may wish to license or acquire it in the future.
Evotec is providing resource support on a fee-for-service basis, with C4XD retaining complete
ownership of any identified orexin compounds.
Addiction – a substantial market
C4XD is targeting the smoking cessation and binge eating disorder (BED) markets initially,
believing that the increased selectivity and potency of its candidate will prove more effective and
tolerable than existing therapies. Other potential indications may include drug and alcohol addiction.
Despite being largely genericised and losing market share to e-cigarettes, global sales of nicotinereplacement therapy (NRT) amounted to $2.4bn in 2013 (Bloomberg). Targeting OX1 would aim to
modify addictive behaviour, and could potentially prove a more efficacious aid to cessation than
NRT, providing an opportunity to make inroads into this market.
BED is characterised by repeated episodes of binge eating in the absence of compensatory
8
behaviours to avoid weight gain; it is estimated to affect 1.5-2% of the general population. Vyvanse
(Shire) became the first FDA-approved treatment for BED in January 2015. However, it carries a
black-box warning due to cardiac and psychiatric risks; additionally it is a controlled substance due
to the risk of addiction and abuse. OX1 receptor mechanisms have been shown to play a major role
7
in the control of BED episodes and could potentially avoid these restrictive side-effects.
As far as we are aware, there are two other selective OX1 receptor antagonists in development,
both preclinical. Sosei Group’s small molecule is also targeting BED and nicotine addiction; Eolas
Therapeutics’ programme (partnered with AstraZeneca) is targeting smoking cessation.
Earlier-stage pipeline
C4XD has identified protein targets in the treatment of inflammation and diabetes, and is aiming to
create best-in-class drugs in these blockbuster indications, where efficacy, safety and ease of use
will be critical to obtaining significant market share. These are outlined in Exhibit 3.
8
Mcelroy SL, et al. (2003) Topiramate in the treatment of binge eating disorder associated with obesity: a
randomised, placebo-controlled trial. AM J Psychiatry. 160:255-261.
C4X Discovery | 5 January 2016
7
Exhibit 3: C4XD earlier stage pipeline
Target
(Indication)
Keap1-NRF2
pathway
(COPD and
inflammation)
GPR142
(Type 2
Diabetes)
GLP-1
(Type 2
Diabetes)
IL-17/IL-17R
(Inflammatory
and
autoimmune
diseases)
Rationale
Notes
The Keap1/NRF2 pathway plays a major role in the protection of cells
against oxidative stress. Impaired NRF2 function has been implicated
in a number of diseases including pulmonary and cardiovascular
diseases, cancer, aging-related and neurodegenerative diseases,
making this an attractive therapeutic target. 9
Oxidative stress has been shown to play a central role in the
progression of chronic obstructive pulmonary disease (COPD).
Increasing evidence suggests that targeting NRF2 can be a novel
therapy to mitigate inflammation, improve innate antibacterial defences
and restore corticosteroid responses in COPD.9 In keeping with this
C4XD has chosen to initially concentrate on COPD.
In Type 2 diabetes the body develops resistance to insulin, or produces
less insulin, resulting in high blood glucose levels. Many drug
treatments aim to increase insulin production; however this is often
done independent of the blood glucose levels, which can result in
hypoglycaemia which is dangerous and sometimes fatal.
GPR142 is a receptor predominantly expressed in pancreatic β-cells; it
mediates enhancement of glucose-stimulated insulin secretion.
Therefore, it is an exciting target for novel, safer, insulin secretagogues
with reduced or no risk of hypoglycaemia.
Over two-thirds of type 2 diabetics rely on injectable therapies, which
are associated with side-effects and compliance issues. As a result
many companies are working to develop oral versions of existing
treatments. Victoza (Novo Nordisk) is the market leading injectable
GLP-1 receptor agonist. It generated revenues of c $2bn in 2014.
Interleukin 17 (IL-17) is a cytokine that plays a crucial role in in
protecting the host from invasion by many types of pathogens,
mediating its action via its receptor, IL-17R.
Dysregulated IL-17 production can result in excessive pro-inflammatory
cytokine expression and chronic inflammation, leading to tissue
damage and autoimmunity. 11 As a result, it is a high value target for the
treatment of multiple diseases, including psoriasis, ankylosing
spondylitis, MS and rheumatoid arthritis.
Tecfidera (BIIB) is approved for the treatment of relapsing forms of MS. It
is thought to act by irreversibly modifying Keap-1, thereby increasing the
expression of NRF2. 10 The inclusion of a warning on its label for the rare
brain infection PML.
Bardoxolone methyl (Reata Pharmaceuticals/ ABBV), also an activator of
the NRF2 pathway, is in a Phase II study in pulmonary arterial
hypertension.
C4XD has designed its compounds to have significantly increased
selectivity and potency compared to other NRF2 pathway activators, and
also to reversibly bind to Keap-1. It believes this will result in both
improved efficacy and safety profiles.
C4XD has identified novel, orally available, lead molecules that activate
GPR142.
In 2014, the global prevalence of diabetes was estimated to be 9%
among adults; 90-95% of cases of diabetes are Type 2 (WHO). By 2018,
the drug market for diabetes is estimated to be $55bn (Bloomberg).
Success in either of its diabetes programmes could constitute a
significant market opportunity. C4XD has received grant funding from
Innovate UK for these projects.
C4XD used Victoza, along with other in-development GLP1 agonist
candidates, to develop orally available compounds, which it believes will
not only be efficacious but will also have reduced side-effects and will
improve compliance.
The majority of drugs targeting IL-17 are monoclonal antibodies reflecting
the size and complexity of the IL-17/IL17R engagement, which makes
targeting the IL-17 with small molecules difficult. Secukinumab (NOVN) is
approved and ixekizumab (LLY) is in registration (both for psoriasis).
Using its technology, C4XD has identified small molecules that can
selectively block the IL-17/IL-17R interaction with high potency. These are
conventional, drug-like compounds, for oral and/or topical use, which
would offer benefits over IL-17 antibodies which require injection. C4XD
aims to progress this programme towards optimisation and in vivo
validation over the coming months.
Source: C4X Discovery; Edison Investment Research. Notes: PML = progressive multifocal leukoencephalopathy
Sensitivities
C4XD is subject to the usual risks associated with drug development, including clinical development
delays or failures, IP protection, regulatory risks, competitor successes, partnering setbacks, and
financing and commercial risks. The biggest near-term sensitivity is the successful transition of the
Orexin programme from preclinical to clinical development, and its subsequent partnering. In
addition, as a novel technology, the platform requires validation. Although C4XD’s reported data to
date has demonstrated the lead compound’s increased selectivity for the OX1 receptor, whether
this will translate to a safe and efficacious drug in humans has yet to be established. C4XD’s
current development pipeline is focused on targets that have previously been validated clinically,
therefore reducing the risk profile to a certain extent.
Progress of the Orexin programme will provide validation of the drug discovery platform; influencing
C4XD’s negotiating position with future partners for this programme and others in development.
Likewise, repetition of the time- and cost-savings for lead candidate selection in the other discovery
programmes will confirm the findings with the Orexin programme, validating the platform’s premise
that it can substantially accelerate the drug discovery stage of drug development.
9
Mercado N, et al. (2014). Activation of transcription factor NRF2 signalling by the sphingosine kinase inhibitor
SKI-II is mediated by the formation of Keap1 dimers. PLoS ONE 9(29):e88168.
10
Jaramillo MC et al. (2013). The emerging role of the NRF-2-Keap1 signalling pathway in cancer. Genes &
Dev. 27:2179-2191.
11
Jin W et al. (2013). IL-17 cytokines in immunity and inflammation. Emerging Microbes & Infections. 2:e60.
C4X Discovery | 5 January 2016
8
C4XD is in the process of pursuing patents for its method to determine the 3D structures of
dynamic molecules; a patent has been granted in Japan with others filed in the US, Canada and
Europe. C4XD must also obtain IP protection for its development candidates. Further competitor
barriers arise from the significant degree of know-how required for the set-up of the NMR
experiments and the use of the software.
Finally, C4XD’s stock is tightly held; poor liquidity can result in increased volatility.
Valuation
Assigning a fundamental valuation to C4XD necessitates consideration of the inherent value of the
technology platform, pipeline candidates and potential future partnership deals. However, with a
unique platform and multiple early-stage candidates, this is not appropriate at this stage. The
experience with the candidate selection for the Orexin programme suggests the platform’s potential
to significantly shorten the drug discovery stage, although this will require repetition against more
than one target. Whether the technology will also lead to the selection of safer and more efficacious
drugs for use in humans has yet to be proven. However, an illustrative valuation of the lead Orexin
programme gives an rNPV of £21m, suggesting that this one programme alone largely supports the
current share price, leaving significant room for upside when the earlier-stage programmes and the
inherent value of the technology platform are considered.
For illustrative purposes therefore, we applied a risk-adjusted NPV analysis of the Orexin
programme. We arrive at an indicative rNPV of £21m based on a number of assumptions, including
successful completion of Phase I trials in 2018, peak sales ($1.4bn), launch dates (2023), royalty
rates (10%) and partnership deal metrics. Our indicative peak sales are based on the following
assumptions:

Prescription in speciality clinics for BED and on prescription for smoking cessation, therefore
targeting a smaller market but at a premium price: $500/month (US); $375/month (Europe);

For BED: 3.5% of patients with BED receive treatment at a speciality facility (c 0.5m patients
per year in the US and Europe). Peak penetration of 20% in the US and 15% in Europe,
achieved in 2029; constituting peak sales of c $530m (of note, Shire predicts peak sales of
$200-300m for Vyvanse in BED in the US alone, also indicating that it could even exceed this);

For smoking cessation: 8% of smokers will use pharmacological treatment to aid smoking
cessation (c 11 million patients per year in the US and Europe) and a three-month treatment
course. Conservative peak penetration of 7.5% in the US and 5% in Europe in 2029;
constituting peak sales of c $825m. For comparison, Chantix (Pfizer) achieved peak sales of
$883m in 2007; Chantix’s label includes a ‘black box’ warning due to its significant side-effects;
and,

7.5% overall probability of success. However, given that the premise of the C4XD technology
platform is an improved success rate, particularly in the transition from preclinical to clinical
development, one could argue for a higher probability of success. Increasing this to 15% (in
line with a Phase I product) would increase the rNPV to £39m (or 127p/share).
Exhibit 4: Indicative rNPV valuation of the Orexin programme
Product
Indication
Orexin
programme
BED and
smoking
cessation
Launch
2023
Peak sales
($m)
1,400
Value
(£m)
156
Probability
7.5%
rNPV
(£m)
21.0
NPV/share Assumptions*
(p/share)
67.6 Peak sales in 2029. 10% royalty. Includes deal milestone
estimates: $15m upfront in 2018; $12.5m on Phase II start
in 2019; $17.5m on Phase III start in 2020; $30m on NDA
filing/approval in 2022. These milestones are risk-adjusted.
Source: Edison Investment Research. Note: *Deal estimates benchmarked against deal data from BioCentury.
C4X Discovery | 5 January 2016
9
Exhibit 4 illustrates the Orexin programme’s indicative rNPV. This programme alone largely
supports the current share price (107.5p) and enterprise value (£25.5m), suggesting significant
room for upside when one considers the value of the earlier-stage pipeline and the technology
platform.
We note that in comparison to other drug discovery companies, C4XD appears comparatively
undervalued, for instance Verseon (VSN), with a current market cap of £309m. Verseon’s small
molecule drug discovery platform uses a computational modelling engine to design drug-like
compounds. According to its website the platform allows for the systematic design, synthesis, and
physical testing of multiple, high-quality drug candidates per programme, so ‘reducing the high
failure rate that plagues the rest of the pharmaceutical industry’. Like C4XD, its pipeline has yet to
enter clinical studies and therefore achieve clinical validation; it has with three preclinical
programmes in development for anticoagulation, diabetic macular oedema, and solid tumours.
Financials
C4XD reported cash of £7.5m at end-July 2015. Our model suggests that this should be sufficient
to fund operations through to the end of FY16. Revenues from collaborations amounted to £0.3m in
2015 (vs £0.6m in 2014). We forecast that collaborations will continue to provide stable, but modest
revenues in FY16e (£0.5m) and FY17e (£0.7m). Although our valuation model includes riskadjusted milestones from a partner for the Orexin programme, our financial forecasts do not include
any such income. Hence our forecasts include £3m of illustrative financing included as long-term
debt on the balance sheet in 2017.
Increased activity required to progress the discovery programme, along with the necessary rise in
headcount following the IPO, resulted in R&D spend of £3.2m in 2015 (vs £1.2m in 2014). In
keeping with this, we forecast £3.8m R&D spend in 2016 and £4.8m 2017, as the Orexin
programme enters clinical development, and the earlier stage pipeline progresses. Beyond this, we
assume that future R&D spend for the Orexin programme will be borne by a partner. G&A spend
also increased (£0.9m in 2015 vs £0.6m in 2014), reflecting costs incurred following the IPO; we
assume a gradual increase in the coming years. We forecast net loss of £4.3m in FY16 compared
with £3.1m reported in 2015.
C4X Discovery | 5 January 2016
10
Exhibit 5: Financial summary
2013
IFRS
2014
IFRS
2015
IFRS
2016e
IFRS
2017e
IFRS
736
(1)
735
0
(573)
(583)
(4)
0
0
(587)
(89)
(672)
(676)
195
(477)
(481)
619
(23)
596
(1,180)
(1,207)
(1,216)
(4)
0
0
(1,220)
(118)
(1,334)
(1,338)
220
(1,114)
(1,118)
312
(112)
200
(3,159)
(3,837)
(3,858)
(5)
0
0
(3,863)
49
(3,809)
(3,814)
750
(3,059)
(3,064)
468
(123)
345
(3,791)
(4,358)
(4,391)
(5)
0
0
(4,395)
68
(4,323)
(4,327)
0
(4,323)
(4,327)
655
(136)
520
(4,755)
(5,191)
(5,227)
(5)
0
0
(5,232)
0
(5,227)
(5,232)
0
(5,227)
(5,232)
Average Number of Shares Outstanding (m)
EPS - normalised (p)
EPS - normalised and fully diluted (p)
EPS - (reported) (p)
Dividend per share (EUR)
19.9
N/A
N/A
N/A
0.0
20.0
N/A
N/A
N/A
0.0
28.5
(10.75)
(10.75)
(10.77)
0.0
31.0
(13.95)
(13.95)
(13.96)
0.0
31.0
(16.87)
(16.87)
(16.88)
0.0
Gross Margin (%)
EBITDA Margin (%)
Operating Margin (before GW and except.) (%)
99.9
N/A
N/A
96.3
N/A
N/A
64.1
N/A
N/A
73.7
N/A
N/A
79.3
N/A
N/A
83
60
23
0
1,947
0
129
1,514
304
(127)
(127)
0
(2,144)
(2,144)
0
(241)
77
56
21
0
1,080
0
157
673
250
(270)
(227)
(43)
(2,220)
(2,220)
0
(1,333)
144
59
85
0
8,573
0
388
7,485
700
(749)
(749)
0
0
0
0
7,968
124
62
62
0
4,599
0
582
3,317
700
(1,060)
(1,060)
0
0
0
0
3,663
111
65
46
0
2,589
0
815
1,074
700
(1,247)
(1,247)
0
(3,000)
(3,000)
0
(1,547)
(489)
89
(195)
(14)
0
0
(89)
0
(698)
(68)
0
0
630
(733)
119
(220)
(7)
0
0
(119)
0
(960)
630
0
0
1,590
(2,425)
0
(750)
(85)
0
10,080
2,255
0
9,075
1,590
0
0
(7,485)
(4,407)
68
188
(9)
0
0
(8)
0
(4,168)
(7,485)
0
0
(3,317)
(5,215)
0
0
(20)
0
0
(8)
0
(5,243)
(3,317)
0
0
1,926
July
PROFIT & LOSS
Revenue
Cost of Sales
Gross Profit
Research and development
EBITDA
Operating Profit (before amort. and except.)
Intangible Amortisation
Exceptionals
Other
Operating Profit
Net Interest
Profit Before Tax (norm)
Profit Before Tax (reported)
Tax
Profit After Tax (norm)
Profit After Tax (reported)
£'000s
BALANCE SHEET
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Cash
Other
Current Liabilities
Creditors
Short term borrowings
Long Term Liabilities
Long term borrowings
Other long term liabilities
Net Assets
CASH FLOW
Operating Cash Flow
Net Interest
Tax
Capex
Acquisitions/disposals
Financing
Other
Dividends
Net Cash Flow
Opening net debt/(cash)
HP finance leases initiated
Other
Closing net debt/(cash)
Source: Company accounts; Edison Investment Research
C4X Discovery | 5 January 2016
11
Contact details
Revenue by geography
C4X Discovery Holdings
Manchester One
Portland Street
Manchester M1 3LD
United Kingdom
http://www.c4xdiscovery.com/
%
100%
UK
Management team
Executive Chairman: Dr Clive Dix
Chief Scientific Officer: Dr Craig Fox
Dr Dix was appointed executive chairman in November 2015, having previously
been non-executive chairman of the board. He has more than 30 years'
experience in the pharmaceutical and biotechnology industries. He was CEO
and co-founder of PowderMed, which was sold to Pfizer in 2006. Following postdoctoral roles and a period at Ciba-Geigy (now Novartis), Clive joined
GlaxoWellcome, where he became UK research director. Other previous roles
include senior VP of R&D at PowderJect Pharmaceuticals; chairman of the UK
BioIndustry Association; CEO of Convergence Pharmaceuticals (acquired by
Biogen); chairman of Crescendo Biologicals and chairman of Auralis (acquired
by ViroPharma). Dr Dix is currently chairman of Touchlight Genetics and
Calchan.
Dr Fox is an experienced biologist, having worked on and managed many drug
discovery and development projects during the last 18 years, from initial target
selection right through to investigating clinical efficacy and safety in Phase II
patient studies. Before joining C4XD, Dr Fox was director of respiratory research
at Pulmagen Therapeutics, a clinical-stage company spun out of Argenta in
2010. Craig was part of the Etiologics team that merged with Argenta Discovery
in 2004 and before this he worked for Bayer as a research scientist. He has a
PhD from Birmingham University and a first class biochemistry degree from the
University of Surrey.
Head of Discovery: Dr Thorsten Nowak
Chief Technical Officer: Dr Charles Blundell
Dr Nowak is an experienced pharmaceutical researcher, having joined C4XD
from AstraZeneca, where he worked for 16 years in drug design and project
management. He has a PhD from the University of Cambridge and a first class
chemistry degree from the University of Heidelberg, Germany and has worked
across a range of therapeutic areas and drug targets.
Dr Blundell is C4XD's co-founder and co-inventor of its core technology, having
jointly led the spin-out from the University of Manchester in 2007. He has been
awarded a number of grants from top UK research councils during his career and
has had more than 20 publications in leading scientific journals. Dr Blundell has
a Master’s degree and DPhil in biochemistry from the University of Oxford (Keble
College); he graduated in the top five of his peer group.
Principal shareholders
(%)
The Aquarius & related parties
Founders (Andrew Almond and Charles Blundell)
Aviva
Andrew Black
Baillie Gifford
Board
36
19
10
8
7
7
Companies named in this report
AstraZeneca (AZN); Takeda (4502); Evotec (EVT); Merck & Co (MRK); Shire (SHP); Sosei Group (4565); Biogen (BIIB); AbbVie (ABBV); Novo Nordisk (NOVO-B);
Novartis (NOVN); Eli Lilly (LLY); Verseon (VSN).
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