Focused on value creation

e-Therapeutics 20 September 2016 Update

e-Therapeutics

Focused on value creation

Interim update

Pharma & biotech

20 September 2016

Price

10.63p

Market cap

£29m

Net cash (£m) at end-July 2016

19.9

Shares in issue

268.3m

Free float

10.5%

Code

ETX

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.8)

(18.3)

(67.1)

Rel (local)

(15.4)

(27.2)

(70.2)

52-week high/low

30.2p

10.2p

Business description

e-Therapeutics is a UK-based drug discovery company that has developed a proprietary network pharmacology discovery platform. Its focus is now on commercialisation: securing partners for its discovery and development projects.

Next events

Preclinical data

H217/H118

First partnering deal(s)

2017

Analysts

Lala Gregorek

+44 (0)20 3681 2527

Daniel Wilkinson

+44 (0)20 3077 5734

e-Therapeutics is a research client of Edison Investment Research Limited

e-Therapeutics (ETX) is focused on driving value in its discovery platform. Costs will be reduced as the 17 product candidates in discovery as of July 2016 have been cut to a core five. Cash of £19.9m and future tax credits of c £6m, along with a reduction in cash burn, should fund ETX through to 2019. Legacy assets ETS6103 and ETS2101 will continue to be wound down with reduced costs; the company will look to out-license both. Validation of the platform is key to driving value and wider recognition; future deals, potentially in 2017, would enable this.

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

01/15

0.0

(9.7)

(2.9)

0.0

N/A

N/A

01/16

0.0

(11.1)

(3.2)

0.0

N/A

N/A

01/17e

0.0

(11.6)

(3.2)

0.0

N/A

N/A

01/18e

0.0

(8.9)

(2.3)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Discovery platform refocused

The stepping down of CEO Malcolm Young initiated a strategic review. The development pipeline was subsequently reduced from 17 product candidates as of July 2016 to a core five, which are in medicinal chemistry. With total costs of c £3m for getting a product candidate clinically ready, we anticipate a significant reduction in costs in FY18 from the streamlined pipeline. Additionally, legacy product candidates ETS6103 and ETS2101 are on hold and ETX will look to out-license both.

H117 results: Funded to inflection points

Cash of £19.9m at end July 2016 (£24.8m as of 31 January 2016), c £6m in expected tax credits and a reduction in costs going forward should allow ETX to operate until 2019 without a need to generate cash. The operating loss before goodwill was £7.6m compared with £5.9m for H116, demonstrating the increased external project discovery costs of £2.5m (H116: £0.9m). Current cash would enable ETX to complete development of its five preclinical candidates, at which point licensing partners will be sought.

Valuation: Deals needed to provide validation

Licensing or partnerships will prove pivotal in driving the value of the platform. Applying a historical industry benchmark of a $23m (c £16m) upfront per preclinical asset and assumed annual costs of c £10m, we calculate that the current market cap of £29m is supported by five non-risk weighted deals being secured over the next three years. Two deals per year with these economics would generate £18m operating profit and enable ETX to become self-funding. Execution risk is the key sensitivity. First deals are yet to be secured, thus there is no indication of potential deal terms or format. The first deal will be an important de-risking event. Upside would come from signing further deals, deals at a faster pace, or with better economics (particularly in commercially attractive areas).

Strategy in place to drive value

Since inception ETX has developed, strengthened and industrialised its proprietary network analysis platform from prototype to a “fully operational, highly engineered and efficient discovery engine”. The company is now well placed to validate this platform and drive value. Data produced from the five assets currently in development will be critical to ETX’s ability to generate value. The acquisition of Searchbolt earlier this year strengthens the company’s patent library and is a key component of the value creation strategy now in place. With the recent changes in management, we expect the appointment of a new CEO by year end.

Exhibit 1: e-Therapeutics’ pipeline

Stage

Asset

Target

Comment

Preclinical assets from proprietary platform

ETS2300

Haematological cancers: telomerase inhibition

ETS2300 aims to disrupt as many aspects of telomerase activity as possible; molecules identified are c 1,000-fold more potent than small molecules in killing cancer cells.

ETS3100

Inflammation: anti-TNFα

Small molecule that could potentially avoid issues with biologic therapies (eg inconvenience of administration, development of drug-resistance). Hit rate >40% due to database completeness.

ETS2400

Cancer: hedgehog pathway inhibition

Hedgehog pathway inhibitors with nanomolar potency, which importantly do not bind the SMO protein, thus potentially addressing drug resistance issues by rescuing existing SMO inhibitors (approved for basal cell carcinoma) from therapeutic resistance, or displacing them.

ETS2500

Tryptophan catabolism

The amino acid tryptophan is catabolised by the enzyme IDO in tumour tissue. Inhibition of this may be beneficial in solid cancer treatment.

ETS5200

Broad-spectrum antivirals

Novel small molecule programme initially focused on influenza: active against multiple rather than single strains. Potential to extend platform to other high-profile viruses with high unmet medical need, eg Zika, Ebola and JCV (John Cunningham Virus).

Legacy assets

ETS2101

Cancer: apoptosis

Phase I studies determined maximum tolerated dose for infused formulation (somnolence main side effect). Data indicating selective immune-potentiation effect shifted focus onto reformulation as an oral drug/one that does not require steroid pre-treatment.

ETS6103

Major depressive disorder

Detailed analysis of Phase IIb confirms antidepressant effect in non-SSRI responders with more benign safety/better tolerability than tricyclic antidepressants (current second-line therapy). Data did not show statistical non-inferiority to amitriptyline however.

Source: e-Therapeutics; Edison Investment Research

While five preclinical candidates have been announced so far, we expect additional assets to enter development as the platform continues to generate hits. A further five earlier-stage assets are in development, on which ETX intends to complete assay and hit confirmation before progressing the most promising into medicinal chemistry. Additionally, we expect at least one of the five candidates to enter preclinical development in H118. External project spend in H117 was £2.5m (H116 £0.9m), attributed to both the increased number of projects and their maturation during the period, in particular five product candidates entered medicinal chemistry.

Legacy product candidates ETS6103 and ETS2101 are no longer a core focus for ETX. While ETS2101 is wound down, we still expect costs relating to it in H217. The acquisition of Searchbolt was written down as goodwill to the sum of £2.1m, which was broadly matched and offset by changes in working capital in the period. Cash burn in H117 was £4.9m with a £2.6m tax credit received in June. The company expects future R&D tax credits of c £6m. We have made minor changes to our forecasts to better reflect R&D, tax and acquisition costs.

ETX is well funded to create value from its proprietary network pharmacology discovery platform. Preclinical data over the next 12 months will be key in generating interest from external partners, while potential deals in the latter half of 2017 will provide real validation for both the platform and the company.

Exhibit 2: Financial summary

£'000s

2015

2016

2017e

2018e

Year ending 31 January

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

R&D

(8,549)

(9,965)

(12,500)

(7,500)

G&A

(1,520)

(1,375)

(1,434)

(1,475)

EBITDA

 

 

(9,997)

(11,267)

(11,753)

(8,895)

Operating profit (pre GW and except.)

 

 

(10,069)

(11,340)

(11,833)

(8,975)

Share-based payment

(106)

(215)

(250)

(250)

Operating profit

(10,175)

(11,555)

(14,184)

(9,225)

Net interest

357

271

200

110

Profit before tax (norm)

 

 

(9,712)

(11,069)

(11,633)

(8,865)

Profit before tax (as reported)

 

 

(9,818)

(11,284)

(13,984)

(9,115)

Tax

2,041

2,570

3,188

2,625

Profit after tax (norm.)

(7,671)

(8,499)

(8,446)

(6,240)

Profit after tax (as reported)

(7,777)

(8,714)

(10,797)

(6,490)

Average number of shares outstanding (m)

264.3

264.4

266.4

268.3

EPS - normalised (p)

 

 

(2.9)

(3.2)

(3.2)

(2.3)

EPS - as reported (p)

 

 

(2.9)

(3.3)

(4.1)

(2.4)

Dividend per share (p)

0.0

0.0

0.0

0.0

EBITDA margin (%)

N/A

N/A

N/A

N/A

Operating margin (before GW and except) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed assets

 

 

733

804

909

1,014

Intangible assets

637

740

835

930

Tangible assets

96

64

74

84

Current assets

 

 

37,424

28,783

18,477

12,740

Stocks

0

0

0

0

Debtors

3,602

3,941

1,500

1,500

Cash

33,822

24,842

16,977

11,240

Other

0

0

0

0

Current liabilities

 

 

(1,133)

(1,156)

(1,500)

(1,500)

Creditors

(1,133)

(1,156)

(1,500)

(1,500)

Other creditors

0

0

0

0

Short-term borrowings

0

0

0

0

Long-term liabilities

 

 

0

0

0

0

Long-term borrowings

0

0

0

0

Deferred taxation

0

0

0

0

Other long-term liabilities

0

0

0

0

Net assets

 

 

37,024

28,431

17,886

12,254

CASH FLOW

Operating cash flow

 

 

(10,942)

(11,204)

(8,968)

(8,895)

Net interest

642

329

236

155

Tax

1,087

2,027

2,570

3,188

Capex

(31)

(6)

(50)

(50)

Purchase of intangibles

(158)

(138)

(135)

(135)

Acquisitions/disposals

0

0

(1,517)

0

Financing

77

12

0

0

Dividends

0

0

0

0

Other

0

0

0

0

Net cash flow

(9,325)

(8,980)

(7,865)

(5,737)

Opening net debt/(cash)

 

 

(43,147)

(33,822)

(24,842)

(16,977)

HP finance leases initiated

0

0

0

0

Other

0

0

(0)

0

Closing net debt/(cash)

 

 

(33,822)

(24,842)

(16,977)

(11,240)

Source: Edison Investment Research, e-Therapeutics

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by e-Therapeutics and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by e-Therapeutics and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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