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e-Therapeutics provides a clear road-map to value creation

The struggle for any ambitious biopharma group is finding sufficient cash to take a breakthrough treatment to the point where it maximises value for the company and its investors. For e-Therapeutics, the funding silver bullet was fired in March when it successfully concluded a £40mln cash call

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The struggle for any ambitious biopharma group is finding sufficient cash to take a breakthrough treatment to the point where it maximises value for the company and its investors.

For e-Therapeutics (LON:ETX), the Oxford and Newcastle-based pioneer of network pharmacology, the funding silver bullet was fired in March when it successfully concluded a £40mln cash call.

Reflecting a strong interest in the story, the new stock was issued at a modest premium to the prevailing share price, while a number of new blue-chip institutions were ushered onto the shareholder register, including Aviva, which now has just over 16% of the firm.

Of course, those who have followed the e-Therapeutics story will know the group stands out among its peers as having an impressive institutional base, led by Invesco, which holds 49.8%.

The £40mln added to what the group already had in the bank gave it £48mln, and means it can take its lead therapy, cancer treatment ETS2101, through to the conclusion of phase II clinical trials by 2017.

The risk-reward equation suggests this is the optimal point for value creation. There have been examples where hubris has trumped common sense and small firms have shouldered the huge costs of a final stage trial to disastrous effect.

Bringing in big pharma at the successful conclusion of phase II studies mitigates the financial risk as well as potentially replenishing the coffers with significant upfront and milestone payments, as well as possibly a contribution to historic costs. 

For a drug that makes it onto market, royalties can provide a significant income stream for the smaller firm.

This is the way the model should work. However, London’s investors, scarred by past failures (and there have been too many to list), have tended to be very sparing with their investment in the sector and consequently unwilling to bankroll a drug to this value creation sweet spot.

Of course, this has made for a meagre existence for many of the scores of smaller firms trying to eke out enough cash to get them to the next landmark.

And it is why e-Therapeutics’ successful cash call stands out as extraordinary in the current tight equity market.

Whether it signals a change in mind-set is not known, said Dr Daniel Elger, chief financial officer of e-Therapeutics.

But what he, chief executive Malcolm Young and development director Steve Self, were able to deliver was a coherent road map through the clinical trial process – one it is hoped will, ultimately, create significant upside for investors.

“We were fortunate in having very good support from existing investors – Invesco already had a large stake in the business – and we also managed to garner support from important new investors such as Aviva,” said Elger.

“We found there was support for our story – how general that is I don’t know.

“Everyone still says what a tough funding climate it is. But it shows if you have the right story and the right proposition then there is money to support an enterprise.

“I think we had a very clear proposition and rationale that set out what we could achieve if we raised this money.”

The primary goal is to fund the development of cancer treatment ETS2101 through further trials, including a proof-of-concept phase II study in its lead indication of glioma, a type of brain tumour.

Around £25m has been earmarked to pursue the principal glioma indication, together with four to six additional solid tumour indications.

“We had some particularly encouraging pre-clinical data in the brain cancer setting,” said Elger.

“This is a drug we know crosses into the brain and there are a lot of cancer drugs that might work against brain cancer that never get into the brain.”

A phase I trial in the US is currently recruiting up to 24 patients  with brain cancer, while a second trial in the UK is enroling up to  45 patients with a variety of solid tumours.

e-Therapeutics announced some preliminary findings from its trials with its annual results this week, which were hugely encouraging. Key  data on dosing and safety are expected from the US trial in the fourth quarter of this year and from the UK trial in the first three months of 2014.

Much of the balance of the cash raised will be used to propel new drug discovery programmes forward using the company’s network pharmacology platform.

This cutting-edge science underpins a new way to discover compounds, which was designed with the aim of reducing the number of drugs that fail in clinical trials.

As impressive is the ability to find completely new medical uses for products already out on the market, and the potential to derive medicines for diseases that are currently poorly treated or not treatable at all.

According to City research firm Edison, the focus of new drug discovery will be firmly on cancer and central nervous system disorders. 

Overlooked in all of this is ETS6103 for depression, e-Therapeutics’ most advanced drug candidate, which is earmarked to enter phase IIb trials this quarter.

“If the results are positive then we will look to a partnering deal,” said Elger.

However, the fundraising has put the company in the enviable position of being able to choose exactly when it teams with other organizations on ETS6103 or any subsequent drug candidates that trickle out of the pipeline.

While its cornerstone investors are aware of e-Therapeutics’ huge potential, the current share price, even after a decent bump in value, suggests wider market is yet to join the dots. 

Panmure Gordon’s valuation of 70 pence is exactly double the current share price. Analyst Savvas Neophytou concludes: “e -Therapeutics possesses a technology platform that could revolutionise the way the pharmaceutical industry conducts drug development. 

“The platform is increasingly accepted as credible, and the company has intellectual property that puts it in a position of strength, which may necessitate others paying it a licensing fee or, alternatively, result in the company being acquired.”

Quick facts: e-Therapeutics plc

Price: 3.34 GBX

AIM:ETX
Market: AIM
Market Cap: £8.98 m
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