Pinned straw:
Recce Pharmaceuticals
(ASX: RCE, FSE: R9Q)
Company LinkedIn: (24) Recce Pharmaceuticals Ltd: Overview | LinkedIn
Company Website: Home | Recce Pharmaceuticals
Recent Coy Presentation: Sepsis Alliance Summit 2024 - Recce Pharmaceuticals - CEO James Graham (youtube.com)
The Investment Thesis (Summary):
1. People – this is a family business with skin and soul in the game, CEO is the largest investor and grandson of the inventor who is the largest shareholder.
2. Science – spectacular test results, novel mechanism of action, offering strong patent protection and it is solving one of if not the greatest global health challenge (AMR).
3. Value – an opportunity to disrupt and dominate a US$50b market with extended monopolistic patent protection and accelerated regulatory path to market (<4yrs).
4. Capital – prudent capital raising, use of tax rebates and financing to date to minimise dilution will provide the capital needed to progress clinically to continue.
Base valuation = $10.22 (success with current leads only)
Bear valuation = $0 (complete failure is a significant risk)
Bull valuation = $25.86 (a Blockbuster of Blockbuster drugs)
THE PROBLEM:
Infections are a major and universal medical issue, one we don’t consider much due to having antibiotics, without which the simplest of medical procedures or injuries would be life threatening. However, we are in an arms race against nature due to antimicrobial resistance (AMR) that results in the need to continually evolve and develop new antibiotics to remain effective.
Companies in this industry face the following issues:
1. The time, expense and risk to develop new antibiotics is significant.
2. The effective life of antibiotics in market is short due AntiMivrobial Resistance (ARM).
3. Certain bacteria are highly resistant (ESKAPE).
4. It’s a highly competitive market which limits margin opportunities.
5. The market is mature, so offers only low growth.
6. Ability to patent protect a product is limited due to lack of novel approaches (no new class since 1987).
As such viable investments are limited when it comes to antibiotics because of this its an area that attracts little investment to develop novel and new solutions.
AMR: The smart money in medicine: the silent pandemic | ASX:RCE, OTC:RECEF (proactiveinvestors.com.au)
About Antibiotics:
· Antibiotics - Mechanisms of Action (Classification) and Antibiotic Resistance (youtube.com)
· Gram Positive vs. Gram Negative Bacteria (youtube.com)
THE SOLUTION:
A drug that is able to overcome antimicrobial resistances and can be effectively patented would have significant value due to an ability to dominate the market for a considerable period of time. Recce Pharmaceuticals R327 drug candidate address this by having a novel approach:
1. Mechanism Of Action (MOA): R327 has a unique mode of action that has been investigated against a wide array of Gram-positive, Gram-negative and mycobacterial species (including ESKAPE pathogens) and shown to be quick and effective.
2. The MOA is synthetics based rather than natural like current antibiotics, so natural resistance is non-existent and the MOA makes evolved resistance highly unlikely with repeated use tests showing no evolved resistance developing.
3. Broad Spectrum: It has a wide application and effectiveness against growing and non-growing cells makes it well suited to a new first line anti-infective treatment.
4. First Line: Due to the difficulty in identifying the exact infection type in most cases, broad spectrum antibiotics are used initially rather than specialised antibiotics. Being a first line treatment increases use in a clinical setting significantly over specialised antibiotic treatments.
5. Novel: Due to the unique MOA, R327 has strong patented protection which eliminates direct competition from similar MOA’s.
6. Patent Extension: Addressing antimicrobial resistance is a global health priority and has received Qualified Infectious Disease Product (QIDP) in the US under the Generating Antibiotics Initiatives Now (GAIN) Act, which adds 10 years to exclusive marketability and fast track approval.
Recce Pharmaceuticals have developed two primary drug candidates: RECCE® 327 for bacterial infections (in clinic) and RECCE® 529 for viral infections (pre-clinical, not considered for this analysis).
RECCE® 327 may be administered for intravenous, topical, nasal, oral and inhaled use. RECCE® 327’s universal mechanism of action has a patented ability to continuously kill bacteria without tendency for the emergence of resistance, even with repeated use, indicating a unique ability to combat antibiotic resistant superbugs
THE SECRET SOURCE:
R327 is a Synthetic antibiotic (technically its an anti-infective not an antibiotic due to not being naturally derived) so has an advantage over natural antibiotics which have been around for a long time and bacteria has developed to be resistant. Also R327 applies a novel approach, it shuts down the ATP synthesis of bacteria and due to bacteria having a high internal pressure they burst and lose viability. This pressure differential is unique to bacteria so normal pressures human body cells are not affected.
R327 – Mechanism of Action (how it works): shut down the ATP synthesis
· STAGE 1 - R327 permeabilizes cell membrane and enters the cell
· STAGE 2 - R327 interrupts bacterial cellular energetics via ATP synthesis
· STAGE 3 - Cellular division & non-dividing cell functions are disrupted
· STAGE 4 - R327 is rapidly and irreversibly bactericidal
This is a New Class of antibiotics, there hasn’t been a new class since 1987, so R327 has a blue water opportunity in what is currently a red water market.
R327 is in Phase 1/2 clinical studies and seeking IND for Phase 3 in the US, as such it has been shown to be clinically safe and efficacy with optimal dosage trials the current focus. In lab testing has show it to be highly effective and it is approved for use by the TGA via Special Access Scheme – Category A, so the expectation is that it will progress through Phase 3 without efficacy or human safety issues (positive Phase 1/2 results on this to date).
R327 is also included on The Pew Charitable Trusts’ Global New Antibiotics in Development Pipeline as the sole synthetic polymer and sepsis drug candidate in development.
THE MARKET:
US$39.6b in 2013 according to the prospectus.
US$47.8b Antibiotics sales in 2024 (average of 5 market research sources):
· Antibiotics Market Size To Hit USD 71.05 Billion By 2032 (precedenceresearch.com)
· Antiviral Drugs - Worldwide | Statista Market Forecast
· Global Antibiotics Market Size, Share & Industry Growth Analysis (bccresearch.com)
· Antibiotics Market Size, Share, Growth & Trends Report 2030 (grandviewresearch.com)
· Antibiotics Market Size, Share, Growth & Trends | Forecast, 2032 (fortunebusinessinsights.com)
Amoxicillin, a leading antibiotic had sales of US$4.7b in 2021, expected to grow to US$5.5b by 2029 (Amoxicillin Market Share, Drivers & Research Report | 2029 (databridgemarketresearch.com))
Cost of AMR is US$55b a year in US (US$20 health care, $35b productivity).
See market analysis for each current targeted condition under the respective condition below.
THE BUSINESS MODEL:
RCE aims to use its unique Mechanism Of Action (MOA) to test, develop and manufacture treatments for initially a range of infectious condition. It has identified a lead candidate - R327 and lead conditions (UTI, Sepsis, Wound, Burn and DFI) for the use of this MOA to focus on commercialising as a priority and proof of concept for a pipeline of other bacterial and viral treatments.
Prospectus (p25): Initially, Recce aims to primarily focus on the regulatory approval of RECCE antibiotic 327 for the treatment of sepsis (blood poisoning), and secondarily gastritis (inflammation in the stomach) in humans. However, it is anticipated that the additional opportunities available in RECCE antibiotic 355 will also be explored, against diarrhoeal-causing E. coli in the human intestine
RCE makes the R327 compound at their own Macquarie Park facility to provide for clinical studies with a US manufacturing facility planned. This supports trials and retains control of their patented manufacturing method and development techniques.
Targeting Urinary Tract Infections (UTI’s) and related Sepsis conditions with R327 Intravenously which is a major health issue for AMR’s and the need for a broad based anti-infective given challenges and time needed to diagnose.
Targeting Diabetic Foot Ulcer with topical application, have the support of the Indonesian Government to accelerate approval and use R327 Topical for Diabetic Foot Ulcer which is a major health issue in Indonesia. This provides a path to revenue in a few years.
The topical application also targets Wound and Burn Infections which is attracting attention from the US Department of Defence which has provided non-dilutive funding support. There is a large number and value of grant funding available in the US that is accessible for non-US companies which RCE is seeking along with clinical partners by attending key BioTech conferences in the US (eg BioUS which they have attended for several years running).
RCE is using a lead indication approach into key infection types to achieve clinical validity for their technology and keep development costs low until the market recognises the value and capital becomes cheaper. They can then branch out into other infection areas and leverage previous testing results to reduce the time and cost to bring to market.
Prospectus (p26): The opportunity and need for a successful outcome of RECCE antibiotics is emphasised in the fact that no new class of human antibiotic has come onto the market since 1987. The major pharmaceutical companies which normally provide the drive and funding for new research have assessed the development of new nature-based antibiotics as unviable, based on the perceived inevitability of antibiotic resistance from superbugs.
Prospectus (page 24): Listed 31 December 2015
Significant global government support on offer:
· US$2.2m form US Department of Defence
· Governments globally incentivising research specifically into antibiotic resistance (UK bid to battle antibiotic resistance yields first subscription-style plan | BioPharma Dive)
· The Next Pandemic (The pipeline of new antibiotics is drying up. A bill in Congress aims to change that. | BioPharma Dive)
· Biomedical Advanced Research and Development Authority provided about $112 million in funding to develop Zevtera (FDA approves new antibiotic for several hard-to-treat infections | BioPharma Dive)
Path to Market: Unknow – but likely to partner due to large capital requirement for Phase 3
THE PEOPLE (TEAM):
Mix of: Family unity, entrepreneurial spirit, business acumen, marketing experience and the required Biotechnology industry experience and expertise needed for the complicated journey.
Dr John Prendergast (Executive Chairman): US based, Biotech US experience of capital markets and approval process
Dr Prendergast is currently Non-Executive Chairman and Co-Founder of Palatin Technologies Lead Director of IncNighthawk Biosciences, previously a member of the board of the life science companies, Avigen, AVAX Technologies and MediciNova Inc and was a Managing Director of The Castle Group Ltd., a New York medical venture capital firm.
During his career, Dr Prendergast has been responsible for the approval of three (3) New Drug Applications.
James Graham (MD & CEO): Founding investor (participated in all capital raises plus bought shares on market), bought 500k shares on market in June 2023 ($307k).
Appointed CEO on 28 Aug 2020 (previously ED)
Founding Investor: Closely involved in the early growth and direction of Recce - initiated and facilitated funding
Grandson of the founder Dr Graham Melrose
Business success: see Quickboats note at bottom.
Prospectus Info: Committee-member of W.A. Angel Investors; entrepreneurship and marketing Previously, General Manager of start-up marine Company with sales in Australia, Asia and Europe
Recce Pharmaceuticals doses highest cohort in phase I/II UTI/Urosepsis trial (youtube.com)
The Future of Antibiotics: How Recce Pharmaceuticals is Leading the Way (youtube.com)
Emergence 2024 Sydney - Recce Pharmaceuticals (ASX:RCE, FSE:R9Q) (youtube.com)
Michele Dilizia (CSO): conducted founding clinical testing
Co-founder & related to both James Graham and Graham Melrose
Appointed CSO 30 Sep 2020 to replace Dr Graham Melrose in the role.
Ms Dilizia is a Qualified Medical Scientist with specialisation in medical microbiology. Previously, she had a successful executive career in public relations and marketing for a leading retail chain.
Ms Dilizia was a market research consultant, which included marketing development of health-care and pharmaceutical products.
Dr Justin Ward (ED): Chemist, quality management & product development
Dr Ward is qualified chemist with specialisation in pharmaceutical quality management and product development.
Before Recce Pharmaceuticals, he held a technical speciality and special project leadership role with Pfizer Pharmaceuticals, involving providing data for the regulatory submissions to the FDA and TGA.
After Pfizer, he was the Laboratory Manager for Solbec, involving, again as presently, drug specifications and pharmaceutical trials for the ASX-Listed company.
Most recently, he was Quality Manager at Phebra and responsible for product quality and release of all drugs of the company with the TGA.
Dr Alan Dunton (NED): Chief Medical Advisor
serving as president and chief executive officer at Panacos Pharmaceuticals, Inc., Metaphor Pharmaceuticals, Inc., and chief operating officer at Emisphere Technologies, Inc.
served in several positions at Johnson and Johnson including president and managing director at the Janssen Research Foundati
has been responsible for the approval of approximately 20 New Drug Applications; an amalgamation of prescription and OTC products.
Mr Alistair McKeough (NED): Experienced executive and solicitor
extensive experience in a variety of private and listed corporations across many sectors, including professional services, technology, financial services, charities, health, biotech, child care and education.
He recently stepped down as Managing Director of a legal practice specialising in equity capital markets and advice to listed companies and as part of the senior leadership team at share registry, Automic Group
Dr Graham Melrose (Former - Executive Chairman BSc(Hons), PhD, MBA, FRACI, CChem, FAICD)
3 July 2020 completed his service agreement as CRO and resigned (retired – but he didn’t want to be called retired) as ED (aged 87).
decades of research and peer reviewed journal articles on synthetic chemistry, including some eight years as Head of Research at Johnson & Johnson (Australia)
details from prospectus:
· Founder of Recce (2008) and inventor of RECCE antibiotics
· Previously, founded Chemeq Ltd and under his leadership and R&D direction, achieved over a three-year period, the top capital gain of all companies listed on the ASX, and an average market capitalisation of approximately $500 million.
· Earlier, a senior academic in the University of NSW’s Department of Applied Organic Chemistry; visiting research scientist at Oxford and Munich universities
· Executive Director and Chief Research Executive of Johnson & Johnson (Aust) Pty Ltd in Sydney, with global responsibilities, particularly in the Asia-Pacific
· Established and operated for some ten years, an industry-leading marketing consultancy
Graham Melrose (Founder): 30.4m shares held at time of resignation but 12.2m performance rights issues subsequently and had sold down 1.6m shares by 30 Sep 2020 when Top 20 shareholder update was issued and sold down another 3.9m shares by 18 Sep 2023 (18.8% of company held). Prior to resigning he had not sold any shares.
Andre Serobian (Commercial Director): started in May 2023
(27) Andre Serobian | LinkedIn
Insider Ownership: 23% Family owned
Leadership Investment in Company (share trades pivot table)
Share (Value):
Shares (Quantity):
From 2016 Annual Report: Performance Shares
Note that shares exceeded $1.20 in June 2020… There were unusually high volumes of trade but no changes in director interests or significant price sensitive announcements since April and early May. However note that the market was recovering from Covid lows and ultra low interest rates at the time and increased interest in BioTech’s probably drove most of the price appreciation in line with similar companies. So it looks like dumb luck on achieving share price performance hurdles due to market circumstances rather than any sign of share price manipulation but without knowing who exactly the buyers were it is inconclusive.
26/6/20 Announcement (Conversion of Performance Shares): 7,398,174 Class C performance shares converted.
17/8/20 Announcement (Conversion of Performance Shares): 8,754,423 Class D performance shares converted.
INVESTMENT THESIS:
The Investment Thesis:
1. People – this is a family business with skin and soul in the game, CEO (the initial and largest investor) and CMO are family of the Founder Inventor (largest shareholder).
2. Science – spectacular test results, novel mechanism of action, offering strong patent protection and it is solving one of if not the greatest global health challenge (AMR).
3. Value – an opportunity to disrupt and dominate a US$50b market with extended monopolistic patent protection and accelerated regulatory path to market (<4yrs).
4. Capital – prudent capital raising, use of tax rebates and financing to date to minimise dilution will provide the capital needed to progress clinically to continue.
People
Founded by Graham Melrose who had previously founded Chemeq which subsequently failed following his loss of control. His grandson James Graham (now CEO) who had successfully sold a folding boat start up provided the initial funding (and ongoing, way more than gross income from positions). Michele Dilizia (CMO, Co-founder), also a family relative to Graham, provided the initial lab support and work to test and took over as CMO from Graham when he retired having completed his 5 year post IPO commitment at aged 87.
In addition to significant skin in the game (25.2% insider ownership, 22.8% Family), there is also an element of family pride invested in the success of RCE following the failure of Chemeq. The change in business direction that came from the loss of control at Chemeq has been strongly resisted through the development of RCE and so the downside of dilution is far greater than the common financial considerations.
Science
Testing to date has shown R327, the lead candidate being tested for UTI’s, infected burns and Diabetic Foot to be safe for human use, fast and effective in eliminating bacterial infections and most importantly it has shown no bacterial resistance. Furthermore it has shown this in testing across a broad range of bacterial infections including the so called ESKAPE pathogens, which are highly resistant to current antibiotics.
R327 has been awarded by the TGA Special Access Scheme – Category A for use in Australia for it’s topical application to treat patients with AMR infections that are not able to be treated with current antibiotics. Also, it has been awarded Qualified Infectious Disease Product (QIDP) in the US which adds 10 years to exclusive marketability and fast track approval, reflecting both the importance of health issue being addressed and the FDA’s confidence in R327’s efficacy.
Both of these health authority classifications are extremely uncommon and provide significant credibility to the science. Hence the science has been significantly de-risked when compared to other Phase 1/2 drug candidates.
Value
The antibiotic market is one of the hardest therapeutic markets in health for companies to invest in due to the high cost of development and high levels of competition limiting market success and due to ARM, the short effectiveness of most therapeutics limiting time in market. All antibiotics are naturally based and there hasn’t been a new class of antibiotics since 1987.
RCE has a good shot at fully disrupting the market with a new class of anti-infectives (synthetic rather than nature based). These don’t have the AMR issues that plage antibiotics and due to being synthetic can be manufactured rather than needing to be grown, so produced at greater scale and efficiency. If proven to be at least as effective as current antibiotics, RCE’s lead compound R327 would have competitive advantages over current antibiotics even before taking into consideration AMR issues.
Capital
RCE is a few years from commercialisation (2-4 years for current leads) and will need additional capital, but is well placed to find a clinical partner to help them. Owners and Mangers are very sensitive to dilution, so will minimise it and compared to the value multiples achievable, dilution will have only a minor impact on long term returns.
Astute use of R&D tax rebates (43.5% on R&D spend) and being able to get overseas findings so that research required overseas also attracts rebates will reduce capital required significantly. In addition their partnering with EndPoint Capital to borrow non-dilutive funds against future R&D rebates show innovation and support from a financial provider that will accelerate R&D work reducing the amount of dilutive capital required. In addition, non-dilutive grants such as that from the US DoD will likely provide an increasing source of capital.
This and the support for capital raises from existing investors is particularly important due to the poor support for BioTech investment in Australia as reflected in the current share price. The general global lack of capital for higher risk investments which has been in place since mid-2021 and the fact that the Antibiotic market is overlooked by BioTech investors and large pharma because the economics of traditional Antibiotics is very poor.
Other
Cash Flow and Capital Access: RCE is past the “valley of death” which Biotechs go through, it has access to capital at reasonable rates via R&D rebates and financing as well as current investor support. 4C information will continually show the company as running out of cash in the next few quarters, but R&D financing will bridge much of the gap. That said, capital raisings will continue to be needed and could be at a steep discount, but they will not be value destroying in their urgency or lack of support plus these funds can be leveraged via non-dilutive rebates and grants (eg US DoD granting US$2.2m for spray on for burn wounds).
Current Price: Short (<1 yr) Vs Long (>1 yr) term money, the price will trade by announcement as short-term traders bet on clinical results and create large up and down movements. However, most of the money (including insiders) is long term, so liquidity is low with the majority of the shares held long term which exaggerates the price movements short term. So significant pull backs from announcement highs are likely, but price lows will move up with clinical progress.
VALUATION:
Value will monetised in one of 3 common ways:
1. IP asset sale: company is sold (bought out)
2. Collaboration/Licence: A combination of up front and milestone payments plus royalties from a partnership with a major pharma company to take the IP to market (or several divided by different treatment applications and or jurisdictions).
3. Commercialise: The company takes the product to market directly, managing manufacture and distribution globally.
A combination of Commercialise and Collaboration is probably most likely for RCE as they roll out approvals for different treatments in different jurisdictions and licence those too big to manage and use smaller jurisdictions (eg Australia and Indonesia) to support ongoing development and clinical application. Either way, the value of the company will be in reference to the total commercial value of the treatment, hence I will use a full commercialised approach as a base plate for value:
BULL Case (It does what they claim) FULL COMMERICALISATION
Taking just the commercial opportunity of the advanced clinical stage application of R327 into account, which have been de-risked by showing efficacy and safety.
The 2030 market opportunity is:
· Urinary Tract Infections (intravenous) ~ US$14.0b
· Sepsis (intravenous) ~ US$6.2b
· Wounds & Burns (topical) ~ US$8.4b
· Diabetic Foot Ulcer (topical) ~ US$11.3b
Total sales opportunity of US$37.1b, which if we assume that R327 would be well established and leading the market in 5-8 years, it could have at least 25% of that total market (US$9.3b sales). Being a synthetic drug it is easier and cheaper to produce than Antibiotics, so Net Margins of 40% with an effective monopoly due to patents (to 2041) are likely.
NPAT US$3.7b (A$4.9b @ 0.75 FX rate)
VALUE (8 years): A$49.5b (at a PE of 10) low PE to take into account limited patent life
Shares = 667m (2 x 222m current including Performance and Option) 50% dilution
SP (8 years) = $111.20
SP (now at 20% discount rate) = $25.86
A$133m current value (At $0.60 per share including options and performance rights)
185x return on current price of $0.60 in 8 years.
BASE Case (Lead indication success only) FULL COMMERICALISATION
R327 is well placed to be the dominant First Line Anti-Infective within 5-8 years so should have sales at least equal to the leading drug Amoxicillin which is expected to have sales of US$5.5b by 2029 (less than 10% of the market). Being a synthetic drug it is easier and cheaper to produce than Antibiotics, so Net Margins of 40% with an effective monopoly due to patents (to 2041) are likely.
NPAT US$2.2b (A$2.9b @ 0.75 FX rate)
VALUE (8 years): A$29.3b (at a PE of 10) low PE to take into account limited patent life
Shares = 667m (3 x 222m current including Performance and Option) 66% dilution
SP (8 years) = $43.96
SP (now at 20% discount rate) = $10.22
A$133m current value (At $0.60 per share including options and performance rights)
73x return on current price of $0.60 in 8 years
NOTE: This assumes they take it to market globally, but partnering would be more likely, which would result in less dilution (less capital required) and less NPAT, but the return multiple is still likely to be well over 100 with royalties averaging around 10% for BioTechs plus milestone payments in the billions likely if they fully deliver.
BEAR Case (It FAILS to do what they claim or harmful side effects)
VALUE: NIL
Without a pivot in terms of application (which is possible and being explored against viruses), the IP will not be worth what it costs to develop.
Comparative Deals & Values: IP Asset Sale or Collaboration/Licence
· Spero Therapeutics (GSK will pay US$66m upfront, US$525m milestone payments +Royalties): Repeating Phase 3, antibiotic targeting complicated UTI’s. Note Spero was struggling to survive having their initial Phase 3 knocked back due to deficiencies and Spero needed to partner to proceed (GSK buys into Spero’s comeback plan | BioPharma Dive)
· Paratek Pharmaceuticals (Novo Nordisk will pay US$123m upfront, assume Paratek’s US$164m debt and receive US$45 in milestone payments): takeover for struggling Paratek that was seeking to commercialise Nuzyra for bacterial skin and pneumonia infections (Antibiotic maker Paratek, low on cash, agrees to a buyout | BioPharma Dive)
· Entasis (Innoviva who owns 60% merged at a US$113m value): successfully completed phase 3 but struggling (Innoviva buys AstraZeneca antibiotic spin-out Entasis (fiercebiotech.com)) it has since been FDA approved (FDA approves new antibiotic for hospital-acquired pneumonia | BioPharma Dive)
NOTE: The deals provide minimal insight to RCE’s value other than a potential base line which the current market value is at or well below. The deals are for companies in distress and related to standard antibiotics, they are not novel, nor are they expected to address bacterial resistance for any significant time period.
INVESTMENT so far: Value already invested into RCE
· Time: Founded in 2008, the company has been in development for 16 years
· Money: $75.6 million invested in the company currently valued at $120m ($59.9m in losses, plus $14.8m in R&D rebates, $0.9m in other income)
· Excludes: US DoD grant of US$2.2m or just announced 2023 additional rebate $2.6m
Current value doesn’t even reflect the time value of funds already invested into the business to advance the IP to the current point with commercialisation 2-5 years away (80% of the time and risk already invested, and about half the money needed invested).
RISKS (BEAR CASE):
Key Risks:
1. Clinical Failure: Despite strong clinical results so far, there is still a chance that R327 fails due to some as yet identified side effect or efficacy issue. Clinical studies to date have been done in Australia with reputable organisations and reviewed by the TGA and FDA so standards appear to be high, but there is never a certainty in drug development.
2. Competitive: AI is accelerating pre-clinical studies to find new drugs and other new classes of Anit-infectives could be developed in coming years that provide strong competition or prove to be even more effective. R327 has a strong lead currently and long patent protection to 2041 but alternatives may appear well before then.
3. IP Protection: There is always a chance that the IP protection is not as strong as hoped or that due to poor contracts the rights to value created by the IP are lost in part or whole. Geopolitical complications may also limit IP applicability in certain parts of the world in the future and limit access to certain markets or provide competition with copycat products into markets with weak IP protections.
4. Dilution: Poor cash management could lead to raising cash at distressed valuation levels causing significant dilution. A high risk for BioTechs generally, but probably lower due to capital support from insiders, but this has it’s limits and the capital demands are increasing as development progresses.
Bear Case:
Worst case, being pre-revenue and requiring significant capital to develop their IP assets, RCE could fail and be worthless if it is unable to raise additional capital to enable it to find a partner, buyer or commercialise its IP. In addition any of the risks above, if realised, would reduce the valuation significantly.
GENERAL INFORMATION
Details of Listing
· $20.5m market cap: 67,441,449 Ordinary shares and 35,017,692 Performance shares on listing at $0.20 a share.
· The Company converted to a public company on 21 August 2015.
· 31 December 2015 the Company issued 25 million ordinary shares as part of its successful IPO to raise $5 million
· 5 January 2016 a further 2,550,000 shares were issued to State One as payment for successfully managing the Company’s IPO
· 16 February 2016, 4,152,423 Class A Performance Shares were converted to ordinary shares as a result of the Company achieving the milestone applicable to these Performance Shares.
Legel settlement (p57 FY23 AR): In 2022 an unfavourable judgement was handed down with respect to the non-issue of ordinary shares to holders of 1,356,249 Class C Performance Shares and 1,356,249 Class D Performance Shares, despite the employee's tenure having ended many years prior to the performance hurdles being achieved. After taking appropriate legal advice, the directors appealed the decision. The appeal was subsequently lost resulting in a payment of $1,417,527 during the current financial year. An additional $83,054 was paid subsequent to year end to cover the plaintiff's legal costs with the matter now settled.
Shares on Issue
Options with $1.56 price issues in February 2021
Performance Rights, unknown, previously lapsed Class B and other classes that have lapsed which are yet to be re-allocated.
Articles (General topics)
5/6/24: Recce Pharmaceuticals’ synthetic approach to combatting AMR (drugtargetreview.com)
3/6/24: Recce steps up defence ties with burn gel presentation at Military conference | The Market Online
Yet to be sorted:
R327's potential to address critical medical needs in the treatment of UTIs and urosepsis.
· 8Apr24: R327 works and keeps on working with repeated use: tested in over 300 Strains of Bacterial Pathogens – Effective Against All
· 8Apr24: Submission of Investigational New Drug (IND) Application with the US FDA expected in H2 2024 for U.S. trial initiation in H1 2025
· 8Apr24: US Department of Defence has Recommended R327 Gel (R327G) as a topical treatment for Burn Wound Infections for grant funding of USD $2.2 million (AUD 3.34 million). Recce expects funding to be received in H1 2024.
· 8Apr24: Biomedical Advanced Research and Development Authority (BARDA) Presentation
8Apr24: R327, along with R435 and R529, gained recognition from the World Health Organization (WHO) by being added to their list of antibacterial products in clinical development for priority pathogens.
Recce has been successfully selected to be part of the Western Australia and New South Wales delegation at BIO 2024,
R&D Tax Rebates
Companies with R&D need to apply to AusIndustry for eligibility to R&D tax rebates at 43.5% for spending on registered activities. The spending can be Core or Supporting so can include costs beyond direct lab and testing such as the cost to plan and manage activities so may include some G&A costs. Costs must be incurred in Australia unless you have an Overseas Finding which is very rear, but RCE has received as detailed below.
Recce Awarded AusIndustry Advanced Overseas (R&D) Finding for Synthetic Anti-Infective Development Program
Sydney Australia, 14 December 2023: Recce Pharmaceuticals Ltd (ASX: RCE), the Company developing a New Class of Synthetic Anti-Infectives, is pleased to announce the Australian Government has Awarded an Advanced Overseas Finding for AU$43,774,907 of Synthetic Antibiotic Research & Development (R&D) applicable expenditure by AusIndustry (a division of the Australian Government’s Department of Industry, Innovation and Science). The Advanced Overseas Finding is one of the largest awarded in Australian history as a pillar of the R&D Tax Incentive Program administered by the Australian Government. This Finding does not constitute a grant, or an upfront payment of the amount awarded. It is a binding, underwritten guarantee provided by the Australian Government, which affirms the Company’s R&D activities are of national interest and extends the 43.5% R&D rebate from locally, to cover those undertaken by the Company anywhere in the world.
R&D Financing (EndPoints Capital & Radium)
RCE has borrowed against future R&D rebate credits to provide up front or additional funding for R&D programs. This is commonly used in BioTech’s and there are several providers of this form of credit which is secured against future R&D refunds and usually allows for the borrowing of up to 80% of refunds. The cost of this financing is currently around 15% across providers, noting that this is short term financing drawn on as eligible R&D work is done and repaid when the rebate is received, so not held for a full year.
RCE have previously used Radium to provide R&D Finance but recently switched to Endpoints Capital because they offered to finance future R&D spend, not just spend that has happened. This is the first or a very near instance of R&D financing being provided in advance and hence unsecured. Note that EndPoints Capital is funded out of a family office and this additional risk they take reflects in part an altruistic interest in seeing RCE succeed.
Recce Receives AUD $11.17m R&D Advance
Sydney Australia, 8 March 2024: Recce Pharmaceuticals Limited (ASX:RCE, FSE:R9Q), (the Company), the Company developing a New Class of Synthetic Anti Infectives, is pleased to announce AUD $11,178,965 as an R&D Advance with Endpoints Capital (Endpoints) capturing Recce’s Research and Development (R&D) tax incentive for FY23/24 & FY25.
CEO discussion with Endpoints Capital: Recce Pharma and Endpoints Capital on Navigating Biotech Funding Challenges (youtube.com)
Urinary Tract Infection (UTI)
Average 2030 Market Size: US$11.2b
· The global urinary tract infection therapeutics market size was valued at USD 8.92 billion in 2022. It is estimated to reach an expected value of USD 11.85 billion by 2031, registering a CAGR of 3.2% during the forecast period (2023-2031). (Urinary Tract Infection Therapeutics Market Size, Trends & Growth Analysis | 2031 (straitsresearch.com))
· The Urinary Tract Infection Therapeutics Market size is estimated at USD 9.37 billion in 2024, and is expected to reach USD 10.74 billion by 2029, growing at a CAGR of 2.77% during the forecast period (2024-2029). (Urinary Tract Infection Treatment Therapeutics Market - Size, Share & Growth Analysis (mordorintelligence.com))
· Global Urinary Tract Infection Therapeutic Market is estimated to be valued at US$9.39b in 2024 and is expected to exhibit a CAGR of 3% during the forecast period (2024-2031). (Urinary Tract Infection Therapeutic Market Size & Share Analysis - Industry Research Report - Growth Trends (coherentmarketinsights.com))
General facts:
· 405m individuals had UTI’s in 2019
· The most common pathogen causing UTIs is Escherichia coli (E. coli) with 62%
· The resistance among the isolates of E. coli are: ampicillin (86%), amoxicillin (76%), tetracycline (71%), trimethoprim-sulfamethoxazole (64%), cephalexin (61%), and cefalothin (60%)
Clinical Progress:
· 8Apr24: Phase I/II UTI/Urosepsis Trial – R327 achieving Minimum Inhibitory Concentration (MIC)
What is a UTI:
· An infection in any part of the urinary system, the kidneys, bladder or urethra.
· Urinary tract infections are more common in women. They usually occur in the bladder or urethra, but more serious infections involve the kidney.
· Common treatment is with antibiotics.
Sepsis
Average 2030 Market Size: US$6.2b
· The global sepsis market has been valued at $3.48 billion in 2020 and is expected to grow at a CAGR of more than 7.5% across the seven major pharmaceutical markets (7MM) the US, 5EU (France, Germany, Italy, Spain, and the UK), and Japan during the forecast period. (Sepsis Therapeutics Market Size, Share & Trends Analysis and Forecast 2021 – 2030 - Market Research Reports & Consulting | GlobalData UK Ltd.)
· The global sepsis therapeutics market generated ~US$2.2b revenue in 2018 and is expected to expand at a CAGR of 7.5% from 2019 to 2027 (Sepsis Therapeutics Market by Drug class, Geography & Forecast to 2027 - TMR (transparencymarketresearch.com))
What is Sepsis:
· Sepsis is a serious condition that happens when the body’s immune system has an extreme response to an infection. The body’s reaction causes damage to its own tissues and organs.
· Sepsis is usually caused by bacterial infections but may be the result of other infections such as viruses, parasites or fungi.
· Treatment for sepsis requires medical care. It will include antimicrobials, intravenous fluids and careful monitoring.
Diabetic Foot Infection (DFI)
Average 2030 Market Size: US$11.3b
· The global diabetic foot ulcer treatment market size was estimated at USD 5.18 billion in 2023 and is expected to grow at a compound annual growth rate (CAGR) of 6.0% from 2024 to 2030.( Diabetic Foot Ulcer Treatment Market Size Report, 2030 (grandviewresearch.com))
· The global industry was valued at US$10.5b in 2022 and is projected to grow at a CAGR of 6.0% from 2023 to 2031 and reach more than US$17.7b by 2031. (Diabetic Foot Ulcers Treatment Market Size & Share to 2031 (transparencymarketresearch.com))
· The Global Diabetic Foot Ulcers Market reached US$ 5,812.7 million in 2022 and is projected to witness lucrative growth by reaching up to US$ 9,300.6 million by 2031. The diabetic foot ulcers market is expected to exhibit a CAGR of 6.2% during the forecast period 2024-2031. (Diabetic Foot Ulcers Market Size, Share and Report 2024-2031 (datamintelligence.com)
8Apr24: Diabetic Foot Infection (DFI) Efficacy Achieved: Expansion of Phase I/II DFI Clinical Trial
What is DFI:
· a soft tissue or bone infection that is often associated with neuropathy or peripheral arterial disease in diabetic patients. The most frequent cause of hospitalization for diabetic patients is due to foot infections.
· As with most infections, antibiotic treatment is necessary to cure a diabetic foot infection. If the wound is not treated by a medical professional, the infection can spread, leading to pain, discomfort, necrosis, and, in the worst cases, amputation
Burn & Wound Infections
Average 2030 Market Size: US$5.6b (Burns)
· Burn Treatment Anti-Infectives Products market size was valued at USD 5663.67 million in 2022 and is expected to expand at a CAGR of 6.11% during the forecast period, reaching USD 9104.35 million by 2030. (Burn Treatment Anti-Infectives Products Market Size, and Forecasts to 2030 (globalgrowthinsights.com))
· global burn treatment market size was USD 2955 million in 2020 and market is projected to touch USD 5246.37 million by 2032 at CAGR 4.9% (Burn Treatment Market Size, Share, Research Report [2032] (businessresearchinsights.com))
· The global Burns Treatment Market is expected to garner a market value of US$ 1.2 Billion in 2023 and is expected to accumulate a market value of US$ 2.59 Billion by registering a CAGR of 8% in the forecast period 2023 to 2033. (Burns Treatment Market - Size, Growth, Trends, Share | 2033 (futuremarketinsights.com))
Average 2030 Market Size: US$2.8b (Wounds)
· The global wound care biologics market size was valued at USD 1.77 billion in 2022. It is projected to reach USD 4.10 billion by 2031, growing at a CAGR of 9.74% during the forecast period (2023–2031) (drug market size to treat wound infections - Search (bing.com))
· The Global Infectious Wound Care Management Market has valued at USD 1.42 billion in 2022 and is anticipated to project steady growth in the forecast period with a CAGR of 7.13% through 2028. (Global Infectious Wound Care Management Market - Industry Size, Share, Trends, Opportunity, and Forecast, 2018-2028 (researchandmarkets.com))
· The global antimicrobial wound care dressings market size was valued at USD 1.3 billion in 2022 and is projected to witness a compound annual growth rate (CAGR) of 6.4% from 2023 to 2030. (Antimicrobial Wound Care Dressings Market Size Report, 2030 (grandviewresearch.com))
What is Burn & Wound Infections:
· Burn wound injuries are at an increased infection risk for multiple reasons: (1) the body's physiological response to a burn injury presents with many of the same signs and symptoms of a developing infection, (2) the burn injury can impair many body systems which limits a patient's innate ability to fight off infection
· Cuts, grazes, and other breaks in the skin can become infected when bacteria enter the wound and begin to multiply. The bacteria may come from the surrounding skin, the external environment, or the object that caused the injury
Other Related Companies
Chemeq
Prospectus 7.11, page 48:
Just before 2000, Dr Melrose began his global R&D leadership in pharmaceutical applications of acrolein-polymers, in an Australian company, Chemeq Ltd (Chemeq). Applications were essentially restricted to veterinary applications, specifically within the intestines of animals.
Chemeq had a market capitalisation of approximately $14 million at listing, and then achieved over a period of three years the highest growth in market capitalisation, on the ASX – averaging a market capitalisation of about $500 million. At Dr Melrose’s retirement as C.E.O., Chemeq had nearly 100 grantedpatents; and the FDA had awarded the technology legal Expedited Review Status. The Company had taken a new drug from concept to production - in a $60 million custom-designed manufacturing plant, registered and approved by Australia’s regulatory authorities, all staff were trained; producing at soon to be achieved name-plate output, and beginning to export. Additionally, all activities were supported by $60 million of financing.
However, some 2 years after his retirement from all executive duties in Chemeq Ltd, a dispute occurred between the new management and its financiers – and as a result, Chemeq Ltd was placed in voluntary administration. Production at the plant was ceased and patents allowed to destructively lapse.
Dr Melrose had no executive part in the dispute; he did not recover any cash from his equity in Chemeq Ltd.
Quickboats
Started by Deryck Graham (52 in 2013) as a carve out of Quickstep Holdings (aerospace company he co-founded) in April 2012 with son James Graham (owns 65%) as general manager. Raised $1.5m (Perth Angels included in raise).
Exit: Unknown
Oct13 SMH: Foldable boats - what will they think of next? (smh.com.au)
FB: Quickboats | Facebook (Deryck & James Graham in boat pictured)
Sky News: Quickboats on Sky News Australia (youtube.com)
Disc: I own RL & SM