Full notes, references and thesis provided in straw (once I work out how to imbed the word document it's all in...)

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)

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 license 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/License

·        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).

Disc: I own RL + SM