With some time to review the capital raise and UoF, my detailed notes and thoughts:

Capital Raise Points

• 241.3m shares post raise: 22.2m shares issued adding to the 219.1m shares, options and performance rights on offer so 9.2% dilution.
• Ord Minnett deal lead, Evolution Capital Co-Manager. Fees of 6% of amount raised (industry standard) so $600k.
• Price = $0.45, 25% discount on last close, 21.4% discount on 30-day VWAP.
• $10m raised, $8m institutional and $2m SPP (up to $30k each, closes 31 July)
• NorthStar Impact Fund (NorthStar Impact Funds Sydney | Responsible Investing) has invested, other biotech investments include Botanix Pharmaceuticals, Clarity Pharmaceuticals, CSL, Dimerix, Mayne Pharma, Neuren Pharmaceuticals and Paradigm Biopharma.
• Comment: A modest dilution and discount to provide funding for several key value inflection points before additional funds and dilution is needed, hence value accretive. Adding aligned institutions can help with follow on funding and liquidity. 
• Note: Offer booklet not out until around 10 July.

Use of Funds (Summary)

1.     Phase 3 clinical Trials in Indonesia (Topical – DFI) [Q1 FY25 start]

2.     Phase 2 UTI/Urosepsis Clinical Trial [Q1 FY25 start], Phase 1/2 just concluded

3.     Phase 2 ABSSSI Clinical Trial (Wound & DFI) [Q1 FY25 start]

4.     US Department of Defence Burn Wound Program [Q1 FY25 start]

5.     Investigational New Drug (IND) application to FDA [Q3 FY25 US trial target]

6.     Working capital, Manufacture expansion & Pre-Clinical program funding to FY26

Hence funding for clinical progression in 3 core treatments (UTI/Urosepsis, ABSSSI and Burns), accelerated commercial program in Indonesia for opportunity in SEA and to support company capacity and IND applications. With funding into Q1 YF26 the company will be looking for key milestone results across all these areas to create a significant value inflection by the end of FY25 at which time they will need to raise additional capital to supplement R&D rebates and any other grant funding they receive.

A detailed look at each of these areas:

Phase 3 clinical Trials in Indonesia

This is RCE’s accelerated path to commercialisation strategy. By partnering with PT Etana Biotechnologies (Etana) and with the support of the Indonesian government they expect to accelerate into Phase 3 trials for their R327 topical treatment for DFI (just starting Phase 2 in Australia). Via a softer regulatory regime they can get to market many years earlier in Indonesia and potentially access the 10 ASEAN member states. This would provide revenue to fund the core value proposition of FDA approval but also provide valuable data on efficacy in market.

The timeline on this program is indicative, suggesting data readouts should start to be available in early CY25, but government support will be the major swing factor on the timeline. None the less it is a reasonable gamble, they may be in market in under 2 years and generating revenues which for a Biotech is a major value inflection point.

Risks revolve around the cash drain to take this path and having poor clinical or partnership outcomes that damage the value of R327 in major markets down the track. It’s a bit like using fire, a useful tool, but you could get burnt if you’re not careful.

Phase 2 UTI/Urosepsis Clinical Trial

The completion of the Phase 1/2 UTI/Urosepsis clinical trials announced on 28 June was a key trigger for the capital raise and an important milestone to attract major investors. This testing provided the data required for does levels following the successful proof of safety results from the completion of Phase 1 announced on 19 July 2023.

RCE now has safety committee approval to start Phase 2 trials and the capital raise provides the funding needed to conduct Phase 2 trials. Previous trials have been focused on safety, with anecdotal efficacy data. The Phase 2 trials will provide the first clinical proof of efficacy in patents, with positives results providing the largest value inflection so far and this would also support the IND application with the FDA.

Phase 2 ABSSSI Clinical Trial

The other key trigger for the capital raise and support for value to institutional investors was the announcement on 24 June which announced Ethical Approval to All Topical Infections which makes them Phase 2 ready. This meant that clinical studies for DFI (US$11.3b market) and wound (US$2.8b market) infections could be combined for Phase 2 clinical studies and results applicable to both sets of treatments for R327. This study now comes under the succinctly named Acute Bacterial Skin and Skin Structure Infections (ABSSSI) grouping.

In addition to reducing the cost of testing this could also speed up the testing because patient recruitment can be across multiple conditions, increasing the pool of applicable candidates. I would also expect that this will lead to expanded use in the Indonesian clinical trials and commercialisation program in time.

US Department of Defence Burn Wound Program

It appears that with the ABSSSI linking of wound infections with DFI that Burn infections (US$5.6b market) is now flying solo in clinic, but with the support of the US DoD the funding is joint. The DoD has provided US$2m (A$3m) in grant funding for this program.

This program is moving into Stage 2 of Phase 1/2 where it will be in a randomised head to head trial so should provide some efficacy data. The US DoD’s interest is worth more than the initial US$2m grant, follow on support of significantly large amounts and accelerated testing is what is hoped for and ultimately DoD supply contracts on commercialisation.

Investigational New Drug (IND) application to FDA

In order to conduct Phase 3 studies in the US or at FDA approved locations outside the US a Investigational New Drug (IND) status is needed from the FDA. RCE is conducting Phase 1 and 2 studies outside of the FDA system but will be using the results to support their IND application which will allow them to conduct Phase 3 studies that are FDA reviewed and able to be used for FDA approval once complete.

Having and IND is a critical step, it is interesting that they have not applied earlier (often applied for pre-Phase 1 to conduct clinical trials in the US), but it would be a surprise if there were issues in them getting it. A$1.5m of current raise to fund IND approval which tells you a bit about the rigger of the process.

Working capital, Manufacture expansion & Pre-Clinical program funding to FY26

Cash spend on Operating costs in 4 quarters to Q3 FY24 was $17.0m, of which $12.5m was R&D and $4.5m related to other operating costs. So we can probably assume around $5-6m of cash burn outside of direct R&D for the coming FY25. This would include non-R&D work in Indonesia.

Pre-Clinical programs would fall into R&D and the manufacturing program expansion is probably a bit of capex as well. Given the cash they have is expected to last until Q1 FY26, it is hard to imagine large amounts spent in these areas given the clinical programs being conducted will cost more than previous clinical programs cost over the same time period.

A$1m of the raise is for general working capital (400k by deduction) and raise costs (600k at 6%)

CONCLUSION

They have a plan, they have the cash to execute the plan, they executed reasonably successfully to date, and results have been encouraging enough to gain QIDP status with the FDA, Special Access Scheme designation with the TGA and a grant from the US DoD. In terms of value, Phase 2 success is when the first clinical proof of efficacy occurs (treated as anecdotal prior to this), so it’s a major inflection point and we will see data read outs over the next year which should be reflected in the company valuations.

On detailed review I maintain my expectation to participate fully in the SPP which ends 31 July. If the share price drops below the $0.45 I most likely will buy, but I would like to see my funds go to the company so it would have to drop to well below $0.45 for me to buy on market as opposed to the SPP.

Disc: I own RL+SM