In the blog on Friday we mentioned a stock we had in view. This was a tiny cap pharma stock, a tiddler listed on London's Alternative Investment Market (LDN AIM), that potentially could be a giant in the making. And the fact that this stock would be covered in today's blog post and so it will.
What we didn’t say is that when arriving at this particular stock to cover, we had to battle through a difficult decision process. Because right now AIM plays host a number of pharma/biotech tiny cap stocks, and there are four stocks that, we think, could offer exponential returns for the investor.
Now you might expect that a long term approach and resolute patience are required to see the full development of these highly speculative tiny cap stocks. Well yes, generally, but it seems that investors sometimes do not need to wait too long for an exponential rise when it comes to some AIM pharma stocks.
In fact investors on AIM saw the power of one tiny cap pharma play re-rating from 0.25p to 2.6p approximately, in a couple of trading days in February 2011. The company in that case was Sareum Holdings (LDN AIM:SAR) who released (in February just gone) in-vivo pre-clinical results for their Aurora Kinase compound, which seemed to eliminate or inhibit the growth of Leukaemia cells. Sareum Holdings, as we sit here today, has a market capitalisation of £25million (1.45billion shares in issue x 1.75p per share), but given their cancer related programme portfolio and the results as released for the Leukaemia work, who's to say what fair value ultimately would be for this company if its results going forward continue to be positive.
Speaking of spectacular re-ratings we were also drawn to a tiny tiddler called Valirx (LDN AIM: VAL), which has a market capitalisation of £7.8million (1.05billion shares x 0.75p) and is developing technologies and products to help with diagnosis and therapeutics in the fields of cancer, inflammatory disease and neurology. What seems to be gathering much interest, understandably, are the company Self Check (self diagnosis testing) products, providing individuals with some degree of control over their own health monitoring. In an increasingly heath conscious world one has to think that the company has just about hit the nail on the head from a commercial perspective. Valirx's share price moved about 0.25p to 1.6p in just a few days in Ferbuary 2011. Not quite as fast and furious as Sareum, but still a 500% increase in very short order. As with Sareum, the question we have is whether the current market capitalisation fairly reflects the value created by the company or, more importantly, the future potential. We suspect not!
There are more examples of companies on AIM offering exciting stories and stunning potential. We have four in mind and will be covering these in further detail over coming weeks. For now, we have the first of the four companies in view.
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Two years ago Summit Corporation (LDN AIM: SUMM) hit the rocks. Problems (shall we say) with management of working cash flows led to a financial crisis within the company, just at the wrong time. We say the wrong time because the internal crisis was pretty much dwarfed by the global financial crisis which meant there was little appetite to support and engage with funding of speculative biotech/pharma operations, listed or otherwise.
So the effect of this internal/external financial crisis, amongst other things, led to a collapse on the share price to around a penny in early 2009. Re-jigging and rationalisation saved the business in 2009 and enabled a share price recovery leading to a placing of £4million at 5p per share in December 2009.
Overall the actions taken by the company led to a much leaner and focused organisation, with sufficient cash runway (and careful management of the cash forecasts). This provided the basis for what has become a hugely value generative period for the company progressing and developing a wide technological base and specific programmes offering substantial potential upside to the company and, when the markets realise, for investors.
We are going to take a look at the innovative technology and the ‘Leading Three’ specific company programmes shortly, but right now we need to address the one thing that nearly brought the company to its knees in 2009. Cash!!
The results from 31 January 2011 indicated cash of £3.3million. Add to that the cash drawn down under the company's C. difficile programme, through a Wellcome Trust grant (£925,000 - see below) and you have a total figure of around £4.2million. Cash burn is around an estimated £250k per month suggesting current cash of around £3.3 - £3.6million and a remaining cash runway of around 14 months at current burn rates (ie. cash to last until Q3 2012). Of course in reality the company burns cash and can, if it so chooses, cut the burn rate by reducing expenses and commitments. However, the company is intending to raise the cash it needs to cover future expenses through upfront payments attaching to commercial deals (see below), than other means (eg equity placings - which can be quite a costly and worrisome route for existing investors). So the cash situation is strong, controllable and, as regards internal costs, foreseeable.
Turning to the technology and programmes:
Seglin Platform
Back in 2009 the troubles and torment caused Summit to rationalise and focus activities. One focus was the development of the Seglin Technology, which is an innovative platform used for drug discoveries. Seglin stands for Second Generation Leads from Imminosugars and the best place to start for a good introduction is on the explanatory page of the Summit website (click here).
Now the advantage of the Seglin platform, much of which can be determined from the link above, is the ability to use innovative technology to improve the quality, cost effectiveness and efficiency of the drug discovery programme. This is vital to large and small pharma, especially in a more cost-conscious and financially strained world.
Big-pharma are increasingly shutting down in house R&D activities and for an example of this refer to the recent news regarding Pfizer reorganising operations and closing down its R&D site at Sandwich, Kent. This retrenchement from R&D was discussed by the Chief Executive of Shire Pharmaceutical in a February 2011 interview with the UK Telegraph newspaper. The expectation is that, increasingly, larger pharma will eschew the traditional, costly, in-house drug development process, in favour of buying in Phase II and Phase III programmes for further development. Of course with an increasing quantity of drugs now emerging from patent protection periods and open to competitive competition, the drive to develop cost effective new alternatives is increasing.
In truth however, the reality at the moment is a little more intriguing, because Ernst and Young's 2009 Global Biotechnology Report highlighted 11 of the 15 largest European deals in 2008 involved discovery programmes or assets in preclinical development. In other words, for competitive reasons or otherwise, pharma companies are spending very large amounts of money buying promising programmes much earlier in the development cycle.
Of course this is a moving feast and for those interested in the very latest update the Ernst and Young 2010 Report can be found by clicking here.
But the important point here is that, by concentrating much of their effort and focus on building the Seglin drug discovery platform, Summit have developed powerful intellectual property that, as they have already confirmed, is bringing many pharma companies to their door to discuss using the technology on a commercial footing.
That queue of companies looking into the platform could bring a rich run of commercial deals to utilise the technology. These, although not blockbuster in size, could be multiplied many times over, because the key thing here is that the platform can be provided to pharma companies to develop their own specific in-house drugs more effectively. Each deal is separate and unique, and deals can be done again and again.
Moreover Summit have built over a thousand compounds in their "Seglin Library" covering a wide range of disease and infection categories, making the Seglin technology capable of adaptation to a significant proportion of the current research interest areas in the industry.
And not just that, but the technology also has enabled Summit to develop exciting programmes in house, the most noticeable of which, and the first programme of our Leading Three, is the OGA Alzheimers opportunity, discovered through the use of the Seglin Platform.
OGA Alzheimers
Much work is on-going generally to address Alzheimer's disease which wreaks havoc upon sufferers and their families and friends. Given the tens of millions of current sufferers and the prediction that, by 2050, 1 in 85 of the world's population will suffer, the race for a cure is gathering pace.
Much of the work is focusing on the tau protein further information on which can be gathered from the wikipedia site covering same. The search is on for a drug/compound that could stop the Hyperphosphorylation of the tau protein which seems to be related to the development of Alzheimer's.
This, it seems from initial work undertaken, is what the compound developed through the Seglin platform may be capable of achieving. If so, there is a real value here and one would expect it would attract a large amount of interest.
It seems that interest is definitely there with apparently multiple parties, some of which are at advanced stages, looking at the company's Alzheimer's programme. Perhaps one of those parties may progress to a commercial deal to take this programme forward.
But what kind of deals have been done in this area recently. The recent and most prevalent example has to be the deal struck between Merck and Alectos in 2010, whereby Merck committed to clinical development of the relevant compounds and agreed to pay Alectos an upfront fee; research, development & regulatory milestones; and tiered royalty payments on any related sales. The potential total value of this deal being $289 million for compounds at the pre-clinical stage of development or early-stage, such is the attractiveness of find viable drugs in this area.
C. difficile
At a cost of $7billion per annum across European and North American healthcare providers C. difficile is something of a hidden problem. Whilst many in the UK will have heard MRSA, the hospital superbug often cited on news programmes and in the news generally, C. difficile is the more prevalent problem.
There are existing drugs available but the key problematic issue, still unresolved, appears to be, rampant rates of reinfection. That recurrence of the infection, with the commensurate healthcare costs - is a mjor concern!
In this area Summit could have something of a 'tour de force', as their compound SMT C19969, has demonstrated stunning efficacy in targeting the C. difficile bacteria, particularly those from the more virulent strain, and tests show this was achieved without damage to the important gut bacteria needed for everyday bodily function. In addition, all this stunning efficacy was achieved without the recurrence problems plaguing existing treatments.
Summit released a summary of the findings from their c-difficile work in October 2010 and this success, and the follow on work that has occured since, has enabled the company to drawn down a £925,000 grant from the Wellcome Trust which will cover the balancing pre-clinical costs of development.
The grant does not preclude the company seeking a commercial partner to take development forward. In fact we anticipate that the level of technical success achieved to date, particularly the targeted efficacy and low recurrence, mean that commercial partners will be taking a keen interest.
It is difficult to predict what basis any commercial deal could take. But once again a useful comparison would be to consider the deal struck by Merck with Medarex and Massachussets Medical School in 2009, which provided for an upfront payment of $60 million; $165 million in development and approval milestones; and double digit royalties on product sales and sales milestones.
Duchenne Muscular Dystrophy (DMD)
DMD is a distressing disease causing progressive muscle weakness, muscle wasting, wheelchair dependency and a significantly lowered life expectancy. The disease affects 1 in 3500 boys.
In July 2008 Summit signed a deal with Biomarin to pursue clinical trials for its programme SMT C1100, targeting DMD. That deal included an upfront payment of $7million; development and regulatory milestones of $51million and potential royalties of up to $85million.
Phase I clinical trials were not successful, with the levels of desired efficacy not being achieved (although no issues with safety were reported on the positive side), leading to Biomarin cancelling further involvement and return full commercial rights to Summit in 2010. A disappointment at the time, but one the company have turned into an opportunity.
Through additional pre-clinical work the company has altered the approach to administration of the compound and been able to achieve significantly improved results, as outlined in their recent rns announcement. Moreover the results have recently been published in a leading scientific journal and, we understand, this has drawn significant interest from potential partners.
Arguably, SMT C1100 is now further progressed than at the time of the original Biomarin deal and Summit once again retain all the commercial rights for this programme. With the success achieved, we anticipate the company is likely to secure significant commercial interest in taking this forward.
In Summary
The above focuses on four key elements of the Summit business, namely:
- the underlying value and potential of the Seglin platform;
- the Segin inspired OGA Alzheimer's programme;
- the C. difficile programme;
- the Muscular Dystrophy programme.
Summit of course has many more programmes under development, some in association with third party partners. In fact the whole business is so diverse it would likely require the work of a summer dissertation to properly summarise the full extent of what the company has developed.
Whether the assets development lead to revenues for the company through commercial deals remains to be seen. As does the full extent of any revenues.
But we suspect the company is closing in on commercial deals and we wont have to wait too much longer to see the value crystallising. But the question is, as we asked above, recognising the diversity and depth of the company's technology and programmes does the current market cap of £10million (168million shares x 6p) reflect the value or potential.
We think not, by a significant margin! And its good to see we are not alone, with the company publishing a note from broker Hybridan, suggesting a target price of 30.1p, some 5x the share price as of Friday's close.
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Note: Please refer to our notes in the first post on this blog providing guidance that must be read in conjunction with all blog posts. This article in no way recommends the purchase of any stocks, but is written merely to highlight certain companies enabling readers to undertake their own research and seek appropriate financial advice for their needs. The blog has no direct or indirect working relationship with the company and has not liased with them in any way to produce this blog post. There is no guarantee with regard to the information contained herein and readers are advised to check all content through their own investigations. The author owns shares in Summit plc and is delighted to do so.
