Core focus on track despite disappointing results

4SC 13 June 2016 Update

4SC

Core focus on track despite disappointing results

Clinical progress update

Pharma & biotech

13 June 2016

Price

€2.41

Market cap

€46m

Net cash (€m) at 31 March 2016

17.1

Shares in issue

19.0m

Free float

38.1%

Code

VSC

Primary exchange

Frankfurt

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(25.0)

(30.1)

(46.3_

Rel (local)

(23.4)

(32.5)

(38.5)

52-week high/low

€5.0

€2.4

Business description

4SC is a Munich-based cancer R&D company. Epigenetic compound resminostat (HDAC inhibitor) is the lead candidate for CTCL (Phase II planned in H216), partnered with Yakult Honsha (Japan) and Menarini (Asia ex-Japan). 4SC is partnered with Link Health for a Phase I oncology asset. It is seeking partners for a Phase I oncology asset and a Phase IIb autoimmune asset.

Next events

Resminostat Phase II EU CTCL starts

H216

Interim 2016 results

11 August 2016

Phase II data in NSCLC Japan (Yakult)

End 2016

Analysts

Dr Linda Pomeroy

+44 (0)20 3077 5738

Lala Gregorek

+44 (0)20 3681 2527

4SC is a research client of Edison Investment Research Limited

4SC has announced that its partner Yakult Honsha did not reach the primary endpoint in its Asian liver cancer trial with all-comer patients. As a result, it will not be progressing resminostat to a pivotal study. These results do not affect 4SC’s core focus on the launch of its pivotal EU Phase II resminostat study in CTCL and progression of its earlier pipeline. A positive partnership with Link Health (4SC-205) and data at ASCO (4SC-202) underline this. Removal of the Japan HCC contribution reduces our rNPV to €104m (vs €145m).

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

7.1

(8.8)

(0.88)

0.0

N/A

N/A

12/15

3.3

(8.4)

(0.59)

0.0

N/A

N/A

12/16e

3.8

(11.4)

(0.60)

0.0

N/A

N/A

12/17e

4.0

(10.2)

(0.53)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Disappointing Phase II results from partner Yakult

Japanese partner Yakult Honsha (Yakult) has completed the Phase II part of a Phase I/II study of resminostat in combination with sorafenib in advanced liver cancer (HCC). The Phase II part (170 Asian patients) did not meet its primary endpoint of prolonged time to disease progression (TTP) compared to sorafenib monotherapy. Yakult has confirmed that it will not progress to a pivotal study in all-comer patients. However, early data appear to show that patients with certain expression levels of the ZFP64 biomarker at baseline had longer TTP when treated in combination with resminostat, a potentially positive indication. Further clinical trials in Japan are ongoing in NSCLC, pancreatic cancer and bile duct cancer.

Core focus – CTCL Phase II trial remains on track

The pivotal Phase II trial of resminostat in CTCL is on track to start in Europe in mid-2016. This 150-patient, double-blind, randomised controlled study will be conducted in 50 centres, across 10 countries. Initial results could be available in FY18.

Positive progress with early-stage pipeline

4SC has entered into a licensing and development partnership with Link Health in China for its oncology Eg5 inhibitor, 4SC-205. Link Health will undertake clinical development and the regulatory process, while 4SC will receive developmental milestones (€76m) and double-digit royalties. Also, further positive data have been presented (ASCO 2016) for its epigenetic compound, 4SC-202, demonstrating with preclinical evidence that it is an effective combination partner for checkpoint inhibitor therapies.

Valuation: Reduced to €104m, but potential upside

Our rNPV-based valuation reduces to €104m or €5.5 per share (previously €145m or €7.67/share), as we remove the Japan HCC rNPV contribution following Yakult’s decision not to progress in this indication. Nevertheless, we see some upside to our valuation as the pivotal Phase II CTCL trial is initiated later this year.

Valuation

We have reduced our rNPV of 4SC’s product portfolio to €104m (vs €145m), predominantly due to the removal of the Yakult HCC rNPV of €39m, or €2 per share, alongside a reduction in the probability of success (to 20%) for resminostat in the US and EU territories. This follows the announcement that the primary endpoint of the Phase II part of the trial was not met and therefore 4SC’s partner Yakult would not be taking it forward into a pivotal Phase III trial.

This is offset slightly by an increase in the rNPV value of the 4SC-205 product to €20m (or €1 per share) following its partnership with Link Health to develop and commercialise it in China, Hong Kong and Macau. The deal enables Link Health to clinically develop 4SC-205 and to have responsibility for taking it through the regulatory process in China. As a result, 4SC is entitled to developmental milestones of €76m and double-digit royalty payments on product sales. In addition, 4SC receives all the data, which could be useful in securing partnerships for other territories in the future. We do not currently include the milestone payments in our forecasts as the company has indicated that they do not have an immediate impact on cash flow and we have no visibility at this time as to how and when Link Health will progress the programme.

Our overall valuation for 4SC is now €104m (vs €145m previously), or €5.5 per share (vs €7.67 per share). Our other key assumptions remain unchanged. However, we see some upside potential to our valuation as the Phase II trial in CTCL is initiated later this year.

Exhibit 1: rNPV sum-of-the-parts valuation

Product

Indication

Region

Status

Partner

NPV (€m)

Prob. of success

rNPV
(€m)

rNPV/
share (€)

Launch

Peak sales (€m)

Net royalty estimate

Resminostat

First-line HCC

China

Phase I

Menarini

86.1

20%

17.2

0.91

2022

259

15%

 

US

Phase II

-

59.0

20%

11.8

0.62

2021

191

20%

 

EU

Phase II

-

62.2

20%

12.4

0.66

2021

201

20%

Resminostat

Second-line NSCLC

Japan

Phase II

Yakult Honsha

63.6

10%

6.4

0.34

2021

204

17.5%

Resminostat

Second-line CTCL

EU

Phase II

-

50.1

20%

10.0

0.53

2020

123

25.0%

4SC-202

Haematological/solid tumours

WW

Phase II-ready

-

209.6

15%

34.4

1.82

2022

810

tiered up to 15%

4SC-205

Haematological/solid tumours

WW

Phase I

-

20

1.05

R&D expenses

(18.5)

(0.98)

2016-18 expenses (risk-adjusted)

Admin expenses

(6.6)

(0.35)

2016-18 expenses (risk-adjusted)

Net cash (Q116)

17.1

0.90

Includes €1.3m long-term financial asset

Total

 

 

 

 

 

 

104

5.50

 

 

 

Source: Edison Investment Research

Exhibit 2: Financial summary

€000s

2013

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,904

7,055

3,266

3,800

4,000

5,000

Cost of sales

(1,474)

(4,080)

(1,763)

(1,710)

(1,600)

(1,750)

Gross profit

3,430

2,975

1,503

2,090

2,400

3,250

R&D expenditure

(10,243)

(8,504)

(7,255)

(11,000)

(10,000)

(7,500)

Administrative, distribution and other

(3,779)

(3,908)

(3,163)

(3,447)

(3,551)

(3,657)

Operating profit

(10,592)

(9,437)

(8,915)

(12,357)

(11,151)

(7,907)

Intangible amortisation

(1,593)

(819)

(827)

(827)

(827)

(827)

Exceptionals (impairment / restructuring costs)

(862)

0

0

0

0

0

Share-based payments

(53)

(3)

2

(20)

(20)

(20)

EBITDA

 

 

(7,804)

(8,339)

(7,914)

(11,285)

(10,079)

(6,835)

Operating profit (before GW and except.)

 

(8,084)

(8,615)

(8,090)

(11,510)

(10,304)

(7,060)

Net interest

48

(228)

(331)

75

150

100

Other (profit/loss from associates)

19

39

58

75

75

75

Profit before tax (norm)

 

 

(8,036)

(8,843)

(8,421)

(11,436)

(10,154)

(6,960)

Profit before tax (FRS 3)

 

 

(10,525)

(9,626)

(9,188)

(12,208)

(10,926)

(7,732)

Tax

0

(70)

(40)

0

0

0

Profit after tax (norm)

(8,017)

(8,874)

(8,403)

(11,361)

(10,079)

(6,885)

Profit after tax (FRS 3)

(10,525)

(9,696)

(9,228)

(12,208)

(10,926)

(7,732)

Average number of shares outstanding (m)

10.1

10.1

14.3

19.0

19.0

19.0

EPS - normalised (€)

 

 

(0.80)

(0.88)

(0.59)

(0.60)

(0.53)

(0.36)

EPS - FRS 3 (€)

 

 

(1.04)

(0.96)

(0.64)

(0.64)

(0.58)

(0.41)

Dividend per share (€)

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed assets

 

 

11,591

10,639

11,077

10,043

9,280

8,542

Intangible assets

10,651

9,836

9,123

8,164

7,451

6,738

Tangible assets

602

425

357

282

232

207

Investments and other

338

378

1,597

1,597

1,597

1,597

Current assets

 

 

6,114

4,295

22,415

10,665

10,201

2,555

Stocks

23

25

20

20

20

20

Debtors

346

652

94

94

94

94

Cash

4,899

3,202

21,476

9,928

9,464

1,818

Other current assets

846

393

817

623

623

623

Current liabilities

 

 

(3,587)

(4,842)

(5,593)

(3,187)

(3,437)

(3,937)

Creditors

(675)

(993)

(688)

(688)

(688)

(688)

Short-term borrowings

0

(317)

(1,962)

0

0

0

Deferred revenue (short term)

(1,589)

(2,638)

(1,779)

(1,750)

(2,000)

(2,500)

Other current liabilities

(1,323)

(894)

(1,164)

(749)

(749)

(749)

Long-term liabilities

 

 

(2,836)

(8,042)

(1,471)

(188)

(10,038)

(10,038)

Long-term borrowings

0

(6,131)

0

0

(10,000)

(10,000)

Deferred revenue (long term)

(2,682)

(1,788)

(1,433)

(150)

0

0

Other long-term liabilities

(154)

(123)

(38)

(38)

(38)

(38)

Net assets

 

 

11,282

2,050

26,428

17,333

6,006

(2,878)

CASH FLOW

Operating cash flow

 

 

(7,052)

(8,302)

(8,916)

(9,973)

(10,179)

(7,335)

Net interest

66

0

(2)

2

4

3

Tax

0

(70)

(40)

0

0

0

Capex

(99)

(100)

(109)

(150)

(175)

(200)

Expenditure on intangibles

(21)

(3)

(114)

(114)

(114)

(114)

Acquisitions/disposals

10

0

0

650

0

0

Financing

0

477

27,608

0

0

0

Other

0

0

4,333

0

0

0

Net cash flow

(7,096)

(7,998)

22,760

(9,586)

(10,464)

(7,647)

Opening net debt/(cash)

 

 

(12,064)

(4,899)

3,246

(19,514)

(9,928)

536

HP finance leases initiated

0

0

0

0

0

0

Other

(69)

(147)

0

0

0

0

Closing net debt/(cash)

 

 

(4,899)

3,246

(19,514)

(9,928)

536

8,182

Source: 4SC accounts, Edison Investment Research

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