Eyes on the Phase IIb prize

Destiny Pharma is an antimicrobial discovery and development company whose new antimicrobial agents have unique properties that should result in improved patient outcomes. The XF series of antimicrobials are structurally and functionally distinct from all previously approved antimicrobials. Transferable resistance to the XF-series has not been detected in recent clinical isolates and de novo resistance is unlikely to occur. Destiny’s antimicrobial agents have been shown to have rapid-acting bactericidal1 activity against the most resistant bacteria, as well as antimicrobial activity across a broad range of sensitive and resistant Gram-positive and some Gram-negative pathogens. Destiny’s lead product, XF-73, is in clinical development for the prevention of post-surgical infections in high-risk surgical patients. XF-73 has completed Phase I clinical studies and in 2019 commenced a US Phase IIb study that is expected to report in mid-2020. Subsequent indications for the XF-series include terminal infections, the prevention of ventilator-associated pneumonia (VAP) and biofilm-mediated infections like cystic fibrosis.

Our model for Destiny Pharma uses a risk-adjusted NPV analysis resulting in a valuation of £70.2m, or 160p per share, based only on the use of XF-73 in the prevention of Staphylococcal post-surgical infections in high-risk surgical patients. We assume that the first XF-73 launch will be in the US, where clinical trials are now being conducted, followed by other markets including Europe (we have only included EU5), Japan (which has a history of extensive antibiotic use) and China (where Destiny already has a development and commercial agreement with China Medical System Holdings). In addition, we have assumed that, following the completion of the Phase IIb results at by mid-2020, Destiny will license XF-73 on a global basis ex-China. Our peak end-market sales forecasts for XF-73 are $1.89bn in 2028 and our valuation is based only on the royalties and milestones from the sales of XF-73.

Destiny raised £15.2m gross in its September 2017 listing on London’s AIM followed by a £3m investment by China Medical System Holdings (CMS) in December 2017 as part of a regional development and commercialisation agreement. The H119 balance sheet showed cash and equivalents of £9.1m (including term deposits of £4m). The principal H119 outlays were administrative expenses of £0.9m and R&D costs of £1.7m, which we expect to increase as the US clinical programme progresses to completion. This will be softened in FY19 by a £0.8m repayment relating to the R&D tax credit, which we also expect to move in line with R&D spend. We see Destiny funded into 2021.

Destiny is sidestepping the problematic issues associated with the short-course treatment of infections by developing XF-73 in a preventative indication with no on-label US competition. The key sensitivities remain XF-73’s price per course, market share (even though there is no approved competition) and the outcome evidence required by the FDA and payers from Phase III. Once approved, and assuming the demonstration of cost-effectiveness in high-risk patients, we believe the reimbursement of XF-73 should be easier to achieve than for acute antibiotic treatments.

UK-based Destiny Pharma is a largely virtual (with experienced project managers who outsource much of its R&D), clinical-stage antimicrobial development company. Destiny’s products are new synthetic molecular entities that have not been encountered by bacteria in nature before and are therefore not expected to be associated with bacterial resistance. Destiny’s lead product XF-73 is rapidly bactericidal, offering a short-course prophylactic duration that reduces the bacterial nasal carriage burden in order to prevent infections after surgery. The FDA has agreed that XF-73 will be studied in this new preventative indication, which alone addresses most of the contemporary antimicrobial commercialisation issues. The prevention of Staphylococcal post-surgical infections is, like Destiny’s products, novel, and no other agent has been approved for this indication in the US.

Destiny Pharma is developing a novel series of antimicrobial agents that are structurally and functionally distinct from any other antimicrobial agent commercialised to date.

Destiny’s costs as a small UK virtual biotech are modest for a company in mid-stage clinical development. Destiny’s pipeline and development plans for its antimicrobial agents are initially in preventative indications where there is little or no competition. This has already resulted in the investment and regional development agreement with CMS. We expect this strategy to continue with the broader licensing of XF-73 once Phase IIb data has been disclosed in mid-2020. Once XF-73 has been fully out-licensed, Destiny will focus on its earlier-stage pipeline. XF-73 is the key asset on which our valuation is based.

XF-73 is a dicationic porphyrin that has rapid bactericidal activity against antibiotic sensitive and resistant Gram-positive pathogens including MRSA. These properties make the XF series ideal for an indication such as the prevention of Staphylococcal post-surgical infections, where the current challenges of antibiotic commercialisation (short-course acute treatments with generic substitution, resistance issues and on-label alternatives) are largely irrelevant.

The antimicrobial activity of Destiny’s XF series of drugs is due to their cell surface activity, which affects at least the bacterial membrane and probably the peptidoglycan layer. Cell wall integrity is compromised by the action of the XF series, which interact with the bacterial membrane making it leaky, leading to the loss of vital bacterial intracellular components and the death of the bacteria. To prevent Staphylococcal post-surgical infections, XF-73 is applied topically to each nostril to reduce the asymptomatic carriage of Staphylococcus aureus (S. aureus) to a level below which the surgical wound of a high-risk patient would be likely to become auto-infected. Since the ring structure is available as a pharmaceutical intermediate, the cost of goods for XF-73 is low. No other drugs are currently approved for the prevention of Staphylococcal post-surgical infections or the prevention of VAP.

Destiny’s XF series of antimicrobials target the large unmet need of prevention (as opposed to treatment indications where most antimicrobial agents are used) of infections in hospitals. The rise of antibiotic-resistant infections globally is well-documented,2 but there have been commercial challenges in the development of new antimicrobials. The US Centers for Disease Control and Prevention (CDC) estimate at that least 23,000 deaths and more than two million illnesses annually in the US alone are as a result of antimicrobial resistance. Destiny’s focus on prevention of infection (due to resistant and sensitive strains) rather than treatment puts it at the forefront of this market. We estimate that Destiny’s XF-73 will have an addressable market of about $3.5bn in the prevention of post-surgical Staphylococcal infections alone (assuming 100% market share, 100% penetration). In the next section, we discuss the design and conduct of the next expected material event for Destiny Pharma: the US Phase IIb study in the prevention of post-operative surgical infections.

The next major expected catalyst for Destiny Pharma will be the results of the US Phase IIb study of XF-73 in the prevention of S. aureus post-operative infections. As the study is recruiting, with an interim safety, efficacy and futility analysis scheduled for Q120 and final results expected in mid-2020, we take a detailed look at the design and our expectations for the study.

Many of the current investment prejudices against the development of new antimicrobial agents are perfectly valid. The most recent antibiotic to be approved in mid-August 2019 was Nabriva Therapeutics’ Xenleta (lefamulin) – a systemic pleuromutilin – which was announced as a first in-class antibiotic for the treatment of community acquired bacterial pneumonia (CABP). On the day of the announcement of Xenleta’s approval by the FDA, Nabriva’s share price finished up less than one percent. We believe this is because, for most CABP patients, there is already cheap, effective therapy like macrolides, tetracyclines, fluoroquinolones or beta-lactams, since in the community there are lower levels of resistant bacteria than in hospitals. In addition, while Xenleta was described as a first-in-class semi-synthetic pleuromutilin antibiotic, the bacteriostatic pleuromutilins have been in human use since 2007 and even earlier in animals, and pleuromutilin resistance has been reported.

The Xenleta example provides the reasons why investors, and many pharmaceutical companies, do not find the anti-infective therapeutic area an attractive target. However, the Phase IIb study of XF-73 in the prevention of Staphylococcal surgical skin infections addresses most of these concerns because:

The Phase IIa study of XF-73 showed that Staphylococcal decolonisation of the potential surgical patient’s nose could be accomplished by a small number of doses in a short space of time. This is important since higher compliance is associated with shorter treatment durations. In the case of the unapproved (off-label) competition, where compliance is left to the unsupervised patient at home, a few days before hospital admission and the surgical procedure, compliance is likely to be comparable to the 30% associated with primary care drugs. Therefore for XF-73, compliance and efficacy are likely to be enhanced by hospital administration in the 24 hours before and after surgery, where the patients are dosed by a healthcare professional, rather than having to remember to do it themselves at home. Nasal decolonisation is unlikely to mean sterilisation or complete elimination of Staphylococcal nasal carriage in most patients. More likely, nasal decolonisation means a reduction in the absolute numbers of Staphylococci in a pre-surgical patient’s nose that significantly reduces the chances of an auto-infection.

Nasal screening for Staphylococcal carriage prior to surgery, although recommended in some surgical guidelines, is not largely adopted, because a negative nasal swab may not detect a transient colonisation at levels below the level of detection when the sample was taken. This ‘below the level of detection’ may not be ‘below the level that results in an autoinfection’ and this is why a short course of bactericidal agent such as XF-73 may be sufficient to ‘knock down’ the levels of Staphylococci in the nose and prevent post-surgical infections.

The reduction in colonisation and the prevention of post-operative Staphylococcal autoinfection is the objective of treatment with XF-73 nasal gel, not sterilisation. From a healthy microbiome perspective, transient decolonisation around the period of surgery should be important and this was demonstrated by the 60 healthy volunteer Phase IIa three-arm study (1.2mg and 0.3mg of XF-73 per dose, and placebo). As well as confirming the safety for the two doses of XF-73 gel applied to the nares twice-daily for two days, the 1.2mg and 0.3mg doses demonstrated significantly different reductions in S. aureus colonisation compared to placebo at days 1, 2 and 3, but by day 4 (48 hours after the last dose) S. aureus colonisation was again detected.

Study NCT03915470 is a multi-centre, double-blind randomised placebo-controlled study of multiple applications of 0.2% XF-73 nasal gel, to assess its antibacterial effect on nasal Staphylococcus aureus carriage in patients scheduled for heart surgery. Only patients who screen positive for S. aureus carriage will be enrolled in the study and about 200 intent-to-treat patients are expected to be randomised 1:1 to XF-73 or placebo. One immediate advantage of this study design is the pre-selection of patients who demonstrate colonisation with S. aureus. One of the reasons why clinical studies on new antibiotics are done on ‘all comers’ – patients with either resistant or sensitive infections – is to eliminate the likelihood that too few resistant infections will not result in a statistical difference between active and placebo arms. Anti-infective clinical trials are unlikely to be powered (requiring thousands of patients) to detect an effect only in infections caused by resistant pathogens. In clinical practice, these new antibiotics are rarely used in first-line empiric therapy, or in patients infected with sensitive strains because of the much lower cost of generic antibiotic combinations that are prescribed empirically to cover and usually resolve infections caused by a range of pathogens.

As it relates to the ongoing Phase IIb study, we believe that an ‘all comer’ high-risk surgical patient population consists of patients who may or may not be colonised, and a low colonisation rate (akin to a low disease prevalence in one season in vaccine studies), which is typically c 30%,3 could confound the study. The precision of the study to include only culture-confirmed high-risk surgical patients removes this confounding variable from the study design. Based on the results of the Phase IIa study (in colonised healthy volunteers), we expect the Phase IIb trial to demonstrate a significantly higher reduction in S. aureus colonisation (in high-risk patients) than placebo. In addition, if approved, the product may also be used in high-risk surgical patients who have not been screened. The transient nature of S. aureus nasal colonisation discussed above means that patients may be auto-infected, but colonisation may either not be detected per se, or not be detected in time for the surgical procedure. Furthermore, screening introduces costs and time delays that can be avoided by preventative treatment without pre-screening.

In the Phase IIb trial, either the active drug or placebo gel will be administered three times to each nostril over the 24 hours before surgery, and then a single application is administered after the closure of the surgical wound. Patients may undergo chlorhexidine skin decolonisation of the proposed surgical site ahead of surgery (as was allowed in the Phase IIa study) and prophylactic systemic antibiotics (usually a single vancomycin infusion) according to the surgeon’s usual practice.

Safety and efficacy (the latter as measured by the decolonisation of S. aureus from patients’ noses at different time points) will be measured in the Phase IIb study, as they were in the Phase IIa study. In addition, other health economic endpoints will also be measured. The primary endpoint of the Phase IIb study will be microbiological efficacy as measured from baseline, when the patient will be colonised, until just before surgery. Secondary efficacy endpoints will follow the effect of XF-73 nasal gel on the patients’ nasal S.aureus carriage up to six days after surgery (by which time the patients’ commensal S.aureus carriage might be expected to have returned to baseline levels.

A key secondary endpoint is likely to be the difference between active and placebo arms, in the incidence of Staphylococcal post-operative infections (surgical site and bloodstream infections) in the 30-day period after surgery (90 days if the patient received an implant). In addition to this closely watched health economic endpoint, the number of prescriptions for, and the number of patients receiving anti-Staphylococcal antibiotics will be measured.

Our expectations for the results of Destiny’s Phase IIb study are that XF-73 gel will appear safe and microbiologically effective in eliminating nasal Staphylococcal carriage in patients prior to their heart surgery. If this were to be repeated in Phase III, the FDA is likely to approve XF-73 as the first drug in this indication. With today’s focus on cost-effectiveness, an approval based on microbiological effectiveness is likely only to be half of the story. To gain traction with payers, surgeons and hospital administrators, decolonisation with XF-73 gel would need to show a significant reduction in post-surgical infections. This is because the direct cost of a post-surgical infection in terms of additional medicines, extended hospital stays (which in the US are over $20,000 per day) and the morbidity and mortality associated with an infection after heart surgery far outweigh the direct treatment cost of XF-73 for all high-risk surgical patients (not only those with S.aureus culture-positive colonisation), which we have estimated in our valuation.

While it is logical that a statistically significant microbiological reduction in nasal colonisation would also result in a statistically significant reduction in the number of Staphylococcal post-surgical infections in the Phase IIb study, there are dynamics that could mean that the Phase IIb demonstrates a directional benefit in infection rate, but statistical significance may have to wait for the larger patient numbers of the Phase III studies. These factors include:

With the constraints of a small biotech company, powering a much larger study to have more comfort that a statistical reduction in infection rates would be demonstrated is something better left until after Phase IIb and the deeper pockets of a partner.

In its H119 financial results, Destiny noted a three-month delay to the final results of the Phase IIb study, which are now expected in the middle of 2020. There will be an interim safety, efficacy and futility analysis by the independent drug safety monitoring board in early 2020, which we expect to be disclosed. The three-month timeline extension until the final Phase IIb study report in the middle of 2020 is required because many of the initially proposed study centres were already using a non-FDA approved pre-surgical procedure nasal decolonisation protocol. This made the use of a placebo arm in Destiny’s study protocol unpalatable to these hospitals’ respective local ethics committees, and additional (mostly smaller) centres were subsequently enrolled. While this resulted in a lengthened timeline for the study, conducting the study in smaller hospitals that do not have an existing nasal decolonisation policy could mean that there may be a higher post-surgical infection rate in those institutions. This could result in a higher difference in efficacy between active and control arms than would be expected from a study conducted only in large teaching hospitals, for example.

There are three major diseases of the lung that are associated with mucus build-up, the inability to clear the mucus and the bacterial infections associated with excessive or dysfunctional pulmonary mucus. By comparison, the other major lung diseases are more associated with airway constriction (asthma and allergies) or fibrosis (idiopathic pulmonary fibrosis).

While COPD and asthma are the non-cancer lung diseases with the largest number of patients, COPD as a mucus-dysfunction and inflammatory lung disease is almost always caused by prolonged exposure to tobacco smoke. The two diseases of mucus dysfunction relevant to Destiny Pharma are CF and BE. The number of patients with CF and BE is much smaller than those suffering from COPD, but this orphan indication nature makes them commercially attractive to smaller biotech companies. This is because the medical need is often much higher and the patients are under the care of specialist physicians (implying smaller sales and marketing spend) and there is usually less price sensitivity for effective therapies.

CF is an inherited autosomal recessive disorder that causes persistent lung infections, which over time are responsible for reduced lung capacity. CF affects about 70,000 patients globally and is therefore an orphan disease. CF is caused by one of 2,000 different loss-of-function gene mutations that encode the cystic fibrosis transmembrane conductance regulator (CFTR) protein. Defects in the expressed CFTR protein result in secretions in the lung that do not function normally as lubricants, but are abnormally thick and sticky. This in turn results in airways that are blocked and provide a protected and nutritious home for bacterial overgrowth and, in consequence, bacterial lung infections. Repeated infections result in damage to the lung and, eventually, respiratory failure. Due to early diagnosis from pre- and post-natal screening, many more CF patients are diagnosed earlier than they would have been previously. This has resulted in a higher prevalence of disease, as has the finding that earlier treatment slows the rate of lung function decline. At the recent North American Cystic Fibrosis Conference, the predicted survival age of CF patients had risen to 41 years. Nevertheless, depending on the CFTR gene mutation, deterioration is inevitable and CF patients require daily care with physiotherapy and mucolytic enzymes to help mobilise the mucus in the lungs. Where the patient’s mutation is appropriate and the reimbursement available, the small molecule CTFR modulators are the first disease-modifying drugs.

The CTFR modulators Kalydeco, Orkambi and additional experimental combinations from Vertex, while able to restore some normal function depending on the patient’s CTFR mutations, appear to be much less beneficial in the amount of lung function gained, or not lost relative to placebo (measured by forced expiratory volume, or FEV1) compared to what a pulmonologist might expect from a COPD patient receiving an inhaled corticosteroid. While Vertex’s drugs are the first disease-modifying drugs in CF, their very high prices have resulted in a patient and patient group backlash in the US and the UK and France on the basis of their assessed limited cost-effectiveness.

Depending on the patient’s mutation, they will still need treatments that address the symptoms of CF and these include antibiotics. The sticky mucosal environment of a symptomatic CF patient’s lung is typically associated with colonisation with Pseudomonas aeruginosa. (Ps. aeruginosa) is a highly resistant Gram-negative bacteria that often colonises, rather than infects, the lungs of CF patients although the strains isolated from CF patients are frequently capsulated – producing their own protective barrier to antibiotics or biofilm. CF patients may be colonised with Ps.aeruginosa, but as a low-grade pathogen, polymicrobial colonisation of the mucus with more aggressive pathogens like MRSA is likely to result in higher mortality and morbidity. That being said, inhaled antibiotics like tobramycin and the colistin-derivatives have been developed for CF patients with a Gram-negative spectrum in mind.

While colonisation and occasional infection with Ps.aeruginosa may punctuate the life of a CF patient, a 2010 JAMA paper5 found that the detection of MRSA in the lungs of CF patients for longer than two years was associated with lower survival. In addition, a more recent article6 cites the rising incidence of MRSA infection in CF patients. This is not unexpected since almost all CF patients have periods of hospitalisation during which they could be colonised by MRSA.

Bronchiectasis (also known as non-CF bronchiectasis) is much less of an inherited condition than CF, but is often acquired as a result of a previous lung infection (like pneumonia or TB), or an inflammatory condition. Like CF, lung function declines over time with BE and about half of BE cases are idiopathic BE (with no known cause). Like CF, BE involves excessive mucus build-up but it is present as a result of scarred or inflamed airways. The complicated nature of the airways means that mucus is likely to accumulate, and bacterial infections can result. Just as in CF, the pathogens frequently associated with pneumonia in BE patients are Ps.aeruginosa and MRSA. The American Lung Association notes that also like CF, BE patients with MRSA infections may lose lung function at a faster rate and have more bothersome respiratory symptoms.7

As we noted in our initiation, Destiny’s XF-series of antimicrobials is a new class of bactericidal surface-active agents that have demonstrated preclinical and clinical activity against some Gram-negative pathogens and most Gram-positive pathogens including all S. aureus strains including MRSA. One distinct advantage of the XF-series of agents is that they have not been used in clinical practice to date, so no pre-existing resistance has been observed. It has not been possible to generate resistant XF-series mutants in 55 passages in the presence of low-dose XF-73 where far fewer passages have generated resistant mutants to existing antibiotics that are not normally associated with the appearance of resistance during treatment. In addition to bacteria, several fungal species have been implicated in the pathogenesis of CF and the XF-series is known to have anti-fungal activity.

In November 2018 Destiny announced that it had been jointly awarded a National Biofilms Innovation Centre-funded research collaboration with the University of Southampton to investigate the use of the XF-series of agents in preventing, controlling and eradicating chronic clinical infections with underlying biofilm involvement such as those in CF.

Part of the problem with pneumonias in CF and BE patients is that both Ps. aeruginosa and MRSA are difficult to treat, and both can produce their own biofilms to shelter them from the effects of antibiotics. The antibiotics used most often in CF patients are directed against the infecting pathogens and are either systemically delivered, or formulated to be delivered by nebuliser. While the formulation needed to deliver the XF-series into the lung has still to be decided, the XF-series has already shown the potential to eradicate bacteria such as MRSA within a biofilm. In addition, the molecular structure of the XF-series of antimicrobials, if delivered by nebuliser, could have attributes that also imply activity within a pulmonary biofilm. This is because there is a significant amount of work on the ideal properties of inhaled drugs containing quaternary amines like glycopyrronium (a drug for the treatment of COPD) and the XF-series has two important characteristics that aid retention in the lung. The first is the active uptake by epithelial cells using organic cation transporter 1, which is expressed in the lung, and the second is the retention of this type of drug in the lung because of its slower passive cellular permeability. These are a potentially validating rationale for the use of the XF-series antimicrobial agents in biofilm-mediated lung diseases like CF and BE.

We value Destiny Pharma using a risk-adjusted NPV analysis, resulting in a valuation of £70.2m, or 160p per share based solely on the use of XF-73 in the prevention of Staphylococcal post-surgical infections in high-risk surgical patients. This is reduced from our previous valuation of £83.2m or 191p per share due to an adjustment in our pricing assumptions (detailed below) and pushing back the US commercialization timeline to align with company guidance. We have assumed the first launch will be in the US in 2023, as this is where Destiny’s clinical trials are being conducted. This is a delay from our previous reports (2022) due to the progress of the Phase IIb study, which is expected to conclude around mid-2020. Other markets will follow, including Europe (we have only included EU5), Japan (which has a history of extensive antibiotic use, and has a pricing structure for novel drugs) and China (where Destiny already has an agreement with CMS, and there is concern on antimicrobial resistance). We have assumed that within the year following the Phase IIb results, Destiny will license XF-73 on a global basis ex-China, although regional deals may occur. Our recently revised peak end-market sales estimations and the valuation of the royalties and milestones from the sales of XF-73 are shown in Exhibit 1. Details of our typical milestone assumptions are shown in Exhibit 2. Our model also includes £0.25m in grant funding in FY19 since Destiny has received four grants since its IPO as antimicrobials are perceived to be a ‘hot spot’ for these incentives.

We have confined the use of XF-73 to the indication for the prevention of post-operative Staphylococcal infection in only high-risk patients. The preventative indication (to which the FDA has agreed) avoids the commercial issues involved with treating only infected patients with a short course therapy. Instead, the preventative indication covers a significantly larger number of asymptomatic surgical patients prophylactically treated for a short course. We have further restricted our model only to some cardiovascular surgeries (not including interventional cardiology indications, for example), neurosurgical indications (with spinal injections and carpel tunnel release procedures excluded) and orthopaedic surgeries (excluding bunion surgery, knee arthroscopy and muscle, tendon, facia and bursae procedures).

The reported incidence of high-risk surgical procedures differs by market, with the US having the most complete data (of 48.3m surgical procedures in 2010, 6.6m were high risk). The Chinese market has a lower recorded number of high-risk surgeries, and we have assumed a lower penetration rate and market share in China compared to other markets for the initial two-year period after launch and before access to the National Drug Reimbursement List (NDRL). After access to the NDRL, we have assumed that the price per course falls from $100 to $50, but the market share triples (as was the case with Roche’s Avastin). As XF-73 is expected to complete and report the Phase IIb results in mid-2020, we have applied a 35% probability of success with a 70% chance of a licensing deal (since there is already a regional development deal with CMS). We will revisit the deal terms and probabilities after the Phase IIb results. As there is considerable scope to alter the probabilities of success for anti-infectives, we have revised our sensitivity analysis (Exhibit 3, below). The effect of these base case assumptions on end-market sales of XF-73 is shown in Exhibit 1. The other key assumptions in our model include:

We have valued Destiny Pharma based solely on the sum of the milestones and royalties from a licensing deal for its lead product, XF-73. Destiny is developing other XF series products, including for the prevention of VAP, the treatment of CF and dermal indications – VAP is a smaller number of patients, but a higher value per patient – and other earlier-stage products that have in vitro activity against biofilms.

Destiny is developing first-in-class antimicrobial agents as the first drugs to be approved in those indications. Therefore, clinical, regulatory and commercial risks may apply.

Some key sensitivities apply in our XF-73 model. After antimicrobial products have shown biological activity in animal models, their subsequent development is generally less risky than oncology or neurology drugs as the resolution of an infection in mice is predictive of one in humans. For instance, in 2003 CMS reported that the probability of a Phase II anti-infective product reaching the market was 47% vs 2% for a CNS drug at the same stage of development. Even the 47% probability explored in Exhibit 3 may be an underestimation since it would apply to all antimicrobials – systemic and topical – and topical agents like XF-73 generally have far fewer toxicological issues. Exhibit 3 explores the revised sensitivity of the risk-adjusted valuation of Destiny Pharma (inclusive of net cash) to clinical trial probabilities at Phase II and the price per course of XF-73, with all other assumptions remaining unchanged.

The price of a branded drug will almost always be a key driver of the valuation of the company. While off-label but branded Bactroban Nasal (mupirocin calcium) is priced at about $300 per five-day course, we have assumed a price per course of $400 for XF-73 because its profile is expected to have advantages over the off-label competition. XF-73 is active against strains that are mupirocin-resistant, has a shorter course than Bactroban Nasal, and most importantly, because XF-73, unlike Bactroban Nasal, is expected to be the only drug approved for the prevention of Staphylococcal post-surgical site infections. Another possible competitor to XF-73 is intravenous vancomycin, which costs hospitals c $60 per bag. Vancomycin is a valuable drug that retains activity against antibiotic-resistant bacteria and, while some surgeons infuse a single bag before each surgery, it is neither approved for this indication nor included in surgical guidelines. The use of vancomycin in surgical prophylaxis is also discouraged by infectious disease physicians on the grounds that it promotes resistance. However, we have included $60 as the bottom end of the pricing range in Exhibit 3. The prices in each market are linked to the US price of $400 in our model so that when this changes in the sensitivity analysis in Exhibit 3, it feeds through to all jurisdictions.

From the analysis in Exhibit 3, it appears that at a price of c 46p per share, which is roughly similar to the company’s current share price, the market is effectively assuming a price per course for XF-73 that is significantly below all other branded and unapproved competitors, and less than a 20% probability of success for the anti-infective product that already showed efficacy in Phase IIa.

Destiny raised £15.2m gross in its September 2017 listing on London’s AIM, followed by a £3m investment by China Medical System Holdings (CMS) in December 2017 as part of a regional development and commercialisation agreement. This included rights to Destiny’s pipeline in China and some other Asian countries (excluding Japan). The end-H119 balance sheet showed cash and equivalents of £9.1m (including £4.0m in term deposits). Even with Destiny’s investment in its ongoing US Phase IIb study, the H119 total operating expense was £2.5m compared to £2.6m in H118. Part of the reason for this lower operating expense was the delay in opening centres for the Phase IIb study, grant funding of its earlier-stage pipeline and the R&D tax credit. These contributed to Destiny’s H119 loss per share of 4.8p (5.2p per share in H118). We have slightly adjusted our expected operational loss for FY19 to £5.7m from £6.7m as we have offset some R&D expenses into 2020.

Destiny believes that it has enough financial resources to last into 2021, and that they should be enough to carry Destiny through to its key inflection points in 2020 (including the Phase IIb study read-out in mid-2020). Our financial model projects Destiny’s expected spend on the US Phase IIb clinical study and includes a very modest, non-dilutive grant funding inflow of £0.25m in FY19. We have included placeholder funding of £7.8m ($10m) in 2020 since we now forecast that the funds raised in the 2017 IPO will allow operation through 2021, before which we expect either a $10m (assumed for the purpose of our model as illustrative debt) licensing transaction for XF-73 or a fund-raising to provide funds to further develop Destiny’s pipeline beyond 2021.