XF-73 enrolment paused by COVID-19

Destiny Pharma 6 May 2020 Update
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Destiny Pharma

XF-73 enrolment paused by COVID-19

Earnings update

Pharma & biotech

6 May 2020

Price

41p

Market cap

£18m

US$1.24/£

Net cash (£m) at 31 December 2019

7.48

Shares in issue

43.9m

Free float

47%

Code

DEST

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

28.1

9.3

(49.7)

Rel (local)

17.5

41.0

(36.9)

52-week high/low

82p

32p

Business description

Destiny Pharma is dedicated to the discovery, development and commercialisation of new antimicrobial agents that have unique properties that improve outcomes for patients. Destiny’s first product, XF-73, is in a US Phase IIb clinical study.

Next events

XF-73 Phase IIb interim results

Delayed

Analyst

Nathaniel Calloway

+1 646 653 7036

Destiny Pharma is a research client of Edison Investment Research Limited

Destiny reported an operational loss of £5.58m for 2019 and ended the year with £7.48m in cash and equivalents, which it believes will provide a runway to Q421. We expect costs in 2020 to be lower than initial expectations due to the impact of COVID-19, which has caused the company to pause enrolment in its ongoing Phase IIb study of XF-73.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

0.0

(6.0)

(11.9)

0.0

N/A

N/A

12/19

0.3

(5.5)

(10.7)

0.0

N/A

N/A

12/20e

0.0

(4.6)

(8.3)

0.0

N/A

N/A

12/21e

0.0

(6.1)

(12.3)

0.0

N/A

N/A

Note: *PBT and EPS are as reported.

XF-73 trial on pause due to COVID-19

The company has enrolled 68 patients to date (out of a target of 200) in its ongoing Phase IIb study of XF-73 nasal gel for the prevention of post-surgical infections. Last year, following slower than expected enrolment in the US, the company added additional sites to expand the European portion of the trial, but this program has subsequently been put on hold on account of the COVID-19 virus. Although the pause will slow the trial, the company does not believe that it will compromise existing patient data, as follow-ups have been able to be performed remotely. As a result of these delays, the interim study update will be delayed from previous Q220 guidance (and future timelines are pending).

Cash runway to Q421

We assume that the company will be able to restart the Phase IIb study and ramp up to pre COVID-19 enrolment rates in the autumn of 2020 and that the study may provide top-line results in H121. The company’s current cash of £7.48m should be sufficient to reach this milestone, which may open partnering opportunities to finance its further development. Otherwise the company will need to seek financing on the capital markets. We include in our model $10m in additional financing to be incurred in 2021 (delayed from 2020 previously), recorded as £8.07m in illustrative debt.

Valuation: Lowered to £50.4m or 115p

We have lowered our valuation to £50.4m or 115p per share, from £70.2m or 160p per share. This is driven by delays to the XF-73 development timeline, both those caused by enrolment difficulties and COVID-19. We have pushed back the commercialization date for the US and Europe to 2024 and China to 2025.

Trial delays exacerbated by COVID-19

Destiny Pharma is currently in a Phase IIb study of XF-73 for the prevention of post-surgical infections. XF-73 is a topical formulation of a bactericidal agent designed for nasal application to decolonize the nose of Staphylococcus aureus prior to surgery. Nasal S. aureus has been cited as a major contributing factor in surgical skin infections, and the hope is that by reducing the presence of this bacteria, downstream complications can be avoided.

The Phase IIb study has to date enrolled 68 of the planned 200 patients in the study. The company reported in its 2019 preliminary results that enrolment in the study has been slow in the US, and that it opened additional European sites to attempt to bridge the gap. However, the COVID-19 pandemic has complicated this plan by forcing the company to pause enrolment altogether. Many other companies in clinical studies are facing the same issues, and we expect widespread disruption to clinical trials as a result. Interim results from the study, which were previously expected in Q220, have also been delayed. The company has not provided a timeline for when it expects to start enrolment again, but we forecast that studies will remain fully closed until June or July, and then have limited enrolment capacity until autumn 2020.

Destiny however should be able to weather such a delay. It stated that its current cash of £7.48m should provide a runway into Q421, which is consistent with our estimates. The completion of the Phase IIb study will be a major inflection point for the company, and we expect it to provide the company with financing opportunities such as partnering to further advance the product.

Management is optimistic that the COVID-19 crisis may increase awareness of methods to manage bacterial infections. Although COVID-19 is a virus, bacterial infection is often an end-stage complication. In one study in Wuhan, 50% of patients who died tested positive for secondary bacterial infections.1 Antibiotic resistance may further increase the risk in these patients. There are currently no concrete plans to advance XF-73 or any other product of Destiny’s for COVID-19 patients, but the unprecedented medical need during this pandemic may highlight the need for improved treatments for bacterial disorders and improved management of antibiotic resistance.

Zhou F, et al. (2020) Clinical course and risk factors for mortality of adult patients with COVID-19 in Wuhan, China: a retrospective cohort study. Lancet 395, 1054-1062.

Valuation

We have lowered our valuation to £50.4m or 115p per share from £70.2m or 160p per share previously. This is driven by delays to the XF-73 clinical program, both those due to enrolment issues in 2019 and COVID-19. We have delayed the expected launch date for the drug in the US and Europe to 2024 (from 2023) and China to 2025 (from 2024). Japan was on the cusp and is still expected to have approval in 2024 pending completion of a bridging study. Peak sales for the product are lower ($1.56bn all regions combined, from $1.89bn previously) because of a shorter runway until patent expiration in 2030. Additionally, we have delayed our schedule for milestones to reflect this timeline. Finally, net cash is lower at £7.5m from £9.1m previously (30 June 2019). These factors are partially offset by rolling forward our NPVs and lower unallocated costs (£9.0m from £10.7m due to some costs being paid).

Exhibit 1: Valuation of Destiny

Product

Jurisdiction

Launch

Peak sales
($m)

NPV
(£m)

NPV/share
(£)

Probability

Licensing deal probability

rNPV
(£m)

rNPV/share
(£)

XF-73

US

2024

1,173

XF-73

Japan

2024

39

XF-73

EU5

2024

281

XF-73

China

2025

62

XF-73 royalties

211.4

4.8

35%

70%

40.9

0.9

XF-73 milestones

82.3

1.9

35%

70%

18.3

0.4

Unallocated costs

(9.0)

(0.2)

35%

100%

(16.3)

(0.4)

Net cash at 31 Dec. 2019

7.5

0.2

100%

100%

7.5

0.2

Valuation

 

 

 

292.2

6.7

 

 

50.4

1.15

Source: Destiny Pharma reports, Edison Investment Research

Financials

Destiny reported an operational loss of £5.58m for 2019, down from £6.08m for 2018. This is in spite of a small increase in R&D spending (£3.8m compared to £3.5m) and is driven by a reduction in share-based compensation (£0.20m vs £0.73m in 2018) and a grant received for approximately £306,000 in in 2019.

On account of the delays to the XF-73 Phase IIb study, we have reduced our expected R&D expenditure in 2020 to £3.0m from £5.0m, but expect increased R&D spending in 2021 (£4.4m) as the company completes the study and prepares for future studies, contingent on financing.

We assume that the company will attempt to partner the product following the release of top-line results. Otherwise, we expect the company to seek financing on the capital markets at that time to continue to advance the product. In lieu of an agreement, we have included $10m (£8.07m) in illustrative debt in 2021, which is delayed from our previous assumption of £7.8m in 2020. However, the company’s cash at the end of 2019 (£7.48m) should be sufficient to reach this inflection point.

Exhibit 2: Financial summary

Accounts: IFRS; year-end 31 December; £000s

 

 

2018

2019

2020e

2021e

INCOME STATEMENT

 

 

 

 

 

 

Total revenues

 

 

-

306

-

-

Cost of sales

 

 

-

-

-

-

Gross profit

 

 

-

306

-

-

SG&A (expenses)

 

 

(1,863)

(1,869)

(1,700)

(1,700)

R&D costs

 

 

(3,474)

(3,800)

(3,000)

(4,400)

Other income/(expense)

 

 

-

-

-

-

Exceptionals and adjustments

 

(738)

(204)

(25)

(25)

Depreciation and amortisation

 

 

(9.7)

(18.4)

(2.3)

(2.4)

Reported EBIT

 

 

(6,084)

(5,585)

(4,727)

(6,127)

Finance income/(expense)

 

 

76.0

63.5

82.3

45.5

Reported PBT

 

 

(6,008)

(5,521)

(4,645)

(6,082)

Income tax expense (includes exceptionals)

 

 

841

813

1,000

678

Reported net income

 

 

(5,167)

(4,708)

(3,645)

(5,404)

Basic average number of shares, m

 

 

43,563

43,734

43,865

43,865

Basic EPS (p)

 

 

(11.86)

(10.75)

(8.31)

(12.32)

BALANCE SHEET

 

 

Property, plant and equipment

 

 

30.4

32.9

31.1

29.2

Goodwill

 

 

-

-

-

-

Intangible assets

 

 

-

-

-

-

Other non-current assets

 

 

-

-

-

-

Total non-current assets

 

 

30.4

32.9

31.1

29.2

Cash and equivalents

 

 

7,061

7,480

4,134

6,821

Other financial assets (term deposits)

 

 

5,000

0

0

0

Inventories

 

 

-

-

-

-

Trade and other receivables

 

 

931

911

277

277

Other current assets

 

 

36

134

134

134

Total current assets

 

 

13,028

8,525

4,544

7,232

Non-current loans and borrowings

 

 

-

-

0

8,065

Other non-current liabilities

 

 

-

-

-

-

Total non-current liabilities

 

 

-

-

0

8,065

Trade and other payables

 

 

404

514

152

152

Current loans and borrowings

 

 

-

-

-

-

Other current liabilities

 

 

398

285

285

285

Total current liabilities

 

 

802

798

436

436

Equity attributable to company

 

 

12,257

7,759

4,139

(1,240)

Non-controlling interest

 

 

-

-

-

-

CASH FLOW STATEMENT

 

 

Profit for the year

 

 

(6,008)

(5,521)

(4,645)

(6,082)

Taxation expenses

 

 

-

-

-

-

Profit before tax

 

 

(6,008)

(5,521)

(4,645)

(6,082)

Net finance expenses

 

 

(76)

(63)

(82)

(45)

EBIT

 

 

(6,084)

(5,585)

(4,727)

(6,127)

Depreciation and amortisation

 

 

9.7

18.4

2.3

2.4

Share based payments

 

 

738

204

25

25

Other adjustments

 

 

-

-

-

-

Movements in working capital

 

 

381

(83)

272

-

Interest paid / received

 

 

-

-

-

-

Income taxes paid

 

 

234

815

1,000

678

Cash from operations (CFO)

 

 

(4,721)

(4,631)

(3,428)

(5,422)

Capex

 

 

(17.8)

(20.9)

(0.5)

(0.5)

Acquisitions & disposals net

 

 

-

-

-

-

Other investing activities

 

 

76

5,063

82

45

Cash used in investing activities (CFIA)

 

 

58.2

5,042.5

81.8

45.0

Net proceeds from issue of shares

 

 

-

7

-

-

Movements in debt

 

 

-

-

0

8,065

Dividends paid

 

 

-

-

-

-

Other financing activities

 

 

-

-

-

-

Cash from financing activities (CFF)

 

 

-

7

0

8,065

Currency translation differences and other

 

 

-

-

-

Increase/(decrease) in cash and equivalents

 

 

(4,663)

419

(3,346)

2,687

Currency translation differences and other

 

 

-

-

-

-

Cash and equivalents at end of period

 

 

7,061

7,480

4,134

6,821

Net (debt)/cash (includes Term Deposits)

 

 

12,061

7,480

4,134

(1,243)

Movement in net/(debt) cash over period

 

 

(4,663)

(4,581)

(3,346)

(5,377)

Source: Destiny Pharma reports, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Destiny Pharma and prepared and issued by Edison, in consideration of a fee payable by Destiny Pharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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New York +1 646 653 7026

1,185 Avenue of the Americas

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Destiny Pharma and prepared and issued by Edison, in consideration of a fee payable by Destiny Pharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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