Oxford Cannabinoid Technologies — A move away from generic pain treatment

OCT is a UK-based drug development company focused on advancing cannabinoid derivatives, phytocannabinoids (synthetic plant-derived cannabinoids) and NCEs for the treatment of pain and other indications. With the stigma that has become associated with opioids, alternative therapies for the treatment of pain are highly sought after. The company’s leading pipeline asset is OCT461201 (Programme 1), a cannabinoid receptor type 2 (CB2) selective NCE agonist being investigated as a potential treatment for neuropathic pain associated with CIPN and visceral pain in IBS, as initial pain indications. In May 2023, OCT announced that the UK Medicines and Healthcare products Regulatory Agency (MHRA) and the Wales Research Ethics Committee 2 (REC 2) had approved its combined Phase I clinical trial application for OCT461201. Post approval, OCT started patient enrolment and expects to conclude the trial by Q3 CY23. Management believes this programme will be ready for a subsequent Phase II trial in CIPN and IBS patients in the same period.

OCT’s second most advanced asset is OCT130401 (Programme 2), an inhaled phytocannabinoid drug/device combination for the treatment of trigeminal neuralgia, a severe neuropathic facial pain, for which orphan indication designation has been granted. OCT130401 has completed preclinical development work and is a Phase I ready asset. However, following its strategic review in August 2022 and related announcement in April 2023, management has temporarily placed the clinical development of this asset on hold. OCT’s strategy is to focus on the OCT461201 Phase I clinical study, to conserve resources and manage its cash burn rate, and to further progress its two additional cannabinoid derivative projects (Programmes 3 and 4), which are still currently in the early stages of development for undisclosed indications. Management also intends to place Programmes 3 and 4 on hold once they have advanced to preclinical and lead stages, respectively, expected in CY23. We note that in July 2023, OCT announced that Programme 4 will target a solid tumour indication, diversifying the company’s clinical development pipeline.

We value OCT at £26.1m or 2.7p per share. Our valuation is based on an rNPV calculation for the company’s lead asset, OCT461201 (Programme 1) in IBS and CIPN indications in US and European markets. Additionally, we include estimated net cash of £2.0m at end FY23. We use a discount rate of 12.5%, and assume that a licensing deal for OCT461201 will be realised in FY26, provided results from the upcoming Phase II trial are positive.

OCT operates through an asset-light business model, partnering with contract research organisations (CROs) to conduct preclinical and clinical work across its drug pipeline. The company is currently at the clinical stage of drug development and has, until now, funded its operations through capital-raising. We believe it has an immediate need to raise funds to proceed with further clinical development beyond its approved Phase I trial for lead programme, OCT461201. We have modelled a £40m fund-raise in FY24–26 as illustrative debt, following which we have assumed a licensing deal for its lead asset, OCT461201. We expect the licensing partner to fund the Phase III trial and subsequent commercialisation. The balance sheet incudes a cash balance of £4.9m and no long-term debt by end H123. We estimate net cash at end FY23 at £2.0m.

OCT is subject to the regular sensitivities associated with drug research and development. Its prospects will be affected by development delays or failures, regulatory risks, competitor successes, partnering successes and financing risks. While OCT underwent a strategic budget review in August 2022 to curtail its spending rate, additional capital will be required to fund the follow-on Phase II study for its leading asset, OCT461201, which we expect to start in H2 CY23. If financings are achieved through equity issuances, the pricing may not be favourable for current shareholders and could lead to significant dilution. Additionally, failure to generate positive results from the upcoming Phase I study and subsequent studies of OCT461201 may further inhibit access to capital.

Neuropathic pain can be a symptom brought on by a plethora of different diseases or underlying health conditions. Drugs like gabapentin and pregabalin are commonly prescribed for the treatment of neuropathic pain. However, as they are not indication specific, their clinical effectiveness can be inadequate in certain cases. Additionally, the long-term use of such gabapentinoid therapies can have detrimental side effects including depression, anxiety, and memory loss. OCT’s strategy is to develop novel pain treatments directed towards specific pain indications with the aim of providing therapies with enhanced safety and efficacy compared to broader treatment approaches. Management has communicated that, where the data are supportive, it may explore additional indications, possibly expanding and maximising the application of its novel therapies.

One of the first indications OCT is focusing on is CIPN. CIPN is a side effect of chemotherapy, where chemotherapeutic agents can cause peripheral nerve damage leading to potentially debilitating numbness, or pain, in the hands and feet. Common neurotoxicity-inducing classes of chemotherapy include platinum-based drugs, taxanes, and thalidomide and its analogues, which have neuropathy incidence rates of c 70–100%, 11–87% and 20–60%, respectively. It is estimated that c 68% of patients of neurotoxic chemotherapy will experience CIPN one month following the completion of treatment. There are no FDA-approved treatments for CIPN, and the current standard of care (SoC) is often off-label use of gabapentin, pregabalin, or the antidepressant duloxetine.

IBS is the second indication OCT is looking to pursue in the clinical development of OCT461201. IBS affects c 11% of the population globally, with symptoms including abdominal pain, diarrhoea, or constipation. IBS can be broken down into three main subtypes: constipation predominant (IBS-C), diarrhoea predominant (IBS-D) and mixed presentation (IBS-M). Visceral pain (pain of the internal organs) is one of the most common symptoms of IBS. Again, off-label neuropathic pain treatments like gabapentin and pregabalin are used to alleviate IBS visceral pain, as well as clonidine, which is reported to be the only conventional pain-managing drug that provides pain relief across the general IBS population. IBS-C and IBS-D represent potentially lucrative markets and are expected to reach US$967m and US$1.2bn, respectively, by 2028 (source: EvaluatePharma). Additionally, they are dominated by only a handful of treatments: tenapanor (US$246m sales by 2028, EvaluatePharma) and linaclotide (US$457m sales by 2028, EvaluatePharma) in IBS-C, and rifaximin (US$995m sales by 2028, EvaluatePharma) in IBS-D, which aim to alleviate all symptoms associated with IBS, including pain. In our view, IBS represents a potentially sizeable opportunity for OCT, for which it may be able to offer market differentiation with OCT461201.

It is important to note that OCT’s lead asset, OCT461201, is a synthetic endocannabinoid system-targeting NCE. The advantages of using synthetic active pharmaceutical ingredients, as opposed to natural isolates, are clear and recognised by regulators worldwide. Quality control, especially in relation to purity and concentration, is easier and more reliable with synthetic compounds. Furthermore, there are two well-known cannabinoid receptors: cannabinoid receptor type 1 (CB1) and type 2 (CB2). While CB1 is primarily involved in mediating the psychoactive effects of cannabinoids, CB2 is responsible for regulating anti-inflammatory and immunosuppressive responses. It is the CB2 receptor that OCT is aiming to selectively target and activate with OCT461201 (a CB2 agonist), which has been designed to trigger the desired therapeutic effect and circumvent the unwanted psychotropic side effects associated with CB1 agonists. We note that there are currently no FDA-approved treatments that are fully selective for the CB2 receptor, with cannabinoid therapies such as Epidiolex (cannabidiol) and Dronabinol (synthetic tetrahydrocannabinol) targeting both CB1 and CB2.

Management commenced patient enrolment for its UK-based Phase I clinical study of OCT461201 in May 2023, following UK MHRA approval. The randomised, double-blind, placebo-controlled, dose-escalation trial will recruit 32 healthy volunteers to assess the safety and tolerability of OCT461201. Patients will be split into four cohorts of eight and randomised (3:1) to receive either OCT461201 (six patients per cohort) or placebo (two patients per cohort). The trial is set to be conducted by UK CRO Simbec-Orion and will last around two months, with readouts expected in Q3 CY23. The outcomes of the dose-escalation study will help shape the design of follow-on trials. Management attests that this programme will be Phase II ready in Q3 CY23 and hopes to initiate in H2 CY23. We expect the Phase II trial to be conducted in CIPN and IBS patients, although further details on the design, duration and size of the trial are yet to be disclosed.

OCT461201 was in-licensed from the Japanese biotech AskAt in 2019 and OCT will be required to pay certain developmental milestone payments and back-end royalties on net sales to AskAt in accordance with the licensing agreement. The potential amount of milestone payments and related royalty rates has not been disclosed. The agreement provides OCT with exclusive worldwide rights (excluding Japan) to develop, manufacture and commercialise OCT461201 for any indication, as well as the associated know-how and patent protection.

OCT completed the preclinical development of OCT461201 in Q422, with the results of this work generating encouraging early-stage efficacy signals in neuropathic pain and IBS animal disease models. Rats were treated with either vehicle, SoC pregabalin or OCT461201, and assessed for thermal hyperalgesia (pain sensitivity to temperature) and mechanical allodynia (pain sensitivity to low-threshold mechanical stimulation such as touch), symptoms of multiple neuropathic pain indications, particularly those characteristics of CIPN. OCT461201 was able to reduce hyperalgesia at all dose levels, with higher doses (10 and 30mg/kg) achieving results similar to SoC pregabalin (Exhibit 1). Additionally, mechanical allodynia was reduced at elevated dose levels, albeit not at the responses observed with pregabalin (Exhibit 2). In our view, the presence of response signals following treatment with OCT461201 should be seen as a positive early indicator of pain relief, which management hopes will translate to neuropathic pain associated with CIPN. However, we advise caution in the interpretation of preclinical data that may not necessarily translate into clinical utility.

In IBS, OCT461201 was also found to produce efficacious signals in two IBS-D rat models. Analgesic effects in the IBS-D visceral pain model were observed at a low dose (3mg/kg), while a reduction in faecal production was also exhibited at similarly low doses, relative to control (Exhibits 3 and 4, respectively). We note that throughout preclinical studies, OCT461201 continued to demonstrate a positive safety and tolerability profile, while also exhibiting a high degree of selectivity for the CB2 receptor over CB1.

As phytocannabinoids like OCT130401 are naturally occurring, albeit synthetically produced, they are generally not patentable. Instead, market exclusivity may be obtained by pursing orphan drug designation and by generating novel formulations. However, synthetic, endocannabinoid system-targeting NCEs such as OCT461201 and OCT's proprietary library of cannabinoid derivatives are treated like all other new drug molecules in the pharmaceutical industry, and may be patented to provide longer-term market exclusivity. OCT manages the prosecution of 14 distinct families of patent applications, with each family concerned with different groups of cannabinoid derivatives. These applications revolve around the compounds themselves, as well the medical use thereof. This includes OCT461201 and its associated medical applications, in addition to the company’s proprietary library of cannabinoid derivatives, including but not limited to cannabidiol (CBD), tetrahydrocannabinol (THC) and cannabigerol (CBG) derivatives. These 14 families of patent applications were filed from 2020 and cover Europe, the US and Japan. We note that these patents are yet to be secured, and we expect the filing process to take approximately four to five years, based on management guidance.

OCT is subject to the regular sensitivities associated with drug research and development. Its prospects will be affected by development delays or failures, intellectual property risk, regulatory risks, competitor successes, partnering risks and financing risks. OCT underwent a strategic budget review in August 2022, but requires additional capital immediately to proceed with the Phase II and further studies for its leading asset OCT461201. We project that it will need to raise a total of £40m in FY24–26 before it secures a licensing deal in FY26. If it obtains financing through equity issuances, the pricing may not be favourable for current shareholders and could lead to significant dilution. Additionally, failure to generate positive results from the upcoming Phase I study and subsequent studies of OCT461201 may inhibit access to capital. Further, partnership risk is material for OCT, as securing a licensing partnership within estimated timelines and on favourable terms is crucial for the timely initiation of Phase III/pivotal-stage studies or the commercialisation process, according to our estimates. Also, the company’s ability to defend its IP assets is vital for the success of its products.

We value OCT at £26.1m or 2.7p per share. Our valuation is based on an rNPV of the company’s lead asset, OCT461201 (Programme 1) and includes estimated net cash of £2.0m at end FY23. While valuing OCT461201, we have considered both the IBS (rNPV of 1.74p per share) and CIPN indications (rNPV of 0.77p per share) with combined peak sales of US$2,595m for the asset in US and European markets, using a discount rate of 12.5%. We would like to highlight that we have not included preclinical assets such as Programmes 2, 3 or 4 in our valuation. However, we intend to include them when they enter clinical development. The assumptions used in our valuation are shown in Exhibit 5.

Our rNPV assumes a licensing deal for OCT461201 for both the IBS and CIPN indications in FY26 following completion of the Phase II trial, before which we expect OCT to take on all R&D expenses. After entering into a licensing deal, we assume the licensing partner will undertake responsibility for all subsequent R&D (Phase III) and commercialisation expenses. Based on an analysis of recent Phase II and Phase III licensing deals in IBS (Exhibit 6), we assume a total deal value of US$100m, consisting of an upfront payment of US$10m, development milestones of US$30m and sales milestones of US$60m over the period of patent protection, which we include in our rNPV. Additionally, we have accounted for an in-licensing agreement for OCT461201 with AskAt, according to the terms of which OCT will be required to make annual royalty payments for the sale or transfer of licensed product including undisclosed milestone payments. Due to the unavailability of deal terms, we have assumed a 3% royalty rate on net sales for modelling purposes.

Furthermore, given the respective stages of development, we assume a success rate of 10% for both the IBS and CIPN indications. On these assumptions (Exhibit 7), our valuation for OCT comprises 64% IBS, 28% CIPN and 8% cash.

Based on our estimates, we believe that OCT needs to raise funds imminently and we have modelled a £40m fund-raise in FY24–26 as illustrative debt in our model. If these funds are raised through an equity issue, OCT would need to issue an additional 4,324m shares (at the current share price of 0.85p), which would dilute our per share valuation to 1.2p per share from 2.7p per share currently. Additionally, we expect OCT to achieve break-even one year post commercialisation (ie in FY30).

In FY22, OCT reported an operating loss of £5.5m, a 64.5% y-o-y increase due to higher research costs and administrative expenses. R&D expenses grew to £2.9m in FY22 from £0.4m in FY21; the increased costs were mainly associated with preclinical activities related to Programme 1 (OCT461201) and Programme 2 (OCT130401), amounting to £1.5m in research expenses and a further £0.8m related to the acquisition and subsequent screening of cannabinoid derivatives from Canopy Growth Corporation. Administrative expenses were significantly up from £1.5m to £2.3m, which includes £1.1m in salaries. Further, in H123, the company reported an operating loss of £4.5m, nearly double £2.3m in H122 due to enhanced R&D costs associated with preclinical activities related to OCT461201, along with the progression of the clinical pipeline across all programmes. In H123, OCT completed preclinical work for OCT461201 under its £2.6m contract research agreement with Evotec subsidiary Aptuit (Verona), followed by a submission-ready regulatory document obtained in December 2022. Reflecting the higher operating expenses, OCT recorded operating cash outflows of £5.4m in FY22 and £4.2m in H123.

With OCT461201’s preclinical work complete in H123 and, according to management guidance at that time, having an available cash runway into Q124, we forecast lower research costs in H223 (£1.3m versus £3.1m in H123), resulting in an operating loss of £7.5m in FY23, up from £5.5m in FY22. Further, in FY24 we expect R&D expenses to increase significantly to £8.5m as the company has already initiated the Phase I clinical trial for OCT461201 following UK MHRA approval to commence the clinical trial in May 2023, and likely progression of other assets in preclinical stages. For FY24, we project a reported operating loss of £11.6m and a cash burn rate of £11.3m. We expect OCT to incur all R&D expenses until a licensing deal is secured in FY26, after which time we expect the partner to fund the further development of OCT461201. We note that any deal that OCT arranges may differ from our estimates.

We note our trial timeline forecasts product launch in FY29, which is different from OCT’s communicated timelines of FY27, as we have been more conservative in our assumptions. We expect OCT to conduct another Phase II study at US sites, possibly in FY25, to gain traction for licensing deals.

During its preclinical phase, OCT completed four rounds of funding, which raised a total of £6.85m, including a £750k seed funding in January 2018, a £4.75m Series A funding in August 2018 (led by Imperial Brands and Casa Verde Capital), a £750k Series B funding in January 2020 (led by the shareholders of Kingsley Capital Partners) and a £600k fund-raising via the convertible loan note instrument, completed in March 2021. In 2021, OCT raised gross proceeds of £16.5m at its LSE IPO. With our estimated net cash position of £2.0m at end FY23 and anticipated cash burn rate of £11.3m in FY24, we estimate that OCT has an immediate need to raise cash. We therefore expect it to raise a total of £40m through FY26 (£15m each year in FY24–25, £10m in FY26), which we have modelled as illustrative debt. We project that the company will enter into a global licensing deal in FY26. However, we note there is a risk that the company may not enter into a licensing deal in accordance with our estimated timeline, which could cause commercial delay or require additional or incremental funding needs.