Oxford Cannabinoid Technologies — Early signs of revival in clinical activity

OCT is a UK-based biotechnology company taking the standardised and robust pharmaceutical pathway approach to the clinical development of cannabinoid medicines. It has a pipeline mainly focused on pain, which has a global market value estimated to be worth c $192bn by 2030 (according to Growth Plus Reports), but management also announced its expansion into oncology in July 2023 (Exhibit 1). The company is focused on developing new chemical entities (NCEs; eg Programme 1), phytocannabinoids (synthetic plant-derived cannabinoids; eg Programme 2), as well as compounds from its 475-member library of proprietary and in-licensed cannabinoid derivatives (chemically modified CBD and THC derivatives; eg Programmes 3 and 4).

OCT461201, the company’s lead asset, is a cannabinoid receptor type 2 (CB2) selective NCE agonist. The drug candidate has demonstrated its potential in early-stage pre-clinical models for neuropathic pain (nerve-related) associated with chemotherapy-induced peripheral neuropathy (CIPN) and visceral pain (gut-related) in irritable bowel syndrome (IBS), and hence, OCT plans to pursue these as initial indications. We note that these both have potentially sizeable commercial opportunities, with treatment markets projected to be worth $1.17bn by 2028 and $4.7bn by 2030, respectively. We also note that as the mechanism of action of the asset is not specific to CIPN and IBS, OCT may explore additional indications for it, building on the foundation of the recently completed Phase I trial, as described below.

In October 2023, OCT announced that it had completed the SAD study for OCT461201. This was a randomised, double-blind, placebo-controlled study, conducted in the UK by Simbec Research, whereby subjects received just one dose of the drug. Healthy volunteers (n=32) were split into four cohorts of eight and randomised (3:1) to receive OCT461201 (six patients per cohort, dose ranging from 10–450mg, precise doses not disclosed) or placebo (two patients per cohort). The results (announced 10 October 2023) were positive, with no safety or tolerability concerns, green-lighting the next stages of clinical development.

Subject to funding, OCT intends to proceed with a MAD study for OCT461201, whereby subjects will receive multiple mid-range doses (50–150mg, precise doses not disclosed), to provide key information on longer-term dosing and to obtain further pharmacokinetic data. Alongside the MAD study, management plans to submit an IND application to the US FDA, with the intention of launching a Phase II trial for OCT461201 in 2025. While the precise details of this potential Phase II trial are yet to be disclosed, we anticipate that this would be a multi-site study involving a larger population, and will be the first measure of efficacy for patients with CIPN. We note that management is open to discussions with potential partners to advance this programme; however, we expect that results from a Phase II trial, if positive, could greatly facilitate such discussions.

OCT130401 is an inhaled phytocannabinoid drug/device combination, which, with the latest funding announcement, we understand is a key strategic priority for the company. It is being developed as a potential treatment for trigeminal neuralgia (TN), a severe neuropathic facial pain indication. The condition is characterised by sudden attacks of chronic pain in the head and face, which may repeat multiple times per day, and hence has a significant impact on quality of life. TN is an orphan indication with an estimated 10,000–15,000 new cases in the US/year (most common in women over 50 years of age). The condition is currently treated with anti-seizure medicines, muscle relaxants and even surgery, but these options are often found to be ineffective. According to Grand View Research, the global neuralgia treatment market was valued at US$1.8bn in 2019, with a projected CAGR of 6% in 2020–27. The growth is expected to be driven by TN due to an increasing prevalence of the condition, and, hence, represents a potentially sizeable commercial opportunity, in our view.

Given the unpredictable nature of TN, OCT believes that the inhaler-style of the drug/device should offer fast delivery and action, giving more desirable patient outcomes. Pre-clinical research for this asset was completed during FY23, and the company is now gearing up to advance this candidate to the clinic. OCT plans to conduct a Phase I trial in Australia, where management aims to utilise the experience from local committees open to cannabinoid research and clinical research organisations focused on the development inhaled cannabinoids, as well as make use of its access to a diverse and cannabinoid-experienced patient population. OCT is also working with Human Research Ethics Committees to review their research proposals, ensuring they meet the appropriate standards, which should lead to an efficient regulatory approach and potentially facilitate an IND pathway with the US FDA in the future, provided the data are supportive. OCT will also be eligible for Australia’s favourable R&D tax credit regime, with potential rebates of up to 43.5% of clinical trial-related R&D costs. We therefore believe that conducting the Phase I trial for OCT130401 in Australia is a logical strategic decision.

We note that orphan designation has been granted for OCT130401, enabling seven years of market exclusivity in the United States, and 10 years in Europe and Japan, provided it is successful with regulatory approval. In January 2024, OCT also announced that it has filed a European patent application related to this programme, based on the composition of THC and CBD being used as part of this drug/device. If the patent is granted (a decision is expected within two to five years), this would grant OCT the exclusive rights to the use, production and sale of the composition for up to 20 years from the filing date. We note that OCT plans to file several other related patent applications to protect other aspects of the programme throughout 2024.

We understand that Programme 3 (OCT960609) is still in pre-clinical development for a rare neuropathic pain indication that has not yet been disclosed. The candidate is a dual CB1/CB2 agonist and is a derivative of THC. In other words, it has been chemically optimised to improve properties such as bioavailability. Management has communicated that early-stage studies suggest that it may be more efficacious than THC in terms of analgesia, and with lower psychoactive side effects. Management is in the process of filing for patent protection for this asset, as well as exploring the possibility of Orphan Drug designation to extend its market exclusivity period, if successful with regulatory approval.

Programme 4 marked OCT’s expansion into oncology, as in July 2023, the company announced that the candidate is a potential first-in-class immunotherapy agent as a potential treatment for solid tumours. We view this as a positive development for OCT, as it diversifies the company’s pipeline beyond pain indications. Management has communicated that it has demonstrated promising early-stage results in pre-clinical models involving breast cancer cell lines. Although in very early stages of development, we believe that an oral immunotherapy drug could have a sizeable commercial potential. However, it will have to demonstrate strong efficacy in a highly competitive treatment space to garner market share. As with Programme 3, management is also in pursuit of patent protection and potential orphan market exclusivity for Programme 4. Pre-clinical work is still ongoing, and we expect an update when the information is available.

We note that while management is eager to progress these two earlier-stage programmes, funding restraints suggest the company may need to focus on the progress of OCT461201 to Phase II and OCT130401 to the clinic as top priorities in the near term.

Along with the H124 results, OCT announced a planned fund raise, totalling £1.205m in gross proceeds (c £1.15m net). The first part of the raise will include a £640k equity issue (to existing shareholders and new institutional investors), comprising 128m shares, at 0.5p per share (a 31.5% discount to the 0.725p closing price as of 29 January 2024). Management expects the new shares (which would represent a 13.3% increase in the current number of shares outstanding) to enter circulation by 20 February 2024 subject to agreement with the Financial Conduct Authority and London Stock Exchange.

The second part will include a proposed convertible loan note (CLN) to raise up to £565k in additional funding on execution of a binding agreement and subject to certain conditions. Of the total CLN planned issue, £450k will be subscribed for by Cantheon Capital, a venture fund focused on early and mid-stage biotech companies, with the remaining £115k contributed by existing investors and OCT directors. We note that Cantheon’s investment is specifically earmarked for the company’s second pipeline asset, OCT130401 (Programme 2), which is targeting the TN market and is Phase I-ready. The £450k from Cantheon will be payable in two tranches, the first payment to be made on the commencement of the Phase I trial for OCT130401 (expected in Q2 CY24), and the second payment to be paid out when the first patient is enrolled in the study. OCT has also highlighted the potential for an additional £925k investment from Cantheon to help fund Phase II studies for the drug/device combination, should the Phase I data be favourable. The convertible notes have a maturity of 12 months and will carry an interest rate of 8% to be paid annually in cash. The conversion price will be the higher of the issue price and the volume weighted average price over the previous 10 trading days, less a discount of 10%. We highlight that the CLN investment is conditional on shareholder approval, entering into a binding agreement and the company commencing the proposed Phase I trial within 90 days.

In addition to the initiation of the Phase I trials for OCT130401, management expects to use the funds to initiate IND application work to the FDA for its lead asset, OCT461201 (Programme 1) and for OCT130401, as well as to meet working capital requirements. We opine that while these funds will provide OCT with liquidity to initiate clinical development activities for OCT130401, the company will likely need to raise additional funds by late-CY24 to support further clinical progress for its most clinically advanced asset, OCT461201, and its pre-clinical pipeline (Programmes 3 and 4).

OCT’s operating performance improved materially in H124 (versus H123), helped by a tighter control of overheads and focused R&D efforts solely on the lead asset OCT461201 (which entered Phase I clinical trials during the period following approval from the Medicines and Healthcare Products Regulatory Agency) while halting development work on the other programmes. R&D expenses during the period were reported at £1.2m (down c 63% from H123) with OCT461201 accounting for over 90% (£1.1m) of the expenses. Final data from this SAD trial was reported in October 2023 and we therefore expect no further R&D expenses on this programme in H224 (although we do factor in R&D expenses on other R&D programmes, particularly OCT130401; this is detailed below). Based on management guidance we estimate the company to undertake a MAD study and/or initiate a Phase II study in early CY25. Administrative expenses were down 11.6% y-o-y (to £1.2m) of which £0.5m related to salaries, £0.2m to insurance payments and £0.1m towards legal fees. Overall, the reported operating loss almost halved to £2.4m versus £4.5m in H123. The cost controls also reflected an improved cash flow position, with OCT reporting operating cash outflows of £1.2m compared to £4.2m in H123.

Based on the H124 run rate and improved visibility on the company’s clinical plans (as discussed above), we have made certain adjustment to our FY24 and FY25 forecasts. For R&D expenses, while we expect no further development work on OCT461201 in H224, we have incorporated additional expenses of £320k on the other pipeline assets, which includes £200k for OCT130401 following the announcement of the convertible debt raise and plans to take the programme to the clinic in Q2 CY24. The remaining £120k is assumed to be spent on the other pipeline programmes and related activities. We have also adjusted our FY25 estimates downwards based on our understanding that the clinical focus in the next 12 months will be on OCT130401 with further plans for OCT461201 likely to take shape only from early CY25 (late FY25). Our revised R&D estimates for FY24 and FY25 stand at £1.4m and £1.8m, versus £1.0m and £7.5m previously.

We also tweak our estimates for administrative expenses based on the H124 figures, raising the FY24 estimate to £2.1m (£1.9m earlier) and paring the FY25 estimate to £2.2m, from £2.4m previously. Overall, we now estimate operating losses of £3.5m and £4.0m in FY24 and FY25, respectively (previously £2.9m and £9.9m, respectively).

The cash balance at end-October 2023 stood at £1.1m, which, as per management, provides a runway to end-Q1 CY24. Adding the additional £1.3m R&D tax credit and £1.15m in net proceeds to be raised (from the equity and convertible debt raise), and accounting for the company’s clinical plans for the next 6–12 months, we estimate the company to have a cash runway into Q4 CY24, sufficient to make headway with its Phase I study for OCT130401. We project an operating cash outflow of c £3.2m in FY25, which translates to a burn rate of £800k every quarter. We therefore expect that the company would likely need to raise additional funds by late Q4 CY24. Following improved visibility and directional guidance from management on its clinical plans, we have reassessed our estimates for longer-term funding requirements by the company. We now estimate that OCT will be required to raise an additional £10m in FY25 and FY26 combined (versus £40m previously), which we reflect as illustrative debt in our model. Alternatively, if these funds are raised through an equity issue, OCT would need to issue an additional 1,923m shares (at the current share price of 0.52p), which would dilute our per share valuation to 0.88p per share, from 2.6p per share currently.

We keep our enterprise valuation estimates broadly unchanged for now, ascribing 100% of the value to the two indications pursued by the company under its lead programme OCT461201 (CIPN and IBS). While we believe that the clinical progression of OCT461201 will depend on the timing and quantity of addition funds raised by the company, we feel confident in maintaining our 2030 launch estimate for now, given our already conservative assumptions versus the company target of a 2027 launch. We will revisit this assumption based on progress made by the company in the next three to six months. We also continue to assume that the company will pursue both the CIPN and IBS indications in the clinic, although this too is subject to review based on the direction taken by management in the coming months. For the second asset, OCT130401, we await the initiation of the Phase I clinical trial to include it in our valuation, but note the potential upside opportunity on clinical entry.

Our enterprise value benefits slightly from rolling forward our model, although its impact on the equity valuation has been fully offset by the lower net cash figure at end-H124 (£1.1m versus £2.3m at end-FY23). Our overall valuation remains unchanged at £25.3m or 2.6p per share. Incorporating the recently announced £640k equity issue in our estimates would result in our pro-forma valuation adjusting to £26.0m. The pro-forma per share value would change to 2.4p per share. Assuming the convertible notes are fully converted at the equity issue price of 0.5p, our valuation would reset to £26.5m with the per-share valuation diluting to 2.2p/