Financing to extend cash runway
Recce is raising A$8m of equity through the combination of an institutional A$4.0m share placement, priced at A$0.40/share
(a 13.0% discount to the 23 June closing price of A$0.46) and an SPP to existing investors
designed to raise up to an additional A$4.0m by allowing them the purchase shares
on similar terms. Participants in both the placement and the SPP will receive one
‘attaching’ option for every two shares issued. Each attaching option can be exercised
(until 30 June 2027) at A$0.60 per option for the issuance of one new common share
and two ‘piggyback’ options, with each piggyback option allowing the holder to purchase
one common Recce share at A$1.00 per share. The placement has now completed and settled,
with the 10.0m new shares listed for trading. The issuance of the attaching options
and as applicable, the piggyback options are subject to shareholder approval at an
upcoming extraordinary general meeting (EGM) scheduled on or before 31 August.
Under the SPP, eligible shareholders will be able to purchase up to A$30k of common
shares (plus applicable attaching options) at the offer price of A$0.40 per share,
irrespective of the size of their shareholding in Recce. In a situation where total
demand exceeds the A$4m offered, Recce may, in its absolute discretion and subject
to local compliance laws, decide to increase the amount to be raised under the SPP.
The company expects funds raised under the SPP and placement to be allocated towards
the following areas:
- A$4.0m is expected to be deployed towards strengthening the balance sheet, meeting
general working capital needs and supporting the company’s initiatives towards finalising
a commercial licensing agreement for R327G with a leading Middle Eastern pharmaceutical
company and meeting the commercial requirements of this arrangement (described further
below)
- A$2.0m is planned to be allocated towards ongoing clinical studies, including completion
of the current Phase III Indonesian registrational clinical trial for R327G for DFIs
and the initiation of a Phase III DFI registrational clinical trial in Australia
- A$2.0m for regulatory activities including enabling an FDA Investigational New Drug
(IND) application for R327G (to permit clinical studies for R327G in the US) and to
support regulatory approval applications for R327G with the Indonesian drug regulator
(BPOM), provided data from the ongoing Indonesian Phase III study is supportive.
The SPP opened on 6 July and is expected to close on 20 July. Results of the SPP are
expected to be announced by 27 July and shares issued under the SPP are expected to
commence trading on 28 July.
Indonesian Phase III study still on track for interim data in Q3 CY26
The Indonesian Phase III registrational DFI study, which started in September 2025,
is a double-blinded, placebo-controlled design, with a planned total enrolment of
up to 310 patients, where R327G will be compared to placebo. The study has activated
five clinical study sites across one of the world’s largest DFI patient populations.
While the company expects the full study to run for approximately 12–18 months, it
believes that interim results (on c 155 patients), anticipated in Q3 CY26, may demonstrate
a statistically significant efficacy result, and pave the way for a regulatory approval
application in Indonesia in H2 CY26 with potential regulatory approval in the country
before year-end CY26.
As highlighted in our prior note, DFIs are frequent complications of patients who have diabetes mellitus, with more
than 40 million people having diabetes in the US (and Recce estimates c 21 million adults in Indonesia alone).
Among this population, about 2–4% will experience foot ulceration each year, of which 50–60% will result in DFIs due
to the invasion and multiplication of surrounding microorganisms in the area. DFIs
are the leading cause of foot morbidity in diabetic patients as well as the most common
complication from diabetes leading to hospitalisation. One of the key competitive
advantages for R327G in the treatment of DFIs is that, to our knowledge, no topical
antibiotic has specific globally recognised approval for usage in this indication.
Hence, success in the indication could present a substantial opportunity for Recce’s
R327G, as we expect a standalone topical therapeutic option would be convenient for
patients (given the relative ease of drug administration), aid in treatment compliance,
provide a concentrated dose at the presumed site of interest and lower the risk of
systemic side effects often associated with oral or IV antibiotics.
In April, Recce received a positive outcome from a comprehensive regulatory clinical trial
site review and inspection conducted by BPOM. The inspection is part of BPOM’s typical
regulatory oversight procedures. It was completed with no findings that impede the
study from continuing to completion, and BPOM has not requested any changes to the
ongoing clinical trial, which is still on track to release interim data in Q3 CY26.
If study results are positive, we continue to assume a potential launch in Indonesia
in H2 CY26 as our base case, although we recognise this timeline is ambitious and
regulatory delays could push the launch into CY27. We continue to assume launch into
other ASEAN territories (which include Malaysia, the Philippines, Singapore and Thailand)
to CY27.
Recce starts Australian Phase III DFI study
In June, Recce announced that it had received regulatory approval to proceed to an Australian Phase III study of R327G in patients with DFI. This clearance
was obtained through a protocol amendment of the company’s prior Phase II study of
R327G for the treatment of DFIs, which now advances the study to a pivotal Phase III
study level. The protocol amendment expands study eligibility to include patients
with moderate DFI (in addition to patients with mild DFI), which can broaden the eligible
patient population for R327G and potentially help accelerate study enrolment. Recce
estimates that this expanded population could comprise c 80% of DFI presentations.
In addition to foot ulcers, the study will include the recruitment of patients with
infected ulcers below the knee. The company expects this to enable an additional primary
endpoint based on individual ulcers, potentially increasing the statistical study
power.
Recce expects the Phase III study to enrol 200 patients in total by the end of CY27,
with 18 patients having already completed the study. An interim analysis is expected
once 50% of patients have completed treatment.
The study builds on positive results reported in February 2025 from the company’s open-label Phase II Australian study for R327G in the treatment of acute bacterial skin and skin structure infections
(ABSSSI), including patients with DFIs. The Phase II was designed to assess R327G’s
effectiveness and safety in treating a broad range of ABSSSI indications, which, in
addition to DFIs, can include necrotising fasciitis, post-operative wound infections,
simple abscesses, boils, cellulitis and others. In the Phase II ABSSSI trial, R327G
was applied once daily for seven days to the site of infection, with a possible additional
seven-day R327G treatment period considered at the investigator’s discretion if indicated.
The study achieved all primary and secondary efficacy endpoints and met plasma pharmacokinetics
(PK) expectations. After seven days of treatment, 86% of patients (25 of 29) treated
with R327G had a successful clinical response, and at 14 days of treatment, 93% (27
of 29) had achieved a primary efficacy endpoint. R327G was also reported to be safe
and well tolerated, with no serious adverse events. Study efficacy outcomes in this
Phase II study were measured using the Lipsky Clinical Resolution of Infection Scale and/or the Bates Jensen Wound Assessment Tool, both FDA-recognised measures. Importantly, the Phase III Australian DFI study will use the Lipsky scale
to assess clinical response as the primary endpoint.
| Exhibit 1: Phase II ABSSSI study results |
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| Source: Recce Pharmaceuticals Corporate presentation |
Given that the company has designated that part of its objective for the current fund-raising
is to obtain FDA IND clearance, we are confident in our existing assumption that Recce
will receive IND clearance by year-end CY26, which would permit the inclusion of US
study sites.
We continue to model that potential commercialisation for R327G in ABSSSI (including
DFIs) will occur in H2 CY28 in the US and Australia. We believe the company’s near-term
focus on advancing the ABSSSI and DFI indications for R327G provides a clear path
to future revenues.
Term sheet for licensing R327G to the MENA region
Recce signed a non-binding term sheet with an established publicly listed Middle Eastern pharmaceutical company (‘the licensee’)
to enter into an exclusive licensing agreement covering the sales and distribution
of R327G for the treatment of DFIs in MENA. The parties intend to finalise an agreement
in Q127 (Q3 CY26), which, if finalised, would represent a material external validation
of Recce’s R327G programme.
The term sheet calls for the formation of a 10-year exclusive agreement between Recce
and the licensee for commercialisation in countries including the KSA, GCC countries,
as well as Egypt, Algeria and Morocco. The finalised agreement would be expected to
include an upfront fee, plus milestones totalling up to A$5m. Gross pricing terms
for R327G under the MENA agreement is proposed at
US$1,500 per treatment, which we note is meaningfully higher than our current pricing assumption
(
US$750 net price) for the Indonesian and ASEAN markets. Under the proposed term sheet, Recce would receive 30% of the net selling
price, plus an additional 6% royalty on net sales exceeding
US$50m per year. The licensee is reported to have a multibillion-dollar market capitalisation
and a distribution network serving over 30 international markets.
The parties plan to use study data from the ongoing Indonesian Phase III DFI study
to support regulatory submissions in the covered MENA territories. Recce would also
be responsible for the manufacture and supply of R327G. We believe the company has
already demonstrated the required capabilities to meet this requirement through its
prior successful production of drug batches at its in-house pilot facility.
As in the ASEAN territories, diabetes remains a significant burden across the MENA
region, with a reported prevalence of 84m in the region, including c 23% of residents
of Saudi Arabia.
While the full transaction has not yet been concluded, we are now including potential
R327G sales from MENA countries in our financial model and valuation, based on the
terms cited above. We estimate that of the covered countries, Egypt, Algeria, Morocco
and the KSA carry the highest combined prevalence of diabetes. For conservatism, we
also assume potentially more modest net pricing in Egypt, Algeria and Morocco compared
to the GCC countries. We assume potential commercialisation starting in CY27 in these
territories, resulting in peak net commercial sales (by the pharma partner) of c A$140m
in CY34. While we continue to apply a 45% probability of success (PoS) for R327G DFI
commercialisation in Indonesia and ASEAN countries, given that the full transaction
for MENA with the prospective pharma partner has not yet been finalised, we currently
apply a 35% PoS for R327G commercialisation in this market. We expect to raise our
PoS estimate upon the formal signing of a definitive licensing transaction. All in,
the MENA opportunity now adds an rNPV of c A$49m to our valuation of Recce, as discussed
further below.
Financials
In the company’s Appendix 4C Update, Recce confirmed it received A$5.5m in Research and Development Tax Incentives (RDTI)
and other government grants, resulting in a net operating cash inflow of A$1.6m. The
company ended Q326 (period ending 31 March) with A$1.7m in gross cash and at end-June
2026 it received an additional A$3.7m income tax refund from the Australian Tax Office (ATO), completing its tax rebate for the FY25 fiscal
year (period ending 30 June 2025).
Our financial model includes the A$4m raised as part of the institutional share placement
(as part of Q426 cash inflows), although we do not yet include the SPP in our model
as this process is ongoing and as of writing the market price for Recce shares is
slightly under the offer price of A$0.40. Given the receipt of the A$4m (gross) placement,
and the A$3.7m income tax refund at quarter-end, we estimate that the company ended
FY26 (30 June) with A$1.8m in gross cash. Recce ended H226 (December 2025) with A$9.9m
in gross debt, and we assume this amount has not changed.
The company calculates that its pro forma cash liquidity at 30 June 2026 is A$33.1m,
which assumes completion of the SPP (A$4m), its anticipated upcoming RDTI rebate (A$7.5m;
which may potentially be received before year-end CY26) from the ATO (and corresponding
to its FY26 R&D activities), the drawdown of A$10m from its debt facility with Avenue Capital, and a R&D Advance credit (A$10m) against additional future anticipated RDTI payments.
We have made minor adjustments to our FY26 and FY27 forecasts given the Q326 4C statement
and recent trends. We now expect FY26 net R&D expense of A$13.6m (vs A$15.7m previously)
and SG&A of A$11.2m (vs A$12.6m). We reduced our R&D expenditure forecast as the company
reported 9M26 R&D expense of A$10.8m in its 4C statement, below our expectations,
which we believe is due to lower-than-expected trial costs for the Indonesian Phase
III DFI study. Altogether, for FY26, we now expect a normalised operating loss of
A$13.8m (vs A$17.6m previously) and negative free cash flow of A$11.4m (vs A$15.7m
previously). We have maintained our product launch timing forecasts, as discussed
in our prior note, for all major indications (DFI and ABSSSI, sepsis/urosepsis, complex urinary tract
infections and burn wounds).
For FY27, we continue to anticipate a sharp uptick in R&D expenses, given the start
and progression of the Australian Phase III DFI study. We also continue to anticipate
that the company may seek to include the broader ABSSSI indication as part of its
Australian and US development strategy for R327G. We maintain our FY27 R&D expenditure
forecast at A$38.6m, which is driven by Phase III R327G studies (Australia and potentially
also in the US) in DFI/ABSSSI and the commencement of a US Phase II IV R327 study
in cUTI/urosepsis. We now model FY27 free cash outflow of A$46.8m (vs A$50.1m previously).
Assuming Recce continues to develop all four planned clinical-stage indications (ABSSSI
including DFIs, burn wounds, sepsis/urosepsis and cUTI), we project it would need
to raise A$130m in total net proceeds by FY29 (vs A$135m previously) before becoming
sustainably cash flow positive. We continue to model these raises as illustrative
debt.
Valuation
Our valuation is based on a relative rNPV calculation with a 12.5% cost of equity.
We have rolled forward our estimates, adjusted for the share count post the institutional
placement, included contributions from the expected MENA R327G DFI partnership arrangement
and made minor changes to our long-term tax expense assumptions.
| Exhibit 2: Recce Pharmaceuticals rNPV valuation |
 |
| Source: Edison Investment Research |
Given the above, we now obtain an rNPV, including A$8.1m FY26 estimated net debt,
of A$657.3m (or A$2.19 per share), versus A$611.2m (or A$2.28 per share) previously.
As stated above, we project Recce would need to raise A$130m in proceeds between FY27
and FY29 to reach sustainable positive cash flows. While we model these raises as
illustrative debt, if our projected funding need is raised through equity issuances
at the prevailing market price of c A$0.37, our effective value per share would decrease
to A$1.21 (including cash raised via equity).
Depending on the availability of capital, the company may decide to prioritise certain
programmes, which could affect the timing of launches in non-prioritised indications
and our overall valuation. Our funding model assumes Recce will advance all four programmes
in parallel. However, if the company prioritises R327G in ABSSSI and DFIs and puts
its remaining development programmes on hold until the initial R327G commercial approval,
its overall funding need would reduce as it could then apply post-launch commercial
revenue towards resuming R&D and product development activities in the remaining targeted
indications. Partnerships and/or non-dilutive forms of funding (such as third-party
sponsorship of clinical trials) could also reduce the future funding need, although
these are not specifically included in our forecasts.
| Exhibit 3: Financial summary |
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| Source: Company accounts, Edison Investment Research |
