Licensing deal secured for Australia and New Zealand
As Recce continues to advance its separate Indonesian and Australian-based Phase III registrational studies for R327G in DFIs, the company announced an exclusive license and commercialisation agreement with Arrotex Pharmaceuticals, a subsidiary of DBG Health. Formed by the 2019 merger of Apotex Australia and Arrow
Pharmaceuticals, Arrotex is believed to be Australia’s largest and most diversified
generic and private-label pharmaceuticals provider, offering a wide range of prescription
drugs across multiple therapeutic areas.
Under the terms of their agreement, Arrotex obtains exclusive commercialisation rights
for R327G for the treatment of DFIs in Australia and New Zealand, with Recce responsible
for manufacturing and supply of product. Recce is to receive ‘a significant profit
share of gross margin from product sales’. While specific terms have not been disclosed,
the operational framework of the deal is favourable for Recce as Arrotex provides
the required and established regulatory market access and commercialisation capabilities
in the covered territories, and, hence, Recce will not need to invest in a dedicated
salesforce or in additional region-specific regulatory resources. Arrotex possess
the required infrastructure and healthcare relationships needed to optimise R327G’s
sales potential. There are no upfront or milestone payments as part of the Arrotex-Recce
R327G agreement.
While Arrotex’s core business has been generic drugs and affordable private-label
products, it is also involved in the marketing and distribution of innovative, differentiated
and/or higher-value added treatments, such as Pfizer’s Enbrel, CStone Pharmaceuticals’ sugemalimab and Lenz Therapeutics’ Vizz. We see R327G as falling within this proprietary and novel branded product category
provided it receives regulatory approval, given its novel chemistry and mechanism
of action (as an adenosine triphosphate, ATP, production disruptor) and its potential niche as the sole topical treatment approved for DFIs. 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.
Australian Phase III DFI study underway
As a reminder, Recce received approval in June 2026 to proceed with its Australian pivotal Phase III study of R327G in patients with
DFIs, including patients with mild to moderate infections and infected ulcers below
the knee. Recce expects the Phase III study to enrol 208 patients in total by the
end of CY27, and an interim analysis by an independent DMC is planned once 50% of
patients have completed treatment.
In the study, patients are being randomised between R327G and one of four physician-selected
comparator antibiotics. The trial 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. This Phase II 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.
The Phase III Australian study is intended to generate comparative data for R327G
versus existing established antibiotic therapeutic options used for the treatment
of DFIs.
The company reports that it also continues to progress in its negotiations to form
a definitive agreement under the non-binding Middle East and North Africa (MENA) term sheet signed with an undisclosed pharma partner covering the region. The finalisation of
this term sheet, in our view, would represent a material external validation of Recce’s
R327G programme. The term sheet, as discussed in our prior note, calls for the formation of a 10-year exclusive agreement between Recce and the licensee
for commercialisation in countries including the Kingdom of Saudi Arabia, Gulf Cooperation
Council countries, as well as Egypt, Algeria and Morocco. The licensee is reported
to have a multibillion-dollar market capitalisation and a distribution network serving
more than 30 international markets.
Australian commercialisation expected in H2 CY28
We note that under the terms of their recently signed agreement, Arrotex is only required
to apply for Therapeutic Goods Administration (TGA) approval (the regulatory authorisation
process for Australia) once R327G is approved by either the US FDA, the European Medicines
Agency or another regulatory authority recognised by the TGA as a comparable overseas
regulator. Hence, we do not believe that Indonesian or ASEAN market approval alone
would require Arrotex to seek R327G’s approval with the TGA. We continue to model
that, regardless of the Indonesian Phase III study outcome, positive results from
the ongoing Phase III Australian study will be necessary for commercial approval.
We continue to model potential commercialisation in Australia (now through Arrotex)
in H2 CY28.
For the Australian market, given an estimated prevalence of 2.1 million individuals
with diabetes, we assume that approximately 47,000 individuals will experience a DFI
episode each year and, among them, up to 50% would be eligible for a topical treatment
such as R327G. We project sales of about A$18m by CY32 and that Recce would be entitled
to 40% of resulting gross profit (assuming a 90% gross margin). In terms of overall
contribution to our valuation, we continue to view the ASEAN opportunity as meaningfully
larger given the much higher population and resulting prevalence of diabetes within
ASEAN territories (versus Australia and New Zealand).
We believe the company is continuing to work on obtaining Investigational New Drug
(IND) clearance from the US FDA, which could permit the inclusion of US study sites
in its ongoing Australian Phase III study. We continue to model that potential commercialisation
for R327G in ABSSSI (including DFIs) in the US could occur in H2 CY28, but we may
need to revisit our assumptions if IND clearance is not received by the end of Q1
CY27.
Altogether, we believe the company’s near-term focus on advancing the DFI (and ABSSSI)
indications for R327G provides a clear path to future revenues. The company’s collaborations
with the US Department of War for treatment of burn wound infections provide an additional
lever for growth for topical R327G, as discussed in further detail in an earlier report.
Blinded R327G Indonesian results encouraging for upcoming unblinded readout
Recce on 20 October announced that a review of blinded study data from its ongoing Phase III registrational
study of R327G for the treatment of DFIs indicates strong efficacy and an excellent
safety and tolerability profile across the study. We believe this is highly encouraging
as it suggests that the treatment arm (R327G) could be providing a therapeutic effect,
consistent with previously reported data from an earlier Phase II DFI study. The ongoing Phase III study is a double-blinded,
placebo-controlled design, with an initially planned total enrolment of up to 310
patients, where R327G is being compared to placebo.
In its blinded data update, Recce reports that a recent independent review of blinded
data by Australian and international investigators showed encouraging safety and efficacy
clinical outcomes among study participants, with a high proportion of patients experiencing
either resolution or improvement in their infection. While the data is blinded (ie
it is not yet known which patients received treatment or placebo), we believe the
aggregate trends towards positive efficacy and infection resolution bode well for
the study and suggest, in our view, a strong likelihood of differentiation between
treatment and placebo. We reach this conclusion because in an acute infection population
(such as DFIs), it would be highly unusual for a placebo topical treatment arm to
lead to the positive efficacy findings reported to date.
Recce reports that 90 patients have been enrolled in the study and that the study’s
DMC will now perform an unblinded analysis on the data set corresponding to 75 patients.
This analysis, potentially available by mid-November, will provide an initial indication
of how R327G is performing compared to placebo. Following its analysis, the DMC will
provide a recommendation, which could include advising the company to progress towards
a regulatory submission and potential product registration (if supported by the safety
and efficacy data). If this interim efficacy analysis is positive, showing a statistically
significant efficacy result, it could pave the way for a regulatory approval application
in Indonesia in Q4 CY26, with potential regulatory approval and launch in the country
in the following weeks, as well as approvals and launches in other ASEAN countries
in CY27.
Financials
Recce’s FY26 financial results (for the period ending 30 June) were largely consistent with recent trends and our
expectations, with the company reporting gross R&D expenditure of A$8.2m (vs A$10.4m
in FY25) and SG&A costs of A$14.7m (vs A$17.3m). We believe the majority of R&D costs
were allocated towards the ongoing Indonesian and Australian Phase III trials for
R327G for the treatment of DFIs. Offsetting these costs were R&D research grants and
subsidies, which came in at A$9.4m (including a A$0.5m grant from the US Department
of War), up from A$7.0m in FY25. Altogether, Recce reported an operating loss of A$13.4m
(vs A$20.4m in FY25) and free cash outflow of A$9.8m (vs A$20.6m), suggestive of stronger
cost containment versus the prior year. As discussed in our prior note, Recce raised A$4.0m via an institutional share placement in late June and in subsequent
weeks raised an additional A$2.4m via a share purchase plan (SPP), resulting in total
gross proceeds of A$6.4m from both initiatives.
More recently, in the company’s Appendix 4C Update for the quarter ending 30 September (Q127), Recce confirmed it received A$3.6m in
Research and Development Tax Incentives (RDTI) from the Australian Tax Office (ATO),
and other government grants, bringing total FY25-related R&D rebates to c A$8.9m.
Gross R&D expenses were $5.8m in the period, covering the ongoing Indonesian and Australian
R327G clinical trials as well as other preclinical activities. Recce finished the
period with A$1.0m in gross cash, but it expects to receive c A$7.5m under the Australian
RDTI programme in the coming weeks. This RDTI cash rebate is expected to be based
on the company’s FY26 R&D spending, including costs covered under its Advance Overseas
Finding (which relate primarily to costs incurred as part of the Phase III studies
for R327G).
Recce ended FY26 (June 2026) with A$9.8m in gross debt, and it reported a repayment
of A$0.058m in borrowings in the Q127 Appendix 4C. Hence, we estimate A$9.7m in gross
debt and A$8.7m in net debt as of 30 September.
We maintain our product launch timing forecasts, as discussed in our prior note, for
all major indications (DFIs and ABSSSI, sepsis/urosepsis, complex urinary tract infections,
or cUTI, and burn wounds). Of note, we model launches of R327G in DFIs in Indonesia
in late CY26, in the US and Australia in DFIs/ABSSSI in CY28 and for the IV R327 formulation
in sepsis and cUTI in CY30 (see Exhibit 1).
Given the Q127 4C statement and recent trends, we have made adjustments to our FY27
forecasts. We continue to project a sharp year-on-year increase in R&D expenses, given
the progression of the Australian Phase III DFI study and potential inclusion of US
study sites. 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. However, we have reduced our FY27 R&D forecast to A$30.7m, from A$38.6m previously,
as we have pushed back our forecast for the start of a US Phase II study of intravenous
(IV) R327 in cUTI/urosepsis to the end of FY27 or early FY28 (vs FY27 previously).
We now model an FY27 free cash outflow of A$40.5m (vs A$46.6m previously).
We also introduce FY28 estimates, which are driven by continued R&D spending for the
R327G candidate in DFI and burn wound infections, including US-based Phase III clinical
trials for R327G, as well as a ramp up in clinical trial spending for IV R327 (in
sepsis/urosepsis). We model FY28 R&D spending of A$47.1m and a free cash outflow of
A$60.1m.
Assuming Recce continues to develop all four planned clinical-stage indications (ABSSSI
including DFIs, burn wounds, sepsis/urosepsis and cUTI) in line with our timing expectations,
we project it would need to raise A$115m in total net proceeds by FY29 (vs A$130m
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 and included contributions from the announced
Australian and New Zealand R327G DFI partnership agreement with Arrotex.
| Exhibit 1: Recce Pharmaceuticals rNPV valuation |
 |
| Source: Edison Investment Research |
Given the above, we now obtain an rNPV, including A$8.7m Q127 estimated net debt,
of A$658.4m (or A$2.15 per share), versus A$657.3m (or A$2.19 per share) previously.
The lower value per share is due to increased shares outstanding following the completion
of the SPP.
As stated above, we project Recce would need to raise A$115m 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$0.35, 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 approvals,
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.
