AdAlta, a Melbourne-based drug developer, recently listed on ASX and NDF Research takes up coverage of the stock.
-Working on i-bodies, a treatment for Idiopathic Pulmonary Fibrosis in the first instance
-Assume product can be licensed to a partner by FY20
-Assume 14 years of commercial exclusivity
By Eva Brocklehurst
AdAlta ((1AD)) is a Melbourne-based drug development company with a focus on a new class of protein therapeutic called i-body. NDF Research initiates coverage on the stock with a 60c target and Speculative Buy rating and asks, if the company is that good, why is it only captalised on ASX at $24m?
The answer is it commenced trading on August 22, 2016, after raising $10m in an IPO at 25c per share. Consequently, the market is yet to know the stock. Moreover, the company is yet to go to the clinic with its AD-114 and there are risks related to the pre-clinical development of i-bodies.
What are i-bodies? The drug the company is working on has the same target and affinity as monoclonal antibodies but, importantly, is around 90% smaller. Monoclonal antibodies are key to modern medicine with NDF Research calculating global sales of over $US70bn per annum. These drugs are expensive to make and the molecule size makes them too big for use against many important drug targets. They also require heavy dosing and this must be delivered by intravenous infusion.
While antibodies are expected to remain the mainstay of the industry for many years, given the critical mass of products in development and the ease with which a drug candidate can be selected, the i-body is expected to be made more cheaply, easier to administer and capable of addressing diseases such as fibrosis.
AdAlta's first product from its platform is AD-114, initially for the treatment of Idiopathic Pulmonary Fibrosis (IPF), and targets inflammation in the lungs as well as reducing fibroblast migration to the lungs. NDF Research envisages considerable upside for the company, given the high valuation that validated platforms like this one tend to trade on. The researchers value AdAlta at 38c on a base case and 89c on an optimistic case.
NDF Research assumes another US$5-10m in expenditure for AdAlta to further develop the AD-114 and around 14 years of commercial exclusivity for the product. The risk weighting for the probability of clinical success is 20%, which the analysts consider reasonable given the in vitro evidence related to targeting, and the fact that IPF is an orphan disease, meaning it can quickly transition to mid and late stage clinical development.
They also assume the product can be licensed to a partner by FY20 for US$30-50m up front with subsequent milestones and royalty. Peak sales are assumed at US$300-600m, initially sourced from IPF treatment. The business is expected to be positive on earnings per share by FY19.
The risks specific to AdAlta the analysts have identified are, firstly, manufacturing, where the company may take longer to manufacture AD-114 than expected. There is also the potential that the intended Phase 1 study of AD-114 is delayed and may not happen as early as the start of 2018.
The US Federal Drug Administration (FDA) and other regulators may decline to approve the drug even if AdAlta considers its data adequate, and there is also the risk that there may not be significant commercial usage of the drug in IPF as other therapies come to the market between now and the end of AD-114's clinical development.
NDF Research also notes the industry has become very interested in fibrosis. The advance of drugs like Esbriet have led to strong commercial interest being shown by other companies in new drugs with an anti-fibrosis element. Cancer may also be the next indication for AD-114. AdAlta has favourable pre-clinical data on AD-114 as an antic-cancer molecule.
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