SMALL CAP IDEA: C4X Discovery

Drug development for smaller, innovative life sciences companies is the corporate equivalent of a high wire act.

Ensuring the cash taps remain open is one challenge. The other is finding the balance between risk and reward.

Very few businesses listed on AIM will or indeed ever have hit a home run – this involves discovering, developing and taking to market a unique new treatment.

Why is this? Well, it’s not because these businesses or their principals lack vision or the courage of their convictions (quite the opposite sometimes).

It’s that costs and time associated with the development and launch of a new drug are often more than a fledgling company with limited means can bear.

To put it into context, on average it takes ten years to bring a new pharmaceutical product to market. The estimated costs associated with this effort are put anywhere from £800million to £2billion.

Your average junior drug developer will be lucky to rustle up £10million at any given point in their journey.

So, what you do if you are of limited means is get your asset as far through the clinical trial process as possible. After that you find a partner with pockets deep enough to finish the work started by the small-cap R&D specialist.

Conventional wisdom puts the sweet spot – that intersection of the risk, reward and capital investment curves – at the end of phase II clinical trials.

Getting to this point isn’t as financially onerous as the later stages of drug development tend to be, and at the same time there should be enough data at hand to convince a potential partner to take a punt.

More and more, however, we are starting to see drug developers tie up partnerships earlier in the process – sometimes before the drug candidate has actually entered the clinic.

In part, this is down to the larger drugs companies wishing to snap up new technologies or promising treatments before the competition – and being willing to pay well for the privilege.

In this environment, the cash-constrained minnows of the industry have looked to go early too, seeing an opportunity to crystalise value for investors in a more timely way than has been the norm.

RedX Pharma, which has risen phoenix-like from administration, is one of those companies to break with convention. It sold a pre-clinical cancer programme to Jazz Pharma for up to £170million, and has licensed its phase I porcupine inhibitor for idiopathic pulmonary fibrosis to AstraZeneca in a deal worth as much as £309million.

Silence Therapeutics, the gene silencing specialist, has struck deals with AZ and the American-Irish group Mallinckrodt worth potentially – if my maths is correct – well over £1billion. Admittedly, a lot would have to go right for that jackpot to be struck.

You can add to the list C4X Discovery, which has two partnered programmes: one with anti-addiction specialist Indivior worth up to £230million; the other with French giant Sanofi that has a headline value of £350million.

C4X is interesting because the business model is built around discovery using DNA-based target identification and then out-licensing as soon as is practicable.

In other words, it isn’t particularly interested in the process of clinical trials as a basis of adding value to the newly uncovered asset.

‘We have some proprietary technologies that allow us to find molecules that have the potential to be highly valuable medicines for our sector,’ chief executive Clive Dix told Proactive last month.

‘Our model is that we then partner them at some stage during this discovery process with companies that then take them on to full development and to the market.

‘In doing that, therefore, we get early revenues which we can use to build our portfolio and I’ll tell you more about that later.’

What’s interesting about C4X is it is becoming something of a production line for new, valuable small-molecule drugs that have the sort of attraction to big pharma that a shiny object has to a magpie.

It has a programme called NRF, which is an anti-inflammatory and for which, by the end of the year, it hopes to have found a partner.

‘This is a very important product for us,’ said Dix. ‘We are in late-stage discussions now.’

But the story doesn’t end there. It also has a further two ‘near-term partnering opportunities’ – one in the cancer area, while the other is being developed for inflammatory bowel disease.

‘Because we’ve been making such good progress, we’ve been looking at other new targets because we want to feed the portfolio to fill the pipeline,’ explained Dix.

‘So soon as we partner with these [current] programmes we want to have others in line to move forward.

‘We announced recently that we’ve got six new programmes, all relatively early, but very exciting and we’ve done a lot of work to make sure that the right programmes to take forward into the next phase.’

On Thursday, C4X unveiled plans to raise £5.7million to fund the next ‘droplets’ out of the development pipeline, with cornerstone investor, the Polar Capital Biotechnology Fund, standing its end for £3million of that figure.

It was interesting to see that the company’s advisors haven’t been forced to offer stock at a discount to get the share placing away.

This is both unusual in the current sketchy market environment and a vote of confidence in the company, its management and its plans.

With a market capitalisation of £59million (25.5p) it is a fraction of the worth of RedX (£200million) and Silence (£500million), which suggests C4X isn’t yet on the radar screen of most investors.

It will be interesting to see how long that remains the case if the production line keeps churning as successfully as it has to date.