Destiny Pharmaceuticals - A Defining Moment
22 January 2021
So why all the interest in Destiny Pharma now?
The word “transformational” is used all too frequently in market updates and annual reports, so much so that for many an investor it can lead to a subconscious eye roll. However, Destiny Pharma finds itself at a juncture that can justifiably be labelled as transformational. Dependant on how matters develop, that transformation could be either good or bad for the company. Stick with me while I lay out what to watch out for.
The principle driver of interest in Destiny right now is anticipation of XF-73 Phase 2b results which are due before the end of March 2021. There has been a surge of interest and a corresponding surge in share price since a December update confirming the recruitment process for the trials had completed.
In several recent interviews and presentations, CEO Neil Clarke has trumpeted Destiny’s recently acquired assets. Clearly the acquisitions are a long term positive for the company. However, there is no getting around the fact the market is currently fixated on XF-73.
What Purpose Does XF-73 Serve?
This is the technical bit and I will do my best to simplify it.
Destiny Pharma has a number of drugs it is developing from its patented “XF” platform. The XF platform is based on over twenty years of work by Destiny’s Founder and Chief Science Officer Dr William Love. Dr Love’s work targets the threat posed by antimicrobial resistance (AMR). AMR bacteria are those bacteria which are resistant to medication. The most advanced product from the XF platform is XF-73.
The purpose of XF-73 is to prevent Staphylococcus aureus infections in surgical settings. Such infections have historically been treated with antibiotics, however, “staph” bacteria are increasingly resistant to antibiotic medicine. These strains are called methicillin resistant Staphylococcus aureus, some readers may recognise the commonly used acronym for this strain: MRSA. Both the World Health Organisation (WHO) and US Centre for Disease Control and Prevention (CDC) have added MRSA to their list of priority pathogens that require clinical research. CDC studies have found that approximately 80,500 people contract MRSA in the US, and for 15% (11,500) of them the infection proves fatal. To further highlight the urgency of the problem, private chemicals company Ineos donated £100m to Oxford University just this week to establish a centre whose sole purpose is to find solutions to AMR. As a point of interest, Destiny Pharma already has professional ties with University researchers involved in the new Ineos Oxford Institute for Antimicrobial Resistance.
Because antibiotics are widely used in hospitals, it is not uncommon for staff to be carriers of MRSA. Let me be clear, this is a very real problem for hospitals. Imagine one of several staff in an Intensive Care Unit (ICU) is an MRSA carrier who then goes on to infect a patient in the unit. The patient may come out of ICU with a greater health concern than which they went in, especially when you consider the patient may already have had a weakened immune system going in. Consider the additional hospital care that would then be required. Consider also the potential costly litigation against the hospital. According to a 2011 study published in the Journal of the American Medical Association, 14,156 MRSA infections occurred in US hospital settings with just over a quarter of these infections originating from ICU.
Going back to the purpose of XF-73, the drug is designed to prevent post-operation MRSA infections. XF-73 is a gel applied at the nasal cavity of the patient during a surgical procedure, for example a heart transplant. A key point to keep in mind is XF-73 is about prevention rather than cure.
Through XF-73, Destiny Pharma is targeting the unmet clinical need to combat MRSA. MRSA is the first of many AMR bacteria the company hopes to combat through its novel XF platform.
What is the Market for XF-73?
Before looking at the potential market size for XF-73, it is worth noting the need for a drug like XF-73 is significant and tangible. How can the reader be certain of its necessity? Well here are a few reasons to consider:
In 2015 the US FDA awarded XF-73 Qualifying Infectious Disease Product (QIDP) status. Benefits for XF-73 include priority review and five additional years of product exclusivity.
In 2018 the FDA awarded XF-73 Fast Track status
In 2020, the Covid-19 pandemic halted scheduled Phase 2b trials for XF-73. As mitigation, the FDA approved a reduction in the sample size from 200 to 125 tests in order get development back on schedule.
Having been informed of these points, I will leave it for the reader to assess how much of a priority XF-73 is to the FDA.
As concerns the market for XF-73, let us begin with the understanding that the customer is not the patient, but the hospital. Destiny Pharma estimates 40 million surgeries in the US would potentially require an XF-73 type drug – a potential market of up to US$1 billion. That is not to say that the company expect to own the whole market, although they are in a strong position to be the first to market and therefore are confident of XF-73 becoming the market leader. Destiny further identify a global market in the region of US$500 million.
The Destiny Board do not intend to create their own sales teams in the US or the rest of the world. Instead they are looking to work with regional partners who will leverage already established sales networks to bring XF-73 to market. Destiny Pharma has already entered into a commercial agreement with China Medical Systems (CMS). Through this agreement, CMS will be Destiny’s partner in sales and clinical development for a region that includes China, India, Malaysia and Taiwan. Destiny Pharma in turn will receive a margin from sales as well as sales-based milestone payments. The CMS agreement is likely to be the model for future partnerships in the US.
One further point of interest, GSK recently discontinued the use of Bactroban in the US. Had it not been discontinued, Bactroban would have been XF-73’s closest existing competitor in the US market.
What about the recent acquisitions?
As previously mentioned, two new drugs were acquired in the latter part of 2020. NTCD-M3 is wholly owned by Destiny and preparations are ongoing for Phase 3 trials to begin in 2022. Spor-Cov is a Covid-19 preventative therapy being developed in collaboration with SporeGen, early stage trials are due to commence in 2022. These drugs are of long term future value and therefore not core to the subject of this article.
Destiny Pharmaceuticals Pipeline. Source: destinypharma.com
What is the Shareholder Upside/Downside?
It is a dangerous exercise to attach a cash value to a pharmaceutical product in developmental stage. That said, at a market capitalisation of £67.5m (113p per share), relative to its peers Destiny Pharma is arguably undervalued. In a recent note, Destiny’s analysts Equity Development suggest current Fair Value for the company is £156.9m, equivalent to 262p per share.
Successful results from XF-73 would likely rerate the company’s valuation by multiples. Equity Development state “should Destiny become a company with two Phase 3-ready programs our valuation will need to be updated”. Based on potential Phase 2b success, Destiny’s brokers FinnCap are quoted to have set a 385p per share target – a valuation in the region of £230m. *I should add that I have not yet been able to independently verify the quote attributed to FinnCap.
On the other hand, negative results from Phase 2b trials while not catastrophic, would certainly be a significant set back to Destiny. The acquisitions of NTCD-M3 and SporeGen mean Destiny is not the one-trick pony it was six months ago. Without the two new pipeline products, a failure at Phase 2b for XF-73 may have been a potential existential threat for the company. However, the acquisitions would certainly provide a substantial long term buffer against any bad news from the XF-73 trials.
Without prejudicing the awaited XF-73 Phase 2b results, the Destiny Board have begun making preparations for Phase 3. This will require additional funding, perhaps in the region of £25m. There is the potential for funding to be sourced from a commercial partner as well as the equity market.
What is the Prognosis?
There is no doubt that an XF-73 type product is desperately needed. The first product of this type to get FDA approval would likely command the US market. The Destiny Board are confident XF-73 is in pole position to win this particular race, so much so they appointed NASDAQ experienced Dr Stephanie Bewick as Chief Business Officer earlier this month. The unknown variable is the news Destiny and its shareholders are waiting on: clinical trial data that will either allow the company to move onto the next stage of XF-73 development or force its team back to the drawing board.
Whether the potential reward from investing in Destiny Pharma is a risk worth taking is a question for each individual investor. What is certain though, is the coming weeks will be transformational for Destiny Pharmaceuticals.
if you would like to learn more about Destiny Pharma, please read the detailed November 2020 Simpvestor Report on the company which can be found here:
https://www.simpvestor.com/plcprofiles/destiny-pharmaceuticals-plc
