To Europe and beyond for Avacta Group?
“…working towards placing the product on the market in all 27 countries of the EU for professional use plus sales efforts focused on large businesses, primarily but not exclusively in the UK, for workforce testing…”
The biotech small cap sector presents special opportunities and challenges to mainstream investors. It is saturated with technical language and imagery opaque to non-specialists. Timescales are long, share prices briefly shining before dimming. And its participants face a continual struggle to secure funding necessary to support them through their product development cycles. But as the pandemic highlighted, the industry seeds star performers able to generate spectacular returns as well as make significant contributions to the alleviation of human suffering.
We have tried to identify several over the past year: Avacta Life Sciences (AIM:AVCT), a UK-based clinical stage oncology company developing new cancer therapies, is another worth watching. Avacta is combining two proprietary bio technologies, Affimer, a therapy based on a naturally occurring human protein, and, pre|CISION, a chemotherapy platform, to develop a pipeline of novel cancer immunotherapies that may be particularly suitable for those who have not responded to existing treatments, and diagnostic tests, beginning with a Covid detection kit.
The company’s strategy is to deliver near to medium term revenues from its diagnostic business while rolling out innovative therapies that have the potential to relieve pain and make inroads into the multi-billion cancer treatment market. It has established drug development partnerships with pharma and biotech leaders, including a research collaboration with Moderna, a development and commercialisation deal with LG Chem Life Sciences, and a collaboration with ADC Therapeutics. With more than a hundred employees across its two sites in Cambridge and Wetherby, and a business development team in the US, Avacta is led by CEO Alastair Smith, a former Chair of Molecular Biophysics at Leeds University, who since the company’s 2006 AIM IPO has delivered multiple follow-on fundraisings totalling over £120m.
A precision targeted cancer therapy
The group is organised into two divisions. Its therapeutics wing, based in Cambridge, is developing the Affimer biotherapeutic, designed to address issues with existing cancer therapies, which, based on antibodies derived from testing animal immune systems, are not necessarily wholly effective when transferred to humans. The Affimer system is based on a naturally occurring human protein, which Avacta believes allows it to target tumours more effectively, and makes it easier to produce.
The company has used Affimer in conjunction with its pre|CISIONTM chemotherapy platform to produce its leading drug candidate, AVA6000, a remodelled form of the standard chemotherapy Doxorubicin. Doxorubicin is widely used to treat tumours but is imprecise, impacting the body beyond the tumour itself, making it uncomfortable and even toxic to certain patients. The AVA6000 system is designed to release the drug’s payload into the tumour alone, thereby limiting body-wide exposure.
The drug’s intended effect has been observed in pre-clinical animal models. Avacta believes that if it can be proven to reduce the systemic toxicity of Doxorubicin in humans it has the potential to be applied to a range of other established chemotherapies. The company’s immediate aspiration is to enter the Doxorubicin market – expected to grow to $1.38bn within the next three years – through a licence deal that could generate an upfront payment of tens of millions of dollars. Such a breakthrough would allow the company to roll out a series of innovations for the broader chemotherapy market, which is forecast to be worth more than $50bn by 2024. Avacta is carrying out human trials with a view to licensing AVA6000 as soon as possible: this summer the first patient was dosed in the company’s Phase I multi-centre trial, with the dose escalation phase expected to be complete by Q2 2022, followed by completion of the dose expansion phase by Q2 2023.
Avacta’s second most advanced cancer therapy is AVA3996, a ‘proteasome inhibitor’ which regulates cell-cycle progression. Like AVA6000 it is designed to address shortcomings of the established Velcade treatment, which generates significant side effects such as peripheral neuropathy. On track for clinical development candidate selection by the end of the current year, AVA3996 could establish itself as a treatment for multiple myeloma and tumours such as pancreatic cancer, opening up a market estimated to be worth $1.7bn by 2023.
Avacta has established a potentially lucrative partnership with the South Korean group LG Chem Life Sciences. In September the company announced that ‘a pre-clinical development milestone’ had been achieved triggering ‘an undisclosed milestone payment’, LG Chem successfully completing pre-clinical trials of the Affimer PD-L1 inhibitor, leading to the selection of a pre-clinical candidate for further development. LG Chem has exclusive rights to develop and commercialise the inhibitor, opening the prospect for Avacta of milestone payments of more than $50m for each new product.
The company has also sown the seeds for a potential partnership with Moderna, which has exercised a commercial option to an Affimer programme that it is under consideration for development and subsequent submission for approval to the US Food and Drugs Administration.
A new Covid flow test
Avacta’s diagnostics division, based in Wetherby, uses the company’s platforms to develop diagnostic tests. The first, the AffiDX SARS-CoV-2 Antigen Lateral Flow Test, intended for professional use rather than self-testing, has been validated to test accurately against all emerging Covid variants, including Delta. The company notes ‘key performance benefits’ that ‘allow Avacta to competitively maintain … prices above that of cheaper tests’, including results detection within 20 minutes, and comfortable sample collection through mild nasal swabbing.
The group is hoping to tap a lucrative new Covid diagnostics market which it believes ‘will become a seasonal testing market similar to that for influenza’. Last year the total global SARS-CoV-2 antigen test market size was valued at $5.3bn and is expected to expand at a CAGR of 6.7pc from 2021 to 2027. Avacta’s test achieved ISO13485 accreditation this summer. Sales to the UK market are currently on pause due to a tightening of UK regulations that require the growing range of Covid tests to undergo further evaluation. But the company does not believe the suspension will ‘have a material impact’ on the company’s finances, and is working towards ‘placing the product on the market in all 27 countries of the EU for professional use’. Avacta has also entered into an agreement with life sciences distributor Calibre Scientific for the sale of the test across the European Economic Area – and the UK, once the product has been reassessed. Sales efforts are focused on large businesses, primarily but not exclusively in the UK, for workforce testing and on a range of other users of professional use tests such as elite professional sports teams and the travel industry. Avacta is working with additional distributors in the Asia Pacific region, which accounts for the largest portion of the market so far for Covid testing, representing 37pc of the market.
The company is also seeking to enter the self-testing market, which offers a significantly larger commercial opportunity than professional use testing. Working closely with partner Medusa19 to support an application for a CE mark for a self-test, Avacta says ‘good progress’ has been made ‘with the submission of the regulatory documentation to a notified body in Europe.’
Outlook
Avacta’s current push on both its therapeutics and diagnostic fronts have pushed up its costs. The company’s most recent interims stated that research costs from the development of the flow test and the therapeutics division increased to £6.29m, up from £3.57m for the previous period, and selling, general and administrative costs had increased to £4.06m, up from £3.14m. The group’s operating loss increased to £11.34m from £8.11m, and the reported loss after taxation increased to £10.2m, up from £6.99m. But revenue, principally due to funded research projects and milestone payments to the therapeutics division, increased to £2.32m from £1.81m, and, though down on the previous period’s £54.45m, the group ended the period with £36.97m in net cash and short-term deposits.
As ever, biotech, particularly in the small cap sector, is a sector in which investors should tread cautiously. The pandemic has highlighted our mutual dependence on the remarkable innovations small companies, as well as large, can bring. Speaking to the Investors’ Chronicle James Carthew, head of research at QuotedData said the ‘industry is in something of a golden age as new advances in technology, our understanding of the genome and our ability to manipulate genes open up new territory’. The Nasdaq Biotechnology index is up 62pc over the five years to September.
But it remains fraught with risk. Most biotech companies fail to bring drugs to market, one study finding that 90pc of clinical programmes ultimately fail to get regulatory approval in the US, with areas such as cancer having a lower success rate, and that 92pc of biopharmaceutical companies are unprofitable at any given time. Success or failure with biotechnology investments is driven by the approval of new therapies.
Avacta, however, appears to be making solid progress in this regard. Its share price touched 275p this summer on news of the accreditation of its diagnostic test and progress with the AVA6000 therapy. The price has since drifted back down to something close to the level at which it started the year, around 110p at the time of writing, taking the company’s market cap back down to £275m. It’s a pattern indicative of the challenge smaller biotechs have in sustaining share momentum: key announcements are relatively few, and if positive tend to generate relatively short spikes. It’s a long term game, and one in which it is hard even for technical experts to spot winners.
With the prospect of progress with the passage of AVA6000 on the horizon, and new breakthroughs regarding the distribution of the company’s diagnostic test, Avacta’s price could be return to an upwards path. The group was picked out as one to watch in the Investors’ Chronicle recent AIM 100 feature. Prospective investors should of course take time to review the significance of the company’s work carefully – which, it must said, as with other biotechs could be presented in the group’s communications more clearly to non-specialists. But with several intriguing prospects in development, and a share price that may be at the bottom of its cycle, we think Avacta is another biotech small cap to watch.
