You only have to walk into your doctor's surgery to see signs reminding you to use antibiotics with care; meanwhile the news continues to carry stories which highlight the increasing resistance against antibiotics. Destiny Pharma's novel XF platform offers a solution to the global need for new antibiotics with low risk of resistance generation. With a focus on tackling the most virulent and difficult to target hospital infections like MRSA (methicillin-resistant Staphylococcus aureus), as a group XF drugs have shown activity against eight pathogens tested that appear on the World Health Organisation and US Centers for Disease Control and Prevention (CDC)'s priority list.
Destiny is prioritising XF-73 which has potential to be first to a $1.2bn core market, in a new FDA-backed indication for prevention of post-surgical S aureus infection. CDC estimates that people with MRSA are 64% more likely to die than those with a non-resistant form of infection.
- The XF platform is based on a novel chemical class which offers the potential to rapidly kill bacteria via mechanisms that differentiate the XF candidates from standard antimicrobial treatments. The commercial potential of such drugs is enhanced, not only to treat or prevent infection, but with low propensity for bacteria such as S aureus to develop resistance as seen in standard microbiology models even after 50-plus exposures to XF-73. Anti-Microbial Resistance (AMR) is a major limiting factor with standard antibiotic treatments. The low potential for resistance to XF-73 could support wider adoption, tripling the core patient pool.
- If the data are borne out in the Phase IIb study, then XF-73 has potential to be first to market in a new FDA-backed indication, setting a new standard and gaining a strong foothold in the market. There appears to be limited competition in later stage pipelines in the preventative space and with no approved drugs in the US. Furthermore, it seems that Destiny's XF-73 is likely to be a more convenient presentation compared to currently used off-label antibiotic, mupirocin.
- The company is focused on the fastest route to a Phase III ready data package, first for XF-73 and the next three products in the pipeline, rather than eyeing up a slot as a specialty pharma company. Destiny is already well-funded because of its recent £15.3m fund raise together with a further £3m investment from China Medical Systems, this is sufficient to complete the Phase II program for XF-73 in our forecasts. This route could be accelerated by a range of drivers and policy-led incentives, plus potential to benefit from alternative, non-dilutive sources of funding.
- Looking forward, we consider the probability of securing a deal post-Phase II is high, if efficacy already seen in 166 subjects is confirmed, given the apparent scarcity of novel treatments and recent high-profile vaccines failures.
- China Medical Systems is an ideal partner / investor with access to huge markets.
Our DCF valuation using a 12.5% discount rate is £115m or 263p/share.
NB at this stage this only reflects the current clinical candidate XF-73 in the US market, and includes our estimated net cash of £16.8m at end of 2017. Consequently, we see the current market value as a fair entry point into a novel pipeline with further upside potential if additional candidates enter clinical development.
