SMALL CAP IDEA: AIM healthcare stock C4X struggles for market reward despite business progress

A marked decline in the value of AIM-listed healthcare shares over the past two and a half years belies the significant progress made behind the scenes at these innovative companies.

An example of this is C4X Discoverywhich has two licensing agreements with top partners, has sold an asset and, crucially, is funded for the foreseeable future.

This last point is important because it means that there is no risk of a highly dilutive fundraising in the short term, putting it in a small minority of companies listed on the junior market.

When I meet Clive Dix and Nick Ray, CEO and Chief Scientific Officer of C4XD respectively, it is just before the drug developer’s annual meeting.

Progress, but little reward

In more ordinary circumstances, the AGM would have been a farewell affair, given the company’s performance over the past twelve months.

However, it is fair to say that these milestones have only been rewarded to a limited extent by the markets. The £8.7 million ($11 million) payment under the AstraZeneca deal just over a month ago saw the stock start to rally, but quickly followed in its footsteps.

Otherwise, it has been difficult to gain recognition for the remarkable progress it has made – although it is not alone in this respect, as the AIM healthcare index has collapsed to levels last seen almost a decade ago .

CEO Dix believes the issue is more than purely cyclical, citing poor and deteriorating analyst coverage of the sector, a lack of liquidity and reduced access to growth capital as exacerbating factors. He says there is also a serious lack of government support, financial, legislative and regulatory.

‘The ideal world right now for everyone in biotech is the private world. There is a lot of venture capital (VC) money, a lot of opportunity to grow and develop,” Dix adds.

A must have?

If we see a recovery in listed healthcare companies from current low levels, the Manchester-based drug developer is likely to be a ‘must-have’ on any watchlist.

As mentioned above, it is well funded with a cash runway of around two years thanks to a recent influx of funds from a licensing deal and asset sales.

His area of ​​expertise is primarily, but not exclusively, in inflammation, and his commitment to small molecule discoveries offers treatments that are not only more versatile and affordable than their biological counterparts, but also potentially more accessible due to oral administration.

“The cost of goods for a biologic means it will never be anything like first- or second-line therapy,” explains chief scientific officer Ray.

For that reason, especially in the field of inflammation, doctors are likely to try a range of cheaper treatments first, on a trial and error basis, before prescribing a biologic drug, which has the added disadvantage of requiring an injection.

‘A biological (drug) is the last thing you get. A small molecule (drug) will likely be something that (doctors) can get their hands on more quickly, it will be cheaper and as such the patient population should be larger.”

Differencest approaching

C4XD is distinguished by its business model, which focuses on the discovery and development of assets for out-licensing prior to clinical trials – a departure from industry norms.

The company operates as a virtual pharmaceutical company and outsources many of its R&D functions, maintaining a streamlined operational structure.

This approach has paid off, as evidenced by agreements with industry giants Sanofi and AZ worth a combined £650 million, which have taken over the development of the company’s oral IL-17A inhibitor and NRF2 activator programs respectively.

A licensing deal with Indivior, meanwhile, turned into outright sales of its Orexin-1 receptor antagonist for substance abuse, which raised £16 million.

Strong pipeline

The current pipeline includes promising treatments for inflammatory bowel disease and cancer.

The company’s strategy to find partners before incurring the significant costs associated with clinical trials underlines the company’s innovative and pragmatic approach.

However, Ray told Proactive that he might be tempted to follow the α4β7 program for inflammatory bowel disease via the more traditional route.

He said, ‘This would be a good one (to take to the clinic). But it is always about the right project, the right time and the right effectiveness.’

He also confirmed that there was some “general interest” in the MALT-1 inhibitor program in oncology. Given the company’s focus on inflammation and the competitive market for new cancer treatments, it would not be a surprise if this drug were to quickly disappear from license.

Listed in the US, there is no doubt that C4X would be worth significantly more than the £30m valuation it lists on AIM. It’s not the only one rated so low. There are many more companies that are in the valuation trap described earlier.

Western migration

For now, a western migration to markets like Nasdaq or NYSE seems unlikely. It is widely accepted that a market capitalization of £400 million ($500 million) is the minimum needed to move from London to New York. Currently, very few AIM healthcare innovators reach this minimum threshold.

It’s hard to know what will happen over the course of the year to 18 months. We are already seeing private equity activity at the margins – although the PE has set its sights on buy-and-build stories in pharmaceutical services, such as Instem and Ergomed. And before that, it was income-generating stocks like Clinigen and Amryt Pharma.

Consolidation may take hold or, heaven forbid, the risky attitude towards the life sciences featherweights will eventually reverse when the money taps are turned back on. But in the end, something has to give.

Investors in companies like C4XD, and similar overlooked and undervalued stocks, will be hoping that the dam will break sooner rather than later.