4D Pharma PLC (ticker: DDDD) (AIM traded)
Business Summary
4D Pharma plc (4D) is a United Kingdom-based bio pharmaceutical company focused on developing various projects targeting new therapeutic areas. The principal activity of the Company is research and development of pharmaceutical products in new live biotherapeutic areas. The Company has developed its research to build MicroRx, which is a discovery methodology that is able to rationally select those bacteria that have a precise and evolved therapeutic effect.
Live biotherapeutics is a novel area of life science and 4D are market leaders in this cutting-edge field.
Investment Case
I first came across this company when watching an interview with Neil Woodford, in which he was defending his patient capital fund when it was in meltdown - he gave 4D as an example of a company that was a global leader in its field and had the potential to become one of the UK's best biotech companies. Needless to say, the company's share price was decimated over the period he held (and then some! when his funds were unwound, and everything was sold off at bargain prices).
The company was valued at around the £650 million back in 2016 when live biotherapeutics (LBT) was just coming onto the stage (albeit, many in the bio pharma world were very sceptical that gut bacteria had any potential to treat long term diseases). The company reached a low in March this year when it was thrown out by many investors in the stock market crash (hitting 24 pence). Since then it has carried out two capital raisings by way of discounted placings and the shares traded between 40 and 50 pence until August.
The share price then started to re-rerate (all the way up to 185 pence) on the back of some truly amazing oncology data. The company released data from a phase 1/2 trial on the effectiveness of its MRx0518 candidate drug in combination with immune checkpoint inhibitor Keytruda produced by Merck. In layman's terms, and in an effort to keep this note short!, this was seriously ground-breaking data.
The share price then tanked over 50% (to 85 pence) on the back of its phase 2 IBS trial data. This was a very strange market reaction, as the results were extremely encouraging and the company will be taking forward its IBS drug, Blautix, through to phase 3. I suspect there was some serious misunderstanding in the market about the results - The company has since provided follow up interviews re-iterating the success of the trial and huge potential of Blautix.
Bull Points
Here are some brief bullet points of the major tail-winds for the company (I’m not going to go into the level of detail I would like to, as this note would balloon to 10 pages! but suggest a thorough read of its recent management presentations and regulatory announcements, available on its website):Pipeline
4D has a vast pipeline of therapeutic drug candidates in various stages of development. These include oncology, IBS, Crohn's, Covid-19, Asthma, Autoimmune diseases, Neurodegeneration diseases and many more. It has by far the biggest pipeline of any LBT company in the world.Safety
Live biotherapeutics are extremely safe (by virtue of using bacteria that already exist in the human body) and therefore provide for treatments with little or no side effects. Significantly, most new drugs fail FDA approval for safety, and not efficacy, reasons and therefore commercialisation prospects and accelerated approvals are highly likely for 4D. Yet, the market values 4D like any other high-risk early stage biotech company...AI/Tech
4D has, over many years, developed its own MicroRx platform, which is a discovery platform that is able to rationally select those bacteria that have a precise and evolved therapeutic effect on specific diseases. Think of this as the bible of potential LBT drugs. The market is not really attributing any value to this but 4D has the potential to bring in significant revenue by allowing other companies access to this platform (for example licensing out data access and development partnerships with major pharma companies). 4D also has its own manufacturing capability and so can manufacture new LBT drugs in-house, which is very rare for LBT companies - this allows the company to develop new candidate drugs with speed and low costs. Collaboration with Merck
About a year ago, 4D partnered with Merck (one of the biggest pharma companies in the US) to develop novel LBT vaccines. This involved Merck taking a small shareholding in 4D and, depending on success, has the potential to deliver up to $1 billion dollars in milestone payments for the company. The details of the collaboration are strictly confidential and not know to the market but there is clear scope for significant revenue for 4D and the possibility of Merck taking more shares in the company. Oncology
This was the reason I invested in 4D back in August. 4D is also partnered with Merck on 4D's MRx0518 candidate drug in combination with Merck's immune checkpoint inhibitor Keytruda, which, by the way, is one of the biggest selling oncology drugs in the world!
Firstly, the data showed that MRx0518 is highly effective in treating solid tumours in combination with Keytruda. It is estimated that Keytruda sales will double from the levels in 2019 to over $22 billion by 2025. The potential revenue for 4D here is astronomical, if Merck decide to roll out MRx0518 with Keytruda.
Secondly, initial data shows that MRx0518 is likely also equally effective and safe as a monotherapy - i.e. as a stand-alone treatment for tumours. The potential in this regard is mind boggling and more data will be released by the company soon (possibly the Monday after i'm writing this), which should make the pharma industry really sit up and take notice of LBT and 4D. In short, 4D will show that the MRx0518 is the first LBT drug candidate in the oncology space to act as a stand-alone treatment - what this means is that a new safe and effective treatment will be a proven concept, providing an alternative to chemo, radiation and surgery - truly ground-breaking stuff, the potential of which has most definitely gone under the radar.IBS
The company released phase 2 IBS trial data a month or so ago, which the company are highly encouraged by and will be taking to phase 3, likely with a big pharma partner. Expect to hear more about this soon. Blautix, 4D's IBS drug candidate, has the potential to become the global first line drug for IBS (treating both IBS-D and IBS-C), which is a monster potential market given that 10% of the population have IBS and there are no decent treatments out there.Asthma
This is perhaps the company's second brightest prospect, behind oncology. It is currently in phase 1/2 trials and results are due early next year. Initial results are highly encouraging. Covid-19
The company's Asthma research shows the potential for significantly reducing lung inflammation, which is the most severe consequence of Covid-19. The company obtained fast track approval for a phase 1/2 trial earlier this year and results are imminent. This is the joker in the pack and could well be a viable commercial opportunity if successful and if rolled out in time. It looks like Covid-19 will be with us for years to come and so this is one to watch - certainly very little value is being attributed to the potential here by the market.NASDAQ listing
4D recently announced a merger with the NASDAQ listed special purpose acquisition company, Longevity. As part of the deal, 4D have effectively raised $14.5 million at a 110 pence valuation (which was a decent premium to the pre-existing share price), with the potential to raise an additional $23 million in warrants proceeds if exercised (highly likely in my opinion). This provides capital funding for the company for 2021, and possibly beyond, if and when the warrants are exercised. This therefore removes the immediate prospect of dilutive discounted placings on AIM. More importantly, the company expects to become dual listed on NASDAQ in mid-January 2021, which will open up a whole new investor base of US biotech funds. US listed LBT companies are valued at at least double that of its AIM peers. Seres Therapeutics is the biggest NASDAQ listed LBT company and carries a valuation of over $3 billion, largely due to some recent positive phase 3 data on its C Difficile drug. In short, 4D is a much better overall company than Seres and will eventually show phase 3 success in the next 18 months or so. Management ownership
4D's management own nearly 20% of the company's shares and are highly invested. They also have a fantastic track record in previous ventures and their interests are highly aligned with those of shareholders. Something you love to see! Duncan Peyton (CEO) and others have invested millions into 4D and have certainly put their money where their mouths are!Intellectual Property
This is an under the radar masterstroke by the company - it has over a 1000 granted patents and 400 plus in application, which represents by far the biggest IP portfolio in the LBT space. The value of this IP will become apparent as the LBT industry develops. 4D will benefit seriously from first mover advantage, in my opinion.
DOWNSIDE RISKS:Capital hungry
The company is not yet generating any serious income, given it is in the pre-commercialisation /revenue stage. Therefore, it is a capital hungry business and the financial statements reflect this. The company will require ongoing funding at some point and therefore placings will definitely happen. However, being listed on NASDAQ will help in this regard and, given the US appetite for companies such as 4D, raisings at a premium are likely and so shareholders shouldn't be too worried. The capital raisings will essentially support the massive growth potential. Years away from commercialisation
The company is probably 18-24 months from its first phase 3 success and impending commercialisation and so investors should be aware that the investment opportunity now is to get on board early. Don't expect the financial statements to reflect otherwise in 2021 and early 2022. The caveat to this is that the vaccine collaboration with Merck, and various other potential collaborations in the offing, will generate some initial up-front payments and milestone payments but the really significant revenue will start to flow once its drugs are commercialised.
LBT risks
There is a risk that LBT does not live up to expectations and does not show the required efficacy to satisfy big pharma. This would ultimately completely de-rail 4D's business but I would say is highly unlikely given the data we've seen this year.
TARGET PRICE:
My 6 month target valuation is £1billion, which equates to a share price of £7.61 - almost 650% upside from today's share price. This is based on the previous value assigned to the business back in 2016, the fact that since then the company has released groundbreaking data and that LBT is only now gaining real traction in the pharma world.
My 18-24 month target valuation is £3 billion, which is broadly the same as Seres' valuation and assumes a significant phase 3 success. In all honesty, it’s very difficult to attribute a value to the company, as the potential is so vast, and it has so many 'shots on goal' with only one required to come off. In the event of a number of phase 3 successes over the next 5 years or so, you can use your own skills of prediction...
Of course, the current market cap of £156 million makes a mockery of the above and probably makes me appear to be a stark raving lunatic! But these are my personal targets based on my extensive research and strong conviction. I believe that 4D is seriously undervalued compared to its US peers and its huge disruptive potential, and offers the best risk reward play on AIM for those with the required patience. Its also worth noting that there are some serious barriers to entry here and 4D will face very little competition.
DISCLAIMER: Please note that the above represents my own views and is not intended to be investment advice. Please do your own research into the company. I also hold a sizeable position in the company.
4D Pharma PLC (ticker: DDDD) (AIM traded)
Business Summary
4D Pharma plc (4D) is a United Kingdom-based bio pharmaceutical company focused on developing various projects targeting new therapeutic areas. The principal activity of the Company is research and development of pharmaceutical products in new live biotherapeutic areas. The Company has developed its research to build MicroRx, which is a discovery methodology that is able to rationally select those bacteria that have a precise and evolved therapeutic effect.
Live biotherapeutics is a novel area of life science and 4D are market leaders in this cutting-edge field.
Investment Case
I first came across this company when watching an interview with Neil Woodford, in which he was defending his patient capital fund when it was in meltdown - he gave 4D as an example of a company that was a global leader in its field and had the potential to become one of the UK's best biotech companies. Needless to say, the company's share price was decimated over the period he held (and then some! when his funds were unwound, and everything was sold off at bargain prices).
The company was valued at around the £650 million back in 2016 when live biotherapeutics (LBT) was just coming onto the stage (albeit, many in the bio pharma world were very sceptical that gut bacteria had any potential to treat long term diseases). The company reached a low in March this year when it was thrown out by many investors in the stock market crash (hitting 24 pence). Since then it has carried out two capital raisings by way of discounted placings and the shares traded between 40 and 50 pence until August.
The share price then started to re-rerate (all the way up to 185 pence) on the back of some truly amazing oncology data. The company released data from a phase 1/2 trial on the effectiveness of its MRx0518 candidate drug in combination with immune checkpoint inhibitor Keytruda produced by Merck. In layman's terms, and in an effort to keep this note short!, this was seriously ground-breaking data.
The share price then tanked over 50% (to 85 pence) on the back of its phase 2 IBS trial data. This was a very strange market reaction, as the results were extremely encouraging and the company will be taking forward its IBS drug, Blautix, through to phase 3. I suspect there was some serious misunderstanding in the market about the results - The company has since provided follow up interviews re-iterating the success of the trial and huge potential of Blautix.
Bull Points
Here are some brief bullet points of the major tail-winds for the company (I’m not going to go into the level of detail I would like to, as this note would balloon to 10 pages! but suggest a thorough read of its recent management presentations and regulatory announcements, available on its website):
Pipeline
4D has a vast pipeline of therapeutic drug candidates in various stages of development. These include oncology, IBS, Crohn's, Covid-19, Asthma, Autoimmune diseases, Neurodegeneration diseases and many more. It has by far the biggest pipeline of any LBT company in the world.
Safety
Live biotherapeutics are extremely safe (by virtue of using bacteria that already exist in the human body) and therefore provide for treatments with little or no side effects. Significantly, most new drugs fail FDA approval for safety, and not efficacy, reasons and therefore commercialisation prospects and accelerated approvals are highly likely for 4D. Yet, the market values 4D like any other high-risk early stage biotech company...
AI/Tech
4D has, over many years, developed its own MicroRx platform, which is a discovery platform that is able to rationally select those bacteria that have a precise and evolved therapeutic effect on specific diseases. Think of this as the bible of potential LBT drugs. The market is not really attributing any value to this but 4D has the potential to bring in significant revenue by allowing other companies access to this platform (for example licensing out data access and development partnerships with major pharma companies). 4D also has its own manufacturing capability and so can manufacture new LBT drugs in-house, which is very rare for LBT companies - this allows the company to develop new candidate drugs with speed and low costs.
Collaboration with Merck
About a year ago, 4D partnered with Merck (one of the biggest pharma companies in the US) to develop novel LBT vaccines. This involved Merck taking a small shareholding in 4D and, depending on success, has the potential to deliver up to $1 billion dollars in milestone payments for the company. The details of the collaboration are strictly confidential and not know to the market but there is clear scope for significant revenue for 4D and the possibility of Merck taking more shares in the company.
Oncology
This was the reason I invested in 4D back in August. 4D is also partnered with Merck on 4D's MRx0518 candidate drug in combination with Merck's immune checkpoint inhibitor Keytruda, which, by the way, is one of the biggest selling oncology drugs in the world!
Firstly, the data showed that MRx0518 is highly effective in treating solid tumours in combination with Keytruda. It is estimated that Keytruda sales will double from the levels in 2019 to over $22 billion by 2025. The potential revenue for 4D here is astronomical, if Merck decide to roll out MRx0518 with Keytruda.
Secondly, initial data shows that MRx0518 is likely also equally effective and safe as a monotherapy - i.e. as a stand-alone treatment for tumours. The potential in this regard is mind boggling and more data will be released by the company soon (possibly the Monday after i'm writing this), which should make the pharma industry really sit up and take notice of LBT and 4D. In short, 4D will show that the MRx0518 is the first LBT drug candidate in the oncology space to act as a stand-alone treatment - what this means is that a new safe and effective treatment will be a proven concept, providing an alternative to chemo, radiation and surgery - truly ground-breaking stuff, the potential of which has most definitely gone under the radar.
IBS
The company released phase 2 IBS trial data a month or so ago, which the company are highly encouraged by and will be taking to phase 3, likely with a big pharma partner. Expect to hear more about this soon. Blautix, 4D's IBS drug candidate, has the potential to become the global first line drug for IBS (treating both IBS-D and IBS-C), which is a monster potential market given that 10% of the population have IBS and there are no decent treatments out there.
Asthma
This is perhaps the company's second brightest prospect, behind oncology. It is currently in phase 1/2 trials and results are due early next year. Initial results are highly encouraging.
Covid-19
The company's Asthma research shows the potential for significantly reducing lung inflammation, which is the most severe consequence of Covid-19. The company obtained fast track approval for a phase 1/2 trial earlier this year and results are imminent. This is the joker in the pack and could well be a viable commercial opportunity if successful and if rolled out in time. It looks like Covid-19 will be with us for years to come and so this is one to watch - certainly very little value is being attributed to the potential here by the market.
NASDAQ listing
4D recently announced a merger with the NASDAQ listed special purpose acquisition company, Longevity. As part of the deal, 4D have effectively raised $14.5 million at a 110 pence valuation (which was a decent premium to the pre-existing share price), with the potential to raise an additional $23 million in warrants proceeds if exercised (highly likely in my opinion). This provides capital funding for the company for 2021, and possibly beyond, if and when the warrants are exercised. This therefore removes the immediate prospect of dilutive discounted placings on AIM. More importantly, the company expects to become dual listed on NASDAQ in mid-January 2021, which will open up a whole new investor base of US biotech funds. US listed LBT companies are valued at at least double that of its AIM peers. Seres Therapeutics is the biggest NASDAQ listed LBT company and carries a valuation of over $3 billion, largely due to some recent positive phase 3 data on its C Difficile drug. In short, 4D is a much better overall company than Seres and will eventually show phase 3 success in the next 18 months or so.
Management ownership
4D's management own nearly 20% of the company's shares and are highly invested. They also have a fantastic track record in previous ventures and their interests are highly aligned with those of shareholders. Something you love to see! Duncan Peyton (CEO) and others have invested millions into 4D and have certainly put their money where their mouths are!
Intellectual Property
This is an under the radar masterstroke by the company - it has over a 1000 granted patents and 400 plus in application, which represents by far the biggest IP portfolio in the LBT space. The value of this IP will become apparent as the LBT industry develops. 4D will benefit seriously from first mover advantage, in my opinion.
DOWNSIDE RISKS:
Capital hungry
The company is not yet generating any serious income, given it is in the pre-commercialisation /revenue stage. Therefore, it is a capital hungry business and the financial statements reflect this. The company will require ongoing funding at some point and therefore placings will definitely happen. However, being listed on NASDAQ will help in this regard and, given the US appetite for companies such as 4D, raisings at a premium are likely and so shareholders shouldn't be too worried. The capital raisings will essentially support the massive growth potential.
Years away from commercialisation
The company is probably 18-24 months from its first phase 3 success and impending commercialisation and so investors should be aware that the investment opportunity now is to get on board early. Don't expect the financial statements to reflect otherwise in 2021 and early 2022. The caveat to this is that the vaccine collaboration with Merck, and various other potential collaborations in the offing, will generate some initial up-front payments and milestone payments but the really significant revenue will start to flow once its drugs are commercialised.
LBT risks
There is a risk that LBT does not live up to expectations and does not show the required efficacy to satisfy big pharma. This would ultimately completely de-rail 4D's business but I would say is highly unlikely given the data we've seen this year.
TARGET PRICE:
My 6 month target valuation is £1billion, which equates to a share price of £7.61 - almost 650% upside from today's share price. This is based on the previous value assigned to the business back in 2016, the fact that since then the company has released groundbreaking data and that LBT is only now gaining real traction in the pharma world.
My 18-24 month target valuation is £3 billion, which is broadly the same as Seres' valuation and assumes a significant phase 3 success. In all honesty, it’s very difficult to attribute a value to the company, as the potential is so vast, and it has so many 'shots on goal' with only one required to come off. In the event of a number of phase 3 successes over the next 5 years or so, you can use your own skills of prediction...
Of course, the current market cap of £156 million makes a mockery of the above and probably makes me appear to be a stark raving lunatic! But these are my personal targets based on my extensive research and strong conviction. I believe that 4D is seriously undervalued compared to its US peers and its huge disruptive potential, and offers the best risk reward play on AIM for those with the required patience. Its also worth noting that there are some serious barriers to entry here and 4D will face very little competition.
DISCLAIMER: Please note that the above represents my own views and is not intended to be investment advice. Please do your own research into the company. I also hold a sizeable position in the company.
A good read, thanks
ReplyDeleteThanks Richy - that was interesting.
ReplyDeleteWhat a fabulous read great job
ReplyDeleteNice summary, thanks for that. I am also bullish on the future prospects of 4D or $LBPS as they will be on Nasdaq. A 20-bagger from current SP will be very nice within two years.
ReplyDelete