Research Note: Summit Therapeutics (AIM: SUMM)

Following a request from a reader, I am now looking into the pharmaceutical company Summit  Therapeutics (LON:SUMM). This request was actually made a little earlier in the month and is likely off the back of the recent share price rise. SUMM  shot up 90% after it confirmed it had signed a licensing deal with the US biotech Sarepta Therapeutics (NASDAQ:SRPT) for its treatment for Duchenne Muscular Dystrophy, Ezutromid. This deal is worth up to US$522mln for SUMM. For a company that was worth only £61m in September, that’s a huge deal to sign off.

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The two companies will collaborate on Ezutromid. Initial benefit to Summit was an immediate US$40mln cash injection, with further benefits being:-

  • US$22m due at the end of the current phase II trials.
  • escalating royalties ranging from a low to high teens percentage of net sales in the licensed territory (being Europe, Turkey and the Commonwealth of independent States
  • Summit will also be eligible to receive development and regulatory milestones related to its next-generation utrophin modulators. SRPT and SUMM will share specified utrophin modulator-related research and development costs at a 45%/55% split, respectively, beginning in 2018.
  • Summit retains commercialisation rights in other countries.
  • SRPT retains an option for commercialisation rights in Latin America, which if exercised will result in further payments due to Summit.

As well as the potential royalties, the fact that R&D costs will be shared on a 45/55% split provides additional support to SUMM which is, even after its revaluation, a fledgling company.. Likewise, SUMM will have access to SRPT’s staff and facilities.

 

Suffice to say, this little AIM Company has been literally slingshot into respectable territory. It isn’t all that often that we see a “Company Maker” event  but it clearly has happened.

 

I suppose the question a new investor would be asking themselves now is ‘have  I missed the boat?’

 

SUMM chief executive Glyn Edwards has indicated that this cash injection will see the company through to late 2018 “We believe our existing cash and the US$40mln upfront payment and the anticipated US$22mln milestone payment for the first dosing of the last patients in our Phaseout DMD study will fund the company through December 31, 2018.”

On future partnering, Edwards said: “Our intention for other territories will be to develop these ourselves but obviously we will keep other options open. In particular, our intention is to keep marketing rights for the USA.”

Clearly Mr Edwards is expecting cash outflow to increase dramatically with the Phase III outrivals due to take place in Q2/Q32017, and the company has the funds to do this without being concerned about issuing equity.  The $40m cash injection is not specifically earmarked just for Ezutromid, and so the company is free to develop its second project, a CoDIFy (C-diff) antibiotic

On the note of this second project, ridinilazole, which should not be forgotten about, It is in an ongoing phase II trial of ridinilazole. Current indications are that ridinilazole is more effective at preserving gut microbiome of patients during treatment than the current go-to drug vancomycin. This has been expressed to be important as the destruction of the microbiome of a patients gut explains why the infection can recur in some patients, and why other patients don’t show a sustained response to the drug. There is currently no partner for the development of this drug so the companies options remain open with regard to its commercialisation.

I expect the share price to settle down following its recent volatility, followed by a slow downward trend reflecting the erosion of cash reserves, until:-

  1. Phase III trials are conclude, or
  2. The fast track application in the US for Ezutromid bears fruit with the FDA
  3. Further developments are made with their second project, the CoDIFy

A positive on either of the above events will likely result in significant, and sharp, share price appreciation, particularly with regard to the US fast track that has been granted to Ezutromid, classifying it as an Orphan Drug. This classification is applied to drugs that treat diseases affecting a small number of people.

Ezutromid will be competing with the SRPT’s treatment Exondys 51 in the US. However, Ezutromid has shown it can treat 100% of patients with Duchenne Muscular Dystrophy, whilst Exondys 51 treats 13%, with variations of the drug treating a further 8%. Clearly SUMM’s Ezutromid has the advantage here. Will SUMM find another commercial partner in the US, or will SRPT make a further offer.

It was speculated on message forums that SRPT’s could just buy out SUMM. This certainly may be the case in the future, particularly as the current deal does not include US rights, which SUMM have indicated they wish to retain. To acquire SUMM at a valuation similar to todays £126m  would certainly save SRPT hundreds of millions of dollars in the long run. Timing is more the issue as SUMM still has significant outlay to bring the drug to a ready state. Any future takeover rumours may warrant further investigation.

I believe that an investor looking to purchase now may find a better price than today’s 205gpx, but to wait too long may leave you out in the cold.

If you’re looking nto invest in a more established pharmaceutical, why not look at:-

GSK – Is now the time to buy?

Would you like me to research another company

I’m happy to take requests to research other companies, whether it be FTSE or AIM – just leave me a message on the contact page and I’ll either get back to you with a rough time frame , or do crack on with it straight away.

 

*disclaimer

I do not presently hold a position in SUMM

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