Phylogica: Seeking Partnerships

Phylogica’s outlook depends on management’s ability to attract further drug discovery collaborations. Fewer new partnerships have been concluded than expected, but the expansion of Phylogica’s library of Phylomers should aid the formation of new alliances. The potential of therapeutic peptides is gaining appeal as they appear to combine the best characteristics of small molecules and monoclonal antibodies, and Phylomers are a particularly interesting class of peptide due to their diversity and stability. The delays mean we have lowered our valuation to 5.4c (from 5.6c).

Phylomer – a proprietary drug discovery platform
Phylogica’s technology platform has the potential to both create new peptide therapeutics and validate new targets. The Phylomer libraries are a source of novel drug-like peptides that have been selected by evolution for stability and biological compatibility and, given their structural diversity, should include more under-represented scaffolds (structures) than random combinatorial libraries.

Peptides that offer the better attributes of existing drugs
Peptides share some of the advantages (stability, formulation flexibility and cost of goods) of small molecules but have the binding specificity of antibodies; however, the key benefit that is attracting industry interest is that they can address intractable intracellular targets (ie protein-protein interactions, where small molecules lack the size and specificity for target modulation, and antibodies are too large to enter cells).

Financials: Near-term self-sustainability still the target
Phylogica does aim to become cash self-sustaining in FY13, and cash generative in subsequent years. Achieving break-even is contingent on continued progress of existing partnerships and securing three additional discovery collaborations. The structuring of the recent A$1.6m fund raising with delayed conversion into equity suggests management is confident of achieving this by November 2013. Two to three new major partnerships per annum could allow the company to be self-funding.

Valuation: Base case reduced from 5.6c to 5.4c a share
Valuing Phylogica is not straightforward as its early stage and the limited programme visibility means our usual rNPV approach is not sufficiently robust. Similarly, its industry position means a meaningful quoted peer group doesn’t exist. Our DCF model examines the likely deal flows (apportioning success probabilities for up to six deals over the next two years) and yields a base case valuation of 5.4c a share (A$24.0m).

To Read the Entire Report Please Click on the pdf File Below.