DESTINY PHARMACEUTICALS - A Biotech Company for the Age of Infectious Diseases
Destiny Pharma - An Introduction
Destiny Pharma is a clinical stage, biotechnology company focused on the development of novel medicines for the treatment of infectious diseases. In 2017 the Company raised £15.3 million when it floated on the small caps AIM market in London. The Company aims to develop new drugs for the prevention and treatment of life-threatening infections caused by antibiotic resistant bacteria, popularly referred to as superbugs. The need to develop medicines that combat antimicrobial resistant bacteria (AMR) is a medical priority highlighted by authorities including the Food and Drug Administration (FDA) in the US and the World Health Organisation (WHO).
Destiny Pharma’s lead clinical candidate, XF-73 Nasal Gel, is being developed to combat methicillin-resistant Staphylococcus aureus (MRSA) and is inching towards the concluding stages of Phase 2b trials. The Company also has several other candidates in its pipeline though they are at earlier development stages.
Gauging the outcome of clinical trials requires the prospective investor to consider not just the clinical research done to this point, but to also assess the individuals responsible for developing the product and company. The purpose of this report is to present the facts of the matter in an objective manner to aid the reader in deriving their own informed judgement on Destiny Pharma’s prospects.
Targeting the Problem of Antimicrobial Resistance (AMR)
Antibiotic resistance develops when bacteria adapt to the presence of antibiotics. Many antibiotics belong to the same class of medicines (penicillin, methicillin, etc) so resistance to one type can lead to resistance to a whole class thereby rendering the antibiotic ineffective. This resistant bacterium can circulate in populations of humans and animal through food, water and environment.
Bacterial resistance to drugs is of huge concern to clinicians and infectious disease experts. In 2016, the UK Government backed AMR Review organisation estimated that at current trajectory, globally one person will die every 3 seconds of an AMR related disease by the year 2050. The World Health Organisation is acutely aware of the impending AMR problem. The international medical organisation has called on governments to prioritise and cooperate on a sustained scientific intervention on the matter.
Antimicrobial resistance threatens the very core of modern medicine and the sustainability of an effective, global health response to the enduring threat from infectious diseases. Effective antimicrobial drugs are prerequisites for both preventative and curative measure, protecting patients from potentially fatal diseases and ensuring that complex procedures, such as surgery and chemotherapy, can be provided at low risk. Yet systematic misuse and overuse of these drugs in human medicine and food production have put every nation at risk. Few replacement products are in the pipeline. Without harmonized and immediate action on a global scale, the world is heading towards a post-antibiotic era in which common infections could once again kill.
- Dr Margaret Chan, Director-General WHO
Destiny Pharma’s objective is to develop medicines that tackle these drug resistant bacteria. To this end, the Company has been developing its proprietary XF drug platform since 2003. Clinical studies for its lead candidate XF-73 have been promising. Pre-clinical studies have demonstrated sustained efficacy against such bacteria. Destiny is expecting Phase 2b clinical study results within the next few weeks.
Currently there is a dearth of drugs able to combat AMR bacteria. Vaccines and antibiotics have been tried for the same purpose but as yet there have been no successes. For example, StaphVAX and V710 both failed Phase 3 testing. In the Board of Director’s own words, Destiny Pharmaceuticals is targeting the unmet clinical need to combat infectious antimicrobial resistant bacteria.
Board of Directors
Destiny Pharmaceuticals is currently a non-revenue generating, loss making company which is at an embryonic stage of its corporate development. There is no indicative fundamental or technical data that can be used to ascertain the value of the Company. Instead we must focus on the individuals driving Destiny’s operations. The efficacy and pedigree (or lack thereof) of the Board will be as strong an indicator as any of the future prospects of Destiny Pharmaceuticals.
Nick Rodgers – Chairman
Nick Rodgers was first appointed to the Destiny Pharma’s board as a Non-Executive Director in June 2018. In September of the same year he succeeded Sir Nigel Rudd as Chairman.
Mr Rodgers has significant experience in both public and private life science companies. He is currently chairman of health techonologies network SEHTA (South East Heath Technologies Alliance).
Mr Rodgers was head of both the Life Science and Corporate Finance departments of Investec from 1989 to 2003. More recently, He served as Chairman of the FTSE 250 biotechnology firm Oxford Biomedica (LON:OXB) from 2004 to 2016. Mr Rodgers’ experience at and connections from Oxford Biomedica may be an aid to Destiny Pharma’s growth prospects.
Neil Clark – Chief Executive Officer
Mr Clark has a BSc in Bioscience from the University of Nottingham and qualified as an accountant with Price Waterhouse Coopers in Cambridge. He is also a Fellow of the Institute of Chartered Accountants.
Mr Clark has considerable background in pharmaceutical and corporate worlds. He joined CeNeS Pharmaceuticals in 1997 and after a successful flotation, became the company’s CFO in 1999 and in 2005 he became CEO.
Mr Clark was the man in charge of CeNeS when in 2008, despite successful Phase 3 trials, CeNeS was unable to find licensees for its flagship M6G product. M6G was designed to compete with morphine and boasted fewer side effects than its targeted rival. Perhaps trying to license a product to compete against a ubiquitous pain relief drug was overly ambitious. Regardless, the lack of a forthcoming licensing partner resulted in CeNeS being sold to German Paion AG in a reported £10.9 million all share deal.
Mr Clark joined Ergomed (LON:ERGO) in January 2009 and was Chief Financial Officer during its IPO in July 2014. In January 2016 he moved to be full time CEO of PrimeVigilance, a drug safety business he had helped start that had been folded into Ergomed’s operations.
Having been appointed CEO of Destiny Pharma in January 2017, Mr Clark resigned his position as CEO at PrimeVigilance in April 2017. Mr Clark’s varied experiences in publicly listed clinical biotechnology companies may be an asset as Destiny looks to grow its profile and pipeline.
Dr William Love – Chief Science Officer
Dr Love founded Destiny Pharmaceuticals in 1997 and is the co-inventor of the company’s XF Platform. He is named as inventor for more than 70 patents and counting.
Previously Dr Love had been a senior scientist with Novartis (SWX:NOVN) working on novel drug delivery technologies. While at Novartis he was involved in the development of “Visudyne”, the market leading eye-care pharmaceutical.
Dr Love was also a founding member of the BEAM Alliance (Biotech companies in Europe combating AntiMicrobial Resistance). He is also an Expert Advisory Board member of the Global AMR Innovation Fund.
Dr Love’s overall professional experience, especially at Novartis has equipped him with expertise in the development of drug delivery technologies. He has been involved in Research and Development of drugs from discovery through pre-clinical and clinical development in the USA, UK and EU. This experience will no doubt be invaluable as DEST seeks to further grow its pipeline.
Shaun Claydon – Chief Financial Officer
Shaun Claydon took over from Simon Sacerdoti as CFO in October 2018. Mr Claydon is a Chartered Accountant who has several corporate finance roles including PWC, Investec and HSBC Investment Bank.
Previously Mr Claydon has been CFO at clinical stage pharmaceutical company Creabilis which he helped sell for $150 million to Sienna BioPharma in 2016. He also served as CFO and COO of Orteq Sports Medicines.
Mr Claydon has over 18 years of board level experience at biotechnology firms and is currently a Director at the publicly listed boutique spirits company Distil PLC (LON:DIS).
Dr Huaizheng Peng – Non-Executive Director
Dr Peng was appointed to Destiny Pharmaceutical’s Board of Directors in December 2017 as part of the China Medical Systems (CMS) commercial agreement with Destiny (the agreement is further discussed later in this report).
Dr Peng has been the General Manager of International Operations at CMS since 2011. In his CMS role, Dr Peng has had responsibilities for pharmaceutical asset acquisition, product licensing, international business development, outbound investment and asset management.
Previous to joining CMS, Dr Peng was partner at London based private equity firm Northland Bancorp. He had also served as head of life sciences and director of corporate finance at investment bank Seymour Pierce. Dr Peng served as Non-Executive Director at China Medstar while it was listed on AIM.
Dr Debra Barker – Non-Executive Director
Dr Barker was appointed to the Board from January 2020. Dr Barker has over 25 years of experience in pharmaceuticals and biotech. She has previously worked at Novartis, Roche, GlaxoSmithKline and most recently served as Chief Medical and Development Officer at anti-infective specialist Polyphor (SWX:POLN). Dr Barker was part of the team which took Polyphor public on the SIX Swiss Exchange in 2018. Dr Barker currently sits on the Board for Hutman Diagnostics (specialises in antimicrobial resistance diagnostics) and BarGenBio (oncology company specialising in immune-evasive and therapy resistant cancers).
Capital Structure & Significant Shareholders*
Directors Love and Morgan own 17.98% of Destiny Pharma’s shares. An additional 8.72% in the hands of commercial partners China Medical Systems Holdings through A&B (HK) Ltd and CMS Ltd. A further 25.60% of Destiny’s shares are with investment companies (Canaccord, HSBC, Rosetta). More than three quarters (78.72% to be precise) of Destiny’s shares are owned by Directors and/or Significant Shareholders (those with a holding of 3% or greater). Destiny Pharma states 31.53% of share capital is not in public hands.
Some current members of the Board have Share Options which amount to 5.35% of the current Issued Shares. Additionally, certain former Board members retain Share Options in Destiny Pharma. Namely Sir Nigel Rudd (former Chairman), Simon Sacerdoti (former CFO) and Joe Eagle (former NED).
*This data is correct prior to the November 2020 fundraise and will be updated in due course to reflect changes in Capital Structure
Figure 1 - Destiny Pharma Capital Structure
Product Strategy and Pipeline
Strategy
Destiny Pharmaceuticals intends to grow shareholder value through clinical development and commercialising the proprietary value of its medicines. Rather than producing and selling the product itself, Destiny Pharma’s strategy is to develop drugs through to Phase 2 maturity and subsequently enter into agreements with other pharmaceutical companies to license said drugs at the most opportune time on optimal financial terms. This will allow Destiny Pharma to focus its own efforts on late stage clinical development. The recently announced fundraising for the acquisition of Phase III ready asset NTCD-M3 is the clearest example yet of this strategy in action. Destiny has 95 patents (and two more in the process) across three patent families. Figure 2 is a visualisation of Destiny Pharmaceutical’s pipeline prior to the COVID-19 pandemic.
Figure 2 - Drug Pipeline. Source: Destiny Pharma Plc Annual Report 2019
The XF Platform is currently targeted to the US market however, the need for its treatment is global with Destiny Pharma poised to license the drug in China through its partnership with China Medical Systems.
XF-73 Nasal Gel – Most Clinically Advanced Candidate
Much of Destiny Pharma’s current Market Capitalisation is based on the progress of XF-73 Nasal which is due to conclude Phase 2b testing in December 2020 with results due in Q1 of 2021. Planning for Phase 3 trials has already begun.
XF-73 is expected to be of intrinsic value in hospital operations, albeit not limited to only operating theatres. A key point to keep in mind is the XF platform is about prevention rather than cure.
XF-73 has already demonstrated potential clinical efficacy in reducing the nasal carriage of Staphylococcus aureus (data published in Journal of Global Antimicrobial Resistance in October 2019).
Initial data from test tube studies entitled “Investigation for Potential Mutational Resistance to XF-73” show that the bacteria did not develop resistance after 55 repeat exposures to XF-73. As a comparison, MRSA resistance was shown to develop early after exposure to XF-73’s comparator drugs fusidic acid and mupirocin.
Phase 2b trials are assessing the antimicrobial effect of XF-73 on Staphylococcus aureus nasal carriage in patients due for surgeries that are at high risk of contracting post-operative Staphylococcus aureus. Staphylococcus aureus is a bacterium with resistance to many antibiotics. Surgical groups most at risk are cardiothoracic, neurosurgical and orthopaedic procedures.
Originally the XF-73 Nasal Phase 2b trials were to be conducted across 200 patients. However, due to complications arising from Covid-19, the FDA agreed an amendment which reduced the patient population to 125. The change in sample size will not compromise the statistical power or clinical value of the Phase 2b trials. Given the work load pressures on hospitals resulting from the Covid-19 pandemic, this amendment has allowed the clinical trials to proceed quicker than would otherwise have been expected.
XF-73 had previously been awarded Qualifying Infectious Disease Product (QIDP) status. In 2018 it was also awarded Fast Track status. Add to this that the FDA approved an amendment to reduce sample size in order to speed up clinical trials further highlights how highly one of the world’s leading drug regulatory bodies views the potential value of XF-73.
XF-73 Dermal
Destiny Pharma is additionally developing XF-73 as a new dermal drug for the prevention and treatment of infections associated with diabetic foot ulcers but could potentially also be used for bacterial infected skin lacerations, vaginal infections and bacterial burn-wound infections.
XF-70 Respiratory / DPD-207 Ocular / XF Biofilms
XF-70, DPD-207 and XF Biofilms are all at a much earlier pre-clinical stage of development and are still targeted at bacteria with antimicrobial resistance. The research on the mentioned drugs are examining:
Potential to prevent, control and eradicate dangerous bacteria in biofilms
Potential to prevent, control and eradicate diabetic foot ulcers and cystic fibrosis
Potential to treat dermal and ocular infections
Potential to treat ocular bacterial and fungal infections
R&D Collaborations and Grants
Destiny Pharmaceuticals currently funds its research through a combination of market investment, academic collaborations and non-dilutive grants.
Destiny has been involved in the following grants, collaborations and partnerships:
SporeGen Collaboration: Destiny entered into a collaboration agreement with SporeGen in September 2020 to develop a low-cost, high volume preventative drug as a first line of defence against COVID-19. The partnership was awarded £800,000 of the £1 million required by Innovate UK for work to be undertaken alongside faculty at the University of Liverpool
UK-China AMR Grant Fund: £1.6 million awarded in January 2019 for studies at Cardiff University and Tianjin Medical University on XF Platform’s impact on antimicrobial resistant bacteria
National Biofilms Innovation Centre Grant: undisclosed grant jointly awarded in June 2020 to study XF Platform’s potential to treat mucosal mouth fungal infections
Sheffield University Collaboration: another NBIC grant to fund research in collaboration with the University of Sheffield to examine treatments for drug-resistant, bacterial and fungal infections in a dynamic ex vivo eye model
Aston University Collaboration: a three-year collaboration agreement was penned in July 2018 to examine XF Platform’s potential against dangerous bacteria and biofilms
MedPharm Partnership: Destiny appointed MedPharm in March 2019 as its expert partner to develop new formulations of the XF platform
Commercialising XF-73 Nasal Gel
A 2010 study in the US found that methicillin-resistant Staphylococcus aureus (MRSA) infections led to more expensive treatments and, tragically, significantly higher mortality rates.
https://pubmed.ncbi.nlm.nih.gov/20184420/
The World Health Organisation in 2016 recommended nasal decolonisation of all Staphylococcus aureusstrains prior to high risk surgeries.
https://www.who.int/gpsc/ssi-prevention-guidelines/en/
In 2019, the Journal of the American Medical Association recommended that US surgeons perform nasal decolonisation before all cardiac surgeries. https://pubmed.ncbi.nlm.nih.gov/31054241/
The aforementioned expert publications highlight the need for MRSA nasal decolonisation prior to surgeries. At present there are no reliable treatments to meet this need and relative to its potential peers in development, XF-73 Nasal Gel is at a considerably more advanced stage suggesting a high probability it will be the first to market.
The Destiny Pharmaceuticals Board of Directors estimate 14 million surgeries in the US would potentially require nasal decolonisation treatment. Using an arguably high average $200 retail price of mupirocin nasal ointment as a benchmark, the Board and its market analysts estimate XF-73 Nasal Gel has sales potential in excess of $1 billion in the US.
Additionally, the rest of the world is identified as a potential $500 million market. This is not to say, however, that Destiny Pharma would generate $1.5 billion in revenue from sales of XF-73. Instead the Company’s revenue would be a portion of the sales through specific license agreements with commercial partners.
Just as this report is about to be published, Destiny Pharma’s market analysts have also reported that GSK’s Bactroban Nasal has been discontinued in the US. This would represent the removal of a significant potential competitor to XF-73 and the opportunity of greater market share than previously forecast by the Board or its analysts.
When assessing the market potential of the product, the reader must keep in mind the caveat that this is all dependant on a successful outcome to Phase 2b, subsequent success in Phase 3 of XF-73 clinical trials and then the production and retail of XF-73. Should XF-73 successfully navigate these checkpoints, it is estimated the retail product could be on shelves by 2022.
China Medical Systems Commercial Partnership
In September 2017, Destiny Pharma entered into a framework development and commercialisation collaboration agreement with Hong Kong listed China Medical Systems Holdings (CMS). The terms of the agreement grant CMS full rights to Destiny’s clinical pipeline in China, Taiwan, Malaysia, India and certain other Asian countries. CMS will carry out required research and development as well as be responsible for the commercialisation of drug candidates in the agreed territories. In return, Destiny Pharma will receive a manufacturing margin on products supplied from the Company’s pipeline. A milestone clause in the agreement means that Destiny will receive an as payments as sales targets are reached.
In December 2017 CMS invested £3 million in Destiny Pharma through its wholly owned UK subsidiary “CMS Medical Venture Investment Ltd”. It is worth noting that A&B (HK) Co Ltd, a company with a significant shareholder in common with CMS invested £3 million in Destiny Pharma at the same time. Aside from a 4.36% shareholding, A&B does not seem to have any other rights or interests in Destiny.
As part of the agreement, CMS General Manager for International Operations Dr Huaizheng Peng was appointed to Destiny Pharma’s Board as a Non-Executive Director.
Dependant on the success of XF-73 clinical trials, the commercial agreement between Destiny Pharma and CMS is a significant opportunity for Destiny to monetise its pipeline in populous Asian markets.
Further, the response to the COVID-19 pandemic in the Asia-Pacific region serves as an illustration of the systematic approach to controlling infectious diseases in the region. The CMS agreement gives Destiny significant exposure to this substantial market.
It is worth noting that CMS has recently been involved in a similar arrangement at another AIM listed pharmaceutical company. CMS and A&B (HK) Co invested a combined £8 million in AIM-listed Midatech Pharma (LON:MTPH) in February 2019. Dr Peng was also appointed Non-Executive Director at Midatech as part of the agreement.
SporeGen COVID-19 Collaboration
This year of 2020 has featured arguably the most high-profile US election in history and has also seen the UK “Brexit” the European Union. The headlines however, have been dominated by the COVID-19 pandemic and its socio-economic repercussions.
It should come as no surprise that Destiny Pharmaceuticals – a company focused on novel treatments for infectious diseases – would pursue research and development of a COVID-19 treatment.
In September 2018, Destiny Pharma entered into a collaboration with SporeGen Ltd to develop a nasally administered spray as a first line of defence against COVID-19. The candidate would combine SporeGen’s proprietary formulation of Bacillus bacteria with Destiny Pharma’s technical expertise to develop and trial the product.
Like XF-73, the product is not a cure but rather a preventative measure which has the potential to reduce COVID-19 transmission. There will be no need for cold chain refrigeration making it a cost-effective, easy to stockpile product.
Proposed NTCD-M3 Acquisition and Funding
Destiny Pharma announced on 9 November 2020 its intention to acquire the global rights to the orphan drug NTCD-M3. This is a Phase 3 ready candidate developed for the prevention of Clostridioides difficile (CDI).
C. difficile bacteria produce toxins that cause infectious disease by attacking the gut lining. Amongst other symptoms, the disease manifests itself in diarrhoea, fever and nausea. Antibiotics can be used as a first line of defence however, this can also cause further disruption.
It estimated that there are circa 500,000 annual cases of CDI in the US, a quarter of which recur. Phase 2 data results showed a CDI recurrence rate of 5% for subjects administered with NTCD-M3 (compared to 30% in the placebo group).
Circa 29,000 US deaths per year are attributable to CDI with a cost of approximately $6 billion to the healthcare system. Destiny Pharma suggests that NTCD-M3 treatment would be easier to stockpile and more cost effective than its comparator FMT (faecal microbiota transplants).
Destiny Pharma has been working on the licensing of the M3 candidate for over a year. In that time, the Company has added value to the project by identifying manufacturing facilities, participating in FDA meetings and updating chemistry, manufacturing and controls (CMC) formulations.
The Destiny Board feel the Company has technical knowledge and commercial network to fully exploit the NTCD-M3 candidate, dependant on successful Phase 3 clinical testing. It is the Board’s view that NTCD-M3 acquisition is in line with its strategy to build a world leading anti-infection company.
The Board announced a fundraise of up to £11.5 million to facilitate the acquisition and development of NTCD-M3. This will be done through a £7.4 million Placing, £2.1 million Subscription and £2.0 million Open Offer. The use of funds is broken down as follows:
Acquisition of NTCD-M3 = £2.4 million
Phase 3 Preparations = £5.0 million
Working Capital = £2.1 million
Total Required = £9.5 million
The Board has since confirmed it has successfully raised £10.4 million. This is not quite as much as the Board was targeting but still considerably more than what was required.
Financial Analysis
Destiny Pharma is currently non-revenue generating and forecast to make a loss over £6.5 million in 2020. Should this loss be confirmed, the Company will be carrying forward close to £16 million retained losses into 2021.
Destiny spends approximately £1.8 million per annum on administrative costs, more than half of this cost is made up of Director’s salaries. R&D costs (mainly attributable to XF Platform developments) in 2020 are expected to be in the region of £4 million. Cash burn for 2020 is estimated to be just over £5 million.
Since the November 2020 fundraise, it is estimated Destiny Pharma holds approximately £10.5 million in cash and equivalents. Total assets in 2020 are estimated at £13.5 million (including £2.3 million in Goodwill) with just over £1.1 million in current liabilities.
Destiny Pharma’s Board states the Company is well funded to complete Phase 2 testing. A successful conclusion to Phase 2 will mean further funding will be required for Phase 3, possibly in the region of £8 million. Given Destiny is currently loss making, it is most likely the funding will be sought through the issue of further equity rather than any form of debt financing.
*Estimates in this section are taken from Equity Development (market analysts engaged by Destiny Pharmaceuticals). I encourage the reader to gain further information here: https://www.equitydevelopment.co.uk/research/tag/destiny-pharma
Share Price-News Flow Analysis
Destiny Pharmaceuticals floated on the AIM Index in September 2017. Figure 3 is the Company’s daily share price action since IPO to date.
Figure 3 - Destiny Pharma News Flow Impact on Share Price
1. 3 September 2017 – IPO at 157p per share giving Destiny Pharma a valuation of £15.3 million
2. 1 December 2017 – CMS Commercial agreement finalised, £3m investment
3. 11 April 2018 – Annual Report 2017 published
4. 26 June 2018 – Positive XF-73 Phase 1 trial data announced
5. 25 January 2019 – Positive XF-73 Phase 1 trial data announced
6. 21 March 2019 – Significant Shareholder City Financial Investment Company Ltd enters administration. City Financial held 4.1% of Destiny Pharma’s Issued Shares (approximately 1.8m). All assets were acquired by Garraway Capital Management LLP.
7. 9 April 2019 – Annual Report 2018 published
8. 13 August 2019 – Garraway Capital publishes notification it has disposed of all Destiny Pharma shares it had acquired from City Financial.
9. 20 January 2020 – Update on XF Platform Formulation
10. 3 March 2020 – Update on XF-73 clinal recruitment
11. 20 March 2020 – UK lockdown begins
12. 29 April 2020 – Annual Report 2019 published
13. 27 July 2020 – Change of Phase 2 clinical recruitment protocol announcement
14. 11 August 2020 – XF-73 Phase 2 safety review report published
15. 7 September 2020 – SporeGen collaboration on COVID-19 treatment announced
16. 17 September 2020 – Update on XF-73 clinal recruitment
17. 12 October 2020 – Update on XF-73 clinal recruitment
18. 6 November 2020 – NTCD-M3 Acquisition and Fundraising Announcement
Final Thoughts
By pursuing the development of a low cost COVID-19 treatment and the recent acquisition of NTCD-M3, Destiny has acted to reduce reliance on its flagship XF platform. This diversification of product helps reduce the risk in relying solely on the XF Platform.
It is clear that the administration of City Financial and the subsequent sell off of its 4.1% Destiny Pharmaceuticals holding by Garraway Capital in the summer of 2019 had a considerable negative impact on Destiny’s share price. The nearly 50% fall in share price over that period was not, however, due to any change in the fundamentals of the Company nor any negative developments in the XF-73 clinical process.
There is going to be significant risk attached to any company when it is at its non-revenue generating infancy stage. The risk is greater still if it is a pharmaceutical company developing its first product. In the case of Destiny Pharma, much of its current valuation is based on the progress of XF-73 clinical trials. A failure at Phase 2 would certainly wipe off a significant chunk of Destiny’s £27 million valuation (as at 26 November 2020). Success at Phase 2 though, would go some way to justifying the Board’s confidence and its analysts’ assertion that Destiny Pharma should in fact be valued closer to £150 million.
