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

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

An example of this is C4X Discoverywhich has two licensing agreements under its belt with blue-chip partners, has sold an asset and, most importantly, is funded for the foreseeable future.

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

When I meet Clive Dix and Nick Ray, C4XD’s chief executive and chief scientific officer respectively, it’s just before the annual drug developers meeting.

Progress, but little reward

Under more normal circumstances, the Annual General Meeting would have been a farewell event, given the company’s achievements over the past 12 months.

However, it is fair to say that these milestones have been poorly rewarded by the markets. The payment of £8.7 million ($11 million) under its deal with AstraZeneca just over a month ago saw the stock begin to move only to quickly retrace its steps.

Otherwise, it has been difficult to gain recognition for the remarkable progress it has made, although it is not alone in this regard, with the AIM healthcare index having plummeted to levels last seen almost a decade ago.

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

‘The ideal world at the moment for anyone dedicated to biotechnology is the private one. “There is a lot of venture capital money and a lot of opportunities to grow and develop,” adds Dix.

A need?

If we see a recovery in listed healthcare companies from current depressed levels, then the Manchester-based drug developer is likely to be a “must have” product on any watch list.

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

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

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

For that reason, doctors, especially in the area of ​​inflammation, are likely to look at a number of less expensive treatments through trial and error before prescribing a biologic, which has the added disadvantage of requiring an injection.

‘A biological (drug) is the last thing you get. A small molecule (drug) is likely to be something that (doctors) can access faster, will be cheaper and as such the patient population should be larger.’

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

Operating as a virtual pharmaceutical company, the company outsources many of its R&D functions, thus maintaining an agile operational structure.

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

Meanwhile, a licensing deal with Indivior morphed into the direct sale of its Orexin-1 receptor antagonist asset for substance use disorder, netting £16m in the process.

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Its current portfolio includes promising treatments for inflammatory bowel disease and cancer.

Its strategy of securing partners before incurring the substantial costs associated with clinical trials underscores the company’s innovative and pragmatic approach.

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

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

It also confirmed that there had been some “general interest” around its MALT-1 inhibitor program in oncology. Given the company’s focus on inflammation and the competitive nascent cancer treatment market, it wouldn’t be a surprise to see this asset quickly go out of license.

Listed in the US, there is no doubt that C4X would be worth much more than the £30m valuation it is listed on AIM. It is not the only country to receive such a low rating. There are many more companies caught in the valuation trap described above.

Westward migration

For now, a westward migration to markets like Nasdaq or NYSE seems unlikely. It is generally accepted that a market capitalization of £400 million ($500 million) is the minimum required to make a transfer from London to New York. Currently, very few of AIM’s healthcare innovators meet this minimum threshold.

It is difficult to know what will happen in a year or 18 months. We are already seeing how private capital chooses margins, although the PE has focused its sights on purchase and construction stories of 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, God forbid, the risk-averse attitude towards the life sciences featherweights finally changes as the cash taps are turned back on. But ultimately something has to give.

Investors in companies like C4XD, and similarly underrated and overlooked stocks, will hope the dam breaks sooner rather than later.