e-Therapeutics: Solid Interims

e-Therapeutics has announced interim results which are in-line with our expectations. The drug discovery and development company has made some encouraging developments, in our view, with its leading cancer drug candidate ETS2101 looking like it has now achieved its primary objective of its Phase Ia study, and its major depressive disorder candidate ETS6103 proceeding in the phase IIb trial. Accordingly, we have kept our forecasts unchanged and maintain our stance of “buy”, with a target price of 80p.

Strong balance sheet supporting increased investment

For the 6-months ended 31st July 2013, the operating loss increased to £5.32m (H1 FY12: £3.09m) as R&D expenditure increased to £4.40m (H1 FY13: £2.55m) and administrative expenses increased to £0.92m (H1 FY12: £0.54). No revenues were recorded, but recognition of R&D tax credits of £1.0m (H1 FY12: £0.5m) and net interest income of £0.19m (H1 FY12: £0.31m) reduced the net loss to £4.13m (H1 FY12: £2.28m). Cash at half-year end was £37.0m (£43.1m).

Cancer trials continue & higher rate of drug analysis

It is expected that results from the current ETS2101 trials will be reported towards the end of the current year and we expect the company to move rapidly into phase Ib/II trials shortly thereafter. In Discovery, the rate of compound testing has increased considerably, under a systematic selection process that is intended to yield clinical development candidates of the highest quality.

Forecasts

As the company seeks to make the most of the opportunities provided by its platform and pipeline, we expect to see a further ramp up in investment in discovery and development. For FY15, we are forecasting R&D expenditure to grow to £11.0m, leading to an operating loss of £12.5m. For FY16, we expect the group to maintain its investment momentum and are forecasting an R&D expenditure of £8.5m, leading to an operating loss of £10.0m. We remain of the belief that the current cash position, together with expected receipts from R&D tax credits and interest, will be sufficient to fund all of its planned discovery and development activities into CY19.

Valuation

Our rNPV for the two drug candidates under development, when assuming a 12.5% discount rate, is $301 million, or 70p per share. Add on current cash of £37.0m and subtract a perpetuity-estimated G&A cost and this leads us to a target price of 80p. While there are substantial risks related to the clinical trials, we have been conservative with our assumptions, and see room for significant upside. Buy.