‘Avacta will be the next Roche’

This was a particularly bullish comment I saw on the LSE share boards. I’m not sure I can see their market cap increasing by 830x. But you know what, I’d love to be wrong. I could retire very early if it did!

However, the sentiment is one I share completely. When it comes to Avacta, I’m not sure even the sky is the limit – this one could well go to the moon (followed by obligatory rocket emojis)!

And that is what has inspired me to write this investment rationale. In the chance the share price skyrockets, I want this blog post to serve as a reminder that I called it back before a multi-billion pound valuation.

The TL;DR (a conversation I had with my friend who’s doing a degree in biochemistry):

‘Alex, out of all the biotech companies you’ve told me about, this is the only one with interesting technology‘.

In fairness, he’s not easily impressed.

Investment Rationale

Affimers

Overview

To understand Avacta’s role in the biotech industry, you need to understand their proprietary tech – Affimers (not Affirmers as I see written all too often).

From the Avacta website: ‘Affimer^® reagents are a class of non-antibody binding proteins that have been engineered for a wide range of applications where antibodies and aptamers have limitations. They can be used to detect difficult targets, can easily be formatted for a wide range of applications and can be easily and cost effectively manufactured.’

If (like me a few months ago), that doesn’t make much sense to you, I’m going to break it down into something that should be easier to understand.

In life sciences, you need molecules that can bind to other things. This has two key uses – diagnostics (finding and/or confirming diseases, e.g. the presence of Covid-19 in the human body) and therapeutics (the treating of diseases). Affimer reagents have applications for both of these. It should therefore, come as no surprise that Avacta has divisions for diagnostics and therapeutics.

Existing technology

Currently, a major competitor to Affimers are monoclonal antibodies. These are antibodies that are designed to bind to a specific substance. One of the major advantages Affimers have over the existing technology is in the manufacturing.

The monoclonal antibody production technique is costly, time consuming, and relatively unethical. Essentially, mice are made to have tumours, which are then harvested for the antibodies produced. This is of course a vast simplification – there are many other processes involved to go from scratch to the specific antibodies desired. Roughly though, that is the gist of it.

A widespread alternative to monoclonal antibodies are aptamers. The Affimer protein is an evolution of peptide aptamers. Affimers are designed to mimic the binding properties of monoclonal antibodies, but offer several advantages.

One such advantage is they are more stable – I will explore the positive implications of this later. The main advantage though is in the manufacturing process.

Manufacturing

One of the greatest advantages of Affimers over existing technology is the reduced production times. From the Avacta website:

‘Generated using a well-established and optimised phage display process, high-affinity Affimer^® target binders are routinely identified directly from the naïve library in a few weeks. The simple Affimer^® scaffold is easy and cost-effective to produce in high-yield bacterial expression systems, while being fully compatible with mammalian and other expression systems.’

Therefore – in contrast to antibody production – Affimers are made in ‘bacterial expression systems’. Most commonly this is using E.coli bacteria. This means they are quicker, cheaper and more reliable to produce. An excellent (but very dense) paper on Affimers summarises this, stating they can be ‘produced in large quantities with minimal batch to batch variation’.

A crucial commercial application for the ease of manufacturing is for diagnostics in large populations. To identify any disease across a population, it is of course helpful to conduct mass testing. It’s pretty clear that easily developing a reliable reagent in large quantities aids in the manufacturing of large quantities of tests. With Avacta developing a Covid test, its pretty clear where this is going…

Performance

The one question that remains less concrete than some of the others is – how do Affimers perform in comparison to other technology?

The answer: it will likely vary between uses, but the initial data is extremely positive.

The paper I reference earlier provides some insight into this. The conclusion was that compared to antibodies, ‘Affimers have a higher specificty to enrich the target protein from human plasma’. In the latest RNS, CEO Alistair Smith also stated that laboratory performance of Avacta’s rapid Covid spike antigen test was ‘outstanding‘.

For therapeutics, Affimers would need to offer clinical advantages over antibodies and over delivery mechanisms. Performance related advantages need to be demonstrated through clinical testing. However, there are properties of Affimers though that allow them to achieve things antibodies can’t. Affimers are approximately 10 times smaller than antibodies, offering advantages to tissue penetration. Therefore, it should come as no surprise that Avacta’s most advanced drug – AVA6000 (in phase 1 trials currently) – is based around tumour penetration.

However for diagnostics, this would only be a bonus. The manufacturing advantages could make them a superior to alternatives even if performance was not quite as good. The fact that this does not appear to be the case is mind blowing.

Therapeutics

This is the core of Avacta’s business. They currently have several ongoing projects in the early stages of development, primarily focused on cancer immunotherapies. From their website:

‘Avacta’s long term focus is on achieving a more durable response for patients through synergy of the innate immune response to pre|CISION^™ chemotherapies with the adaptive immune response to Affimer^® immunotherapies in the form of co-administered combinations and in novel tumour-microenvironment activated drug conjugates (TMAC^®).’

What does this mean?

A major issue with current chemotherapy treatments is the severe side effects of the drugs. This is not just unpleasant for the patient, but actively harms treatment as the body is too weak to continue further treatment.

Take Doxorubicin for example. This drug is commonly administered in chemotherapy. It inhibits the growth of cancer cells by blocking the enzyme topo isomerase 2. However, the drug can cause many side effects, ranging from mild to severe. Milder symptoms can include hair loss and feeling sick. More severe symptoms though can be fatal, such as by harming the heart.

Enter AVA6000

This is Avacta’s drug furthest in development and aims to alleviate the side effects of Doxorubicin. As discussed, Doxorubicin is targeted at tumours, but circulates around the rest of the body regardless. Through Avacta’s pre|CISION^TM platform, AVA6000 targets solely the tumour.

This is because a substrate is used which is ‘sensitive to cleavage by fibroblast activation protein (FAPα)’ – a protein which is found unregulated in tumour tissues. Consequently, when the drug is administered into the body, the chemotoxins remain inert until they reach the tumour where they are activated. This allows administration of Doxorubicin to be increased, and for a longer amount of time.

The initial results of the animal trials have been extremely positive. Doxorubicin when administered normally has approximately the same concentration in the heart to the tumour tissue. By contrast, AVA6000 produced less Doxorubicin exposure in the heart, whilst increasing exposure by 18 times in the target tumour. Phase 1 trials are expected to commence in Q1 2021.

The market size of Doxorubicin alone was over 1 billion dollars in 2020. If AVA6000 proves more effective, then it seems reasonable that Avacta could capture a large share of this. That’s without considering the market value expanding due to the potentially increased effectiveness of the drug.

Future Therapeutics

Below is the pipeline of Avacta’s therapeutics developments:

The next milestone to come will be the (hopefully) successful phase 1 results from AVA6000. If the pre|CISION platform proves to work, then Avacta will be able to rapidly expand it to lots of other chemotherapy drugs. It has already begun development of pre|CISION pro-drug forms of Velcade, Oxaliplatin and Paclitaxel.

The chemotherapy market is expected to grow to $56 billion by 2024. If Avacta is successfully able to revolutionise the current drugs, they will obviously be able to capture a large share of this. At the same time, we would have a much better tool to fight cancer with. This is certainly a win-win.

The other key part to consider is funding. Currently Avacta’s revenues are very low, given most of their products have yet to reach market. However, it is my view that the huge potential revenues from Covid tests (more on this below) could rapidly accelerate the development of the therapeutics pipeline.

Diagnostics

Affimer’s appear to be extremely effective as reagents to detect antigens and proteins. As discussed in the Affimer section above, they offer several advantages over monoclonal antibodies for diagnostics. Whilst the application of Affimers in diagnostics is endless, I want to focus this section on Avacta’s Covid lateral flow test. This is the single most important catalyst for the company in the near future, and is the thing that could cause the share price to increase by multiples. I want to discuss the test progress, the potential market and how that could impact the share price.

History

Currently, Track and Trace UK is reliant on PCR tests to detect Covid. These tests are accurate in telling you whether or not you have Covid, but are not intended for mass screenings of populations. They are both unpleasant to use – having to swab your nose and the back of your throat – and have to be sent to a lab to read your results.

The alternative is lateral flow tests. These can provide results much quicker, and not require a professional to interpret the result. The UK has been (until recently) reliant on the Innova tests. These are cheap Chinese manufactured lateral flow tests. Unfortunately, the tests appear to be highly inaccurate. The UK government has been looking for the procurement of more accurate, sovereign lateral flow tests. The first contract has been awarded to SureScreen.

Since early last year, Avacta announced its plan to develop a rapid Covid test. To the frustration of many investors, the test still hasn’t been released. Avacta appears to be on the cusp however of finally releasing the test. With the share price still depressed because of the delays, it is my view that it is currently extremely cheap.

Mologic partnership

The most important recent RNS was Avacta’s announcement of a commercial partnership with Mologic. In it we finally gained details into the timeline of the Covid test.

The key piece of information was that they are currently carrying out clinical evaluation of the test in a hospital in Europe. Crucially, results are expected in the next trading update which is coming out in February. That means there’s just 8 trading days left for what could trigger a massive re-rate in the share price.

Furthermore the partnership means they can CE mark the test quicker, and hopefully get it onto the market by the end of March.

Current laboratory data suggests the test is the most accurate lateral flow test for Covid in the world. What remains to be seen, is if this will translate into the clinical performance – hence the importance of the data of the sensitivity and specificity. The evidence points to the test remaining accurate, but there is still risk.

Edit

I wrote this article on the 15/02/2021. The next day Avacta just announced the results of their initial clinical trials: they achieved sensitivity of 96.7% and specificity of 100%. This was exactly the benchmark I was looking for, and indicates that it could be the gold standard after further trials. In my opinion this is the major de-risking event and will allow Avacta to now go on to mass manufacture the tests.

Market Value

If Avacta does develop the world’s most accurate Covid test, how much revenue could it make?

Covid testing will be here for years to come. In the UK, even if the vaccines are successful, the population will still need to be mass tested for a minimum of 2 years. If the variants of the virus reduce the efficacy of the vaccines, then testing could be here much longer.

Further to that, I expect testing to increase significantly when better tests are made available. It would be ineffective to mass test the population with the Innova tests, given their claimed inaccuracies. With a highly accurate test however, it would make sense to test as many people as possible. If all infectious people were regularly and quickly identified, it would be much to stop the spread of the virus. It’s not impossible to imagine a scenario where everyone has a box of LFTs in their bathroom cupboard.

I’d be hesitant to put any sort of market value on the Covid testing industry. This is because the market is purely constrained by supply; demand may as well be unlimited at the moment. The reality is that all Covid tests will be instantly bought. For Avacta, this will likely be through the UK Government. We know they’ve been working closely together as part of the Rapid Test Consortium.

To date, Avacta has officially announced UK partnerships with BBI Solutions (the largest LFT manufacturer in Europe), Abingdon Health, Mologic and GAD (a manufacturing branch of Mologic), and unofficially appears to be linked with Omega Diagnostics. The reality is, they should be able to manufacture and sell several million tests a week, if not more between them. Even assuming, Avacta are only set to make £1 per test, 5m tests a week would be revenues of £260m a year.

However, that calculation is extremely conservative. I would imagine the manufacturers between them would be able to increase production significantly. Further to that, the reagent is the most valuable part of the LFT, so it would seem reasonable that Avacta receives the majority of revenues per test. It is my belief that Avacta would be able to make a lot more than £1 per test.

Furthermore, that is the UK market alone. Avacta’s test could well be the leading product in the global Covid testing market. That market is likely to be in the hundreds of billions of £s for the years to come. Considering that, Avacta’s current £390m market cap just doesn’t make sense. The Covid test alone could well generate billions of £s for them. Avacta have already said they are talking to manufacturing partners overseas to manufacture the test for them. Not just that, but the robustness of Affimers means they can be easily transported and distributed in hot climates. This is something monoclonal antibodies cannot do.

There is also the possibility that LFTs will be used to open up events again. It could easily be commonplace that before attending a concert or a sports match that you would take a test to prove you weren’t infectious. This would provide a lifeline to the hospitality industry which is on its knees.

To summarise:

Mass Covid testing offers a way out of the pandemic. Ask yourself, how much would governments pay for the test that gets them out of this mess? And how much would the company that makes the leading product make?

Conclusion

The current risk/reward with Avacta just doesn’t make any sense, in my opinion. The Affimer platform has proven to be outstanding inside the laboratory. If this performance can successfully be translated into humans, then Avacta will be a titan in the making. That’s for sure.

The potential revenues from Covid tests would not only multiply the share price on their own, but be reinvested to accelerate and expand the therapeutics platform. This is where the blue skies could be realised. Avacta is working on the next generation chemotherapy drugs that could revolutionise the way we currently treat cancer.

Most importantly the entire platform is built on top of its patented Affimer technology. The patent doesn’t expire until the 2030s, giving Avacta an extremely deep moat.

If the company doesn’t get bought out, it is my view that its share price market cap will quickly reach billions of £s and eventually, tens of billions of £s.