And assumptions: INVESTMENT CASE  We value Race Oncology at...

And assumptions:

INVESTMENT CASE  We value Race Oncology at $0.44-$1.24 per share, using a probability-weighted DCF approach.

We arrived at this figure using the following approach which we regard as conservative:

– We assume the AUD/USD exchange converges on 0.7 over a three-year period from now;
– We valued only the US and European market opportunity for Bisantrene and assumed that Race did not partner the programme in either market;
– We assume that Bisantrene is approved only for use in AML and finds no use in breast cancer or lymphoma;
– We assumed a seven-year exclusivity period in the US for Bisantrene and a ten year exclusivity period in Europe;
– We assumed an FY19 (base) or FY18 (optimistic) launch for Europe and an FY22 (base) or FY21 (optimistic) launch for US;
– We modelled peak sales for Bisantrene of US$25-40m in Europe (market penetration 12-19%) and US$50-75m in the US (penetration 19-29%);
– We assumed gross margins for the drug of 75-85%, rising 0.1-0.2% p.a. over time;
– We assumed that the field force to distribute Bisantrene cost 20-25% of European revenue and 10-15% of US revenues – the difference accounts for a less efficient drug distribution infrastructure in Europe;
– We used a discount rate of 12.4% (RFR of 2%, an MRP of 9.5% and a beta of 1.1); – We assumed a 60% probably of clinical success for the Phase II bridging study and subsequent US registration study;
– We assumed that the clinical work required for Bisantrene over the next four years would cost US$5m (optimistic case) to US$10m (base case). The final figure will in part depend on how comfortable the FDA is with the existing safety profile of Bisantrene from the available data;
– We assumed another A$5m capital raising at A$0.40 per share.  Our target price is $0.45 per share. $0.45 sits near our base case valuation. 

We see newsflow over the course of FY17 as helping to drive a re-rating of the stock, with potential events including:

– Completion of formulation work and filing of new IP
– Completion of pre-IND development
– The pre-IND meeting with the FDA and filing of IND
– IND allowance in US
– Announcement of further details of the NPP
– Potentially a licensing deal for Bisantrene in Asia
– Potential clinical collaborations with hospitals in the US and Europe