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ForbesAustralia

From No MoreTears to no more superbug fears

By Mark Whittaker

Publishedon October 22, 2024

Agrandfather and grandson teamed up to tackle the lethal global problem ofantibiotic resistance, inventing a new class of drug in a Perth garage, and nowgetting it into phase-3 trials.

The minor scratch had festered, and a red line wasstreaking up the leg of a retired fund manager now known in the scientificliterature as “Patient X”.

The bacteria causing the ulcer were not responding toantibiotics, so Patient X was facing a long stretch in hospital, painfuldebridement, acute care and, in the second-worst-case scenario,amputation.

But Patient X, 71, had experience in the med-techspace. He started researching what was out there. He saw thatantibiotic-resistant bacteria, so-called “superbugs”, were predicted by the UNto kill as many people as cancer by 2050. He looked at ASX-listed Next Science,which seemed to be doing interesting things with “biofilms”, but then cameacross another ASX-listed company, Recce Pharmaceuticals, which claimed to havean antibiotic that was resistant to resistance.

“I realised you could access it through the TGA’s[Therapeutic Goods Administration] special-access scheme,” Patient Xtells Forbes Australia on a phone call, asking that we respecthis medical confidentiality. He got his doctor to fill in some forms and wasdelivered a tube of clear gel. Without realising, as he dabbed it into theangry red hole in his ankle, he had become one of the first humans to use ReccePharmaceutical’s formulation, R327.

“A day or so later, we took the gauze off to dressit,” Patient X says. “And the damn thing had just about cleared up. It wasunbelievable.” His wife took photos and put more gel on. When they looked next,it had healed some more, and all that was left was a hole where the infectionhad drilled into the bone. “I can’t think of sufficient words to describe it,”he says. “It disappeared almost like a magic wand.”

Patient X did what any self-respecting retired fundmanager would do; he bought Recce [ASX: RCE] shares. When he visitedorthopaedic surgeon Dr Andrew Wines, who he was seeing about another issue,Wines asked how the infection was going. Patient X lifted his leg and pulleddown his sock.

“I’d never seen anything like it,” recalls the doctor. “And I look after a lotof patients who get ulcers and things. It piqued my interest, so I looked attheir webpage and saw the preliminary data, and I thought, ‘Wow, this seemsamazing’.”

Wines went on to use R327 with other patients underthe special-access scheme and saw consistent results fixing a variety ofailments, including infections around the site of prosthetics and boneinfections [osteomyelitis] – the most intractable of chronic bacterialinfections and the bane of orthopaedic surgeons. Wines is now working withRecce to organise a randomised controlled trial on such bone infections.

He did not buy shares. It would be a conflict ofinterest, he says. “But if I weren’t recommending it to patients, it would be asensible investment because I think it’s got a lot of potential.”

More than 100 people have now been dosed with R327,showing promise in solving the growing resistance of deadly bacteria toantibiotics. It has undergone Phase-2 trials in Australia and is in a Phase-3trial in Indonesia. Recce is seeking approval to commence Phase-3 trials in theUS, having received a $3-milliongrant from the US Department of Defense.

It’s been an extraordinary journey for acompany that started in a Perth garage in 2012, when a then 22-year-old entrepreneur,James Graham, dropped in to visit his 78-year-old entrepreneur/inventorgrandfather, Graham Melrose.

Melrose had invented No More Tears shampoo for Johnson& Johnson. He’d reformulated their baby powder when fears arose that it wastoxic. He’d gone corporate and consulted on marketing matters, then started anag-tech company, Chemeq, that was an ASX star in the early 2000s, selling aprophylactic animal feed, but which went belly up three years after he left it– losing him $180 million in the process.

“He lost his life’s work,” explains Graham. “Neversold a single share and went down with the ship. This is somebody who had abrilliant product, and through no fault of their own, it’s completely gone toshit.”

Graham says many others lost a lot, too, in that 2007Chemeq failure, and it weighed on his Pop. He’d become reclusive, so Grahamwould drop in to his Perth home as often as he could.

“What are you up to, Pop?” Graham asked that day in2012. “I’d love to see if we could
create a company together.”

Melrose went to his garage laboratory under the stairsand pulled out a vial. “I think this has antibiotic properties. Maybe we shoulddo something with it.”

James Graham, now 34, had never been academic. Hedidn’t get an ATAR at high school but managed to get into university with aTAFE qualification. “I went to university to get a piece of paper. My dad[Stewart Graham] invented CommSec’s stock trading system [through
a company called Min-Met] and had a bunch of other successes over the years.Still, he always said, ‘If only I had a piece of paper, people would havebelieved me earlier’.”

“My grandfather would tutor me twice a week. He waseffectively hiding from the media and the public – people had lost a lot ofmoney. There were court cases. He was never in trouble for
anything, but I watched him become a recluse. Under the stairs was his littlelaboratory. He’d be tinkering.”

Graham left university and had success with a foldingboat company, Quickboat. By the time his grandfather pulled out that vial ofR327, he was already an angel investor.

The grandfather explained to him that it was a polymer– a large molecule made from smaller repeating molecules – that was soluble soit could get into the bloodstream. It would get into the bacterial cell viamultiple entry points, disrupting metabolism and cell division, but would leavehuman cells alone.

Graham didn’t need much pitching. “My Pop’s anincredibly dedicated person. When he says it has antibiotic properties, youbetter believe it because it will. With all the controversy and crap he’d dealtwith, why would somebody want to go through that again unless they’re really,really sure it’s worth their time.”

For Graham, it was more a matter of figuring out whattests needed to be done to prove this thing worked, how much it would cost, andwhat it could pay.

But his first job as executive director with the newcompany was lifting all the heavy testing equipment out of the garage andtaking it in the back of his car to a small laboratory they’d secured inBentley Technology Park in southern Perth.

Melrose had formed a company to utilise thegovernment’s 43% R&D rebate on the $20,000 he’d already spent, and theyspent more again doing early tests. “The one I found interesting was the‘25-repeat test’, where it showed no loss of effectiveness after 25 doses,”says Graham. “Then there are the tests they don’t know you do, but you do do. Iwent down to the pet shop, got a whole lot of goldfish, and put them in water.You see how much [R327] you can put into that water before the fish start toget a little woozy. Because, when this stuff is passed from the body into thesewage system and the harbours, you want to make sure there’s no environmentalimpact. You take it to where the fish start just to tilt a little bit. We’renot out to hurt anything. It took mega concentrations.”

For the first three years, it was a part-time interestfor Graham, securing investments from family and friends and “mates’ mates”till the register grew to 47 investors.

“In 2015, I hired myself, then we hired colleagues,put a board together, a prospectus, and we listed on the ASX in January of2016.” Graham was executive director and his grandfather chief researchofficer.

By that time, they’d demonstrated safety and efficacyin animal studies. They had patents, and they’d shown the molecule was cheaperand faster to produce than traditional antibiotics. The polymer only has threeingredients, and they’re all cheap.

“We could compete on price with any other antibioticin the market right now, including generics,” says Graham.

The IPO raised $5 million at 20c per share, valuingthe company at about $14 million. The capital raised allowed them to stepinto the clinical realm. “We went from a few scientists mixing it in a beakerto fully automated.” The first humans to take it were in 2019, under thespecial-access scheme, “also known as ‘last resort’ dosing”.

Graham recalls the first patient. “They had a multi,multi-drug-resistant pseudomonas bacteria in their sinus. They’d beenunresponsive to all existing antibiotics, to half a dozen surgeries. They had aPICC line [catheter] into their chest. They were on the way out. They werelike, ‘I’ll do anything’. The clinicians have to assess the ethics and thepotential for success. It was sprayed up into their sinuses, and a week later,the person was cured of their infection.”

The stock price soared over $1.60 in September 2020during the early COVID-19 love affair with biotech. It’s been down and up – butmostly down – ever since.

With the price sitting around 50c, MST analyst ChrisKallos has a risk-adjusted price target on Recce of $2.46. However, Recce is aclient, and he warns that such companies have risk profiles similar to miningexplorers. And if they fail to jump through the regulatory hoops, everythingcan come to naught. “These things can be binary. But the fact they’ve gotmultiple indications underway gives some hope that something will hit thetarget.”

Graham is baffled by the market. “We got a $3-milliongrant [in July 2024] from the US Department of Defense for topical burn woundwork – and the stock went down. The World Health Organisation (WHO), in itsglobal antibiotic pipeline review, said we were clinically the most capableagainst what they considered the most deadly bugs – and the market barelymoved. Whereas we’ll get a patent in some obscure country, and the stock goesnuts.”

While Graham has focussed on cracking the US – whichcomprises 48% of global antibiotic sales and where R327 has been granted afast-track designation and 10 years of market exclusivity post-approval – anopportunity arose closer to home. “The Indonesian government knew the WHO wasabout to announce us as the most advanced new class of antibiotic, so theyapproached us,” says Graham.

Health Minister Budi Gunadi Sadikin agreed to expeditea Phase-3 trial in Indonesia. “We agreed if the results were compelling, itwould get expedited approval for sale,” says Graham. “It’s a gateway to ASEAN.If you’re approved in Indonesia, you’re approved in Singapore, Malaysia andVietnam. There’s a total population of 680 million people.

“They have an 11% diabetes rate in Indonesia. If youhave diabetes, 48% get a diabetic foot ulcer, if you don’t treat that infection– and there is no drug approved for it specifically – your foot will beamputated.”

The day after speaking to Forbes Australia inAugust, Graham was flying to Indonesia to discuss government subsidies forpoorer people to access R327. Graham says even if it weren’t subsidised, in acountry of 280 million, there was still a considerable market.

Only 300 people are being dosed in the IndonesianPhase-3 trial. “The coolest thing in this space is you don’t have all the costsand complications of other pharmaceuticals. Bacteria are really easy toidentify. If colonisation is going down, it’s working. And if it’s going downin all of them, you don’t need many people to say you’ve got a statisticallyreliable result.”

Graham did not expect the Indonesian data to sway USregulators but was hoping Australian Phase-2 data would be enough to get a USPhase-3 trial going in the first half of 2025.

The global antibiotic market is worth $56 billion – growingat a whopping 10% in the diabetic foot ulcer and sepsis sectors.

“So your market is growing and the antibiotic pipelinehas never been drier while the need has never been greater,” says Graham.

All this does bring a smile to his Pop’s face. GrahamMelrose, now 90, retired from Recce in 2020 and lives in a Perth nursing home.He still owns about 20% of Recce.

“I love and respect my grandfather dearly, but as aperson, he’s a ruthless warlord,” Graham laughs. “He’s a businessman to thecore – that guy is an incredible person in so many ways; with deep authorityand dictatorship-type tendencies. Christmas can be challenging if I haven’t metobjectives!

“But yes, he does crack a smile. He’s absolutelysupportive of what we do. I’ll speak to him every couple of weeks, and he’lltell me in no uncertain terms what he thinks, and we act accordingly. I don’talways take on what he says, but we do work in a very harmonious way.”