This equity research note was formally published on 11^th December 2017 at 5.00am.

goetzpartners securities Limited equity research initiation review on 4SC AG (VSC-DE): Orphan to best-in-class: HDACi come of age

Report type: Initiation Note
Recommendation: OUTPERFORM
Target price: EUR7.50
Current price (as at cob 8^th December 2017): EUR5.05

With a pipeline based on sound proof-of-principle, 4SC is building an independent strategy focussed on orphan drugs with best-in-class blockbusters exploited through major partners. The company's lead product resminostat is in a pivotal trial as a much-needed maintenance therapy in the orphan CTCL (Cutaneous T-Cell Lymphoma). Class I HDACi (Histone Deacetylase inhibitors) are showing real promise in combination with the new wave of immuno-therapeutics. Entering phase II in combination with an approved checkpoint inhibitor in melanoma, the safety and efficacy of the Class I HDACi 4SC-202 provide the hallmarks of a best-in-class blockbuster as well as providing a snug fit into the company's orphan strategy. We initiate with an OUTPERFORM recommendation and a fair value of EUR7.50 / share potentially rising to over EUR10 / share with expected newsflow from the pipeline as well as non-core assets over the next 6 to 12 months.

Proof-of-principle - Although HDAC inhibitors ("HDACi") have frequently disappointed, a number of drugs are now approved or moving through the clinic. Their potential in certain blood cancers and particularly as combinations to boost the efficacy of the current wave of immunotherapies is increasingly evident.

Filling a need in CTCL - With patients frequently subjected to numerous sequential cycles of various short acting therapies, there is an urgent need for an effective maintenance therapy in advanced CTCL. Evidence supports the use of resminostat with the drug now in one of the first and largest placebo-controlled pivotal trials in CTCL; reporting 2019.

Potential best-in-class - Sound science and clinical data point to the potential of Class I HDACi to boost and extend the efficacy of the current wave of cancer immunotherapies. Entering phase II proof-of-concept in melanoma (SENSITIZE), 4SC-202's superior safety and efficacy mark it out as potential best-in-class for combination with immune checkpoint inhibitors in large blockbuster indications as well as part of 4SC's orphan skin cancer portfolio.

Orphans provide independence - With smaller more manageable clinical trials orphan indications provide a realistic opportunity for 4SC to develop and commercialise an independent self-sustaining portfolio of therapeutics targeted at dermatology.

Funded to inflection - The company is well funded with EUR41m raised mid-2017. This plus potential payments from partnered non-core assets (not included in our forecasts) should see the company funded through 2020. With strong newsflow from the in-house orphan portfolio, the prospect of large partners for 4SC-202 combinations, we see upside for the stock. Our risk adjusted DCF indicates a valuation and target price of EUR7.50 / share potentially rising to over EUR10 on positive news. We initiate with an OUTPERFORM recommendation.

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goetzpartners Corporate Research | Research Team
Dr. Chris Redhead | Analyst

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