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4SC AG (VSC-DE): On track and undervalued
Recommendation: OUTPERFORM
Target Price: EUR10.00
Current Price: EUR4.01 (cob on 8th August 2018)

KEY TAKEAWAY

4SC's H1/2018A report published today indicates that the company remains on track, but is fundamentally undervalued. As detailed in our note of the 16th July, financed into 2020E, the company's current valuation is largely justified by its pivotal stage resminostat ("RESMAIN") programme. It takes little or no account of the potential value of the domatinostat currently in Phase II in combination with the immune checkpoint inhibitor ("ICI") pembrolizumab for melanoma. First interim data from the domatinostat ("SENSITIZE") trial due in H1 should provide a substantial catalyst for the stock now trading at less than half of its early 2018 peak. Preclinical studies and positive data from sub-optimally dosed drugs of the same class support a synergy between immune checkpoint inhibitors ("ICI") and domatinostat. We maintain and reiterate both our OUTPERFORM recommendation and TP of EUR10.

Resminostat justifies valuation - The use of resminostat as a maintenance therapy is well supported by both clinical and biological proof-of-concept. Recent preclinical data supports resminostat's mechanism of action. The potential of resminostat has been endorsed by 4SC's Japanese partner in H1/2018A, who elected to join the RESMAIN trial, as well as initiate a Phase II trial for resminostat in biliary tract cancer. We are comfortable the current valuation is supported by resminostat alone.

Interim data catalyst in H2/2018E - Domatinostat-pembrolizumab combo is in Phase II (SENSITIZE) trial in pembro-resistant metastatic melanoma. Interim data from the first two cohorts due in H2/2018E may provide a catalyst prior to the trial read out in 2019E.

Sound basis for HDACi-ICI combos - Preclinical and clinical data strongly support HDACi immunostimulatory action. ICI combination with HDACi entinostat is generating positive data in cancers including melanoma and lung cancer despite likely sub-optimal dosing resulting from drug-specific toxicities. Superior domatinostat tolerability facilitates optimal dosing; therapeutic impact expected to exceed other Class I HDACi including entinostat.

Further upside from partnering and trial data - 4SC anticipates generating further news flow from out-licensing of non-core assets as well as potential partnering opportunites with domatinostat. An additional Phase II ("EMERGE") study with domatinostat in combination with the ICI avelumab is due to start in Q1/2019E with first readout in H2/2019E.

Remains undervalued - Our risk DCF analysis indicates a fair value of EUR4.40 / share on the basis of the resminostat alone. This rises to EUR7.10 / share when including the in-house domatinostat programmes. Assuming the company out-licenses domatinostat to major partners drives the valuation to EUR10.30 / share. This would increase to over EUR14 / share as the drug successfully moves through clinical trials over the next 6 -12 months. We reiterate both our OUTPERFORM recommendation and TP of EUR10.

Kind regards,

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

goetzpartners securities Limited

The Stanley Building, 7 Pancras Square, London, N1C 4AG, England, UK.

T +44 (0) 203 859 7725 | chris.redhead@goetzpartners.com / healthcareresearch@goetzpartners.com

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