Humans and other mammals can become aware that parasites are biting them when they experience a sharp pain or some other sort of irritation as the skin is punctured. Unfortunately for the parasite, retribution normally swiftly ensues. This does not apply, however, to Rhipicephalus appendiculatus, otherwise know as the East African cattle tick. Evolutec discovered that this tick could happily feed off its host for up to ten days while remaining undetected. It does this by injecting its saliva into
the host’s skin and suppressing the immune system. Why is this interesting? Because if the saliva can “disable” a host’s defences, then it could potentially be used to treat the many disorders caused by overactive immune systems – including common allergies and problems such as hayfever, conjunctivitis and asthma. This week’s Tip has been developing drugs based on these findings:
Tip of the week: Evolutec (Aim: EVC, 127p), recommended as a BUY by Bridgewell Securities
Evolutec’s scientists have spent the last eight years researching, patenting and developing medicines based on the tick’s saliva. As a result, Evolutec now has three potential blockbuster drugs that are currently progressing through various stages of pre-clinical or clinical trials. Its lead product, rEV131, addresses the huge hayfever ($6.6bn), eye irritation ($1.5bn) and asthma ($11bn) markets. Phase II clinical trials for the hayfever drug are presently underway, with results scheduled for the end of the year. Assuming these findings are positive, Evolutec will be in an excellent position to license out its leading technology to a large healthcare firm.
Clearly, there are significant challenges that face any small business developing new and unproved treatments. But Evolutec’s management team believes that the risks are lower than normal because of two key factors. For a start, earlier test results have been very promising. In September 2005,
Evolutec announced positive results for rEV131 in a 112-patient ‘proof-of-concept’ study for hayfever that was designed to show the drug had the potential to work. The drug took 45 minutes to work, compared to eight hours for steroids. Pre-clinical data have also been collected for the treatment of asthma and eye irritation. Secondly, the tick’s saliva has developed naturally over millions of years and hosts suffer few side-effects when bitten. This leads Evolutec to believe that the science is intrinsically safer than most other early-stage drugs – which should help cut the cost of testing and, more importantly, improve the chances of success.
At 127p, Evolutec is valued at £34m with net cash of around £11m, following a £2.8m fund raising in October 2006 at 118p. The group is getting through about £0.7m in cash each month, so existing resources should comfortably last until a licensing deal can be negotiated to pay for rEV131’s final phase III trials. Edison Investment estimates that on a risk-adjusted basis Evolutec’s drug pipeline is worth around £48m (or 180p per share). Edison adds that this value would rise to £67m if rEV131’s phase II trials are positive, and that the probability of concluding successful phase III tests is around 65%.
Although it carries a fair dose of risk, Evolutec is a high-quality, science-rich stock, which could make a good
addition to a well-diversified portfolio. Another reason to be upbeat is that, at the end of last month, the chairman, chief executive and finance director all topped up their shareholdings at 129p.
Recommendation: SPECULATIVE BUY at 127p