4SC AG (VSC-DE): Melanoma data major catalyst in second half

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4SC AG (VSC-DE): Melanoma data major catalyst in second half
Recommendation: OUTPERFORM
Target Price: EUR10.00
Current Price: EUR4.32 (CoB on 13^th July 2018)

KEY TAKEAWAY

With the share price down over half from its early 2018 peak, 4SC's valuation looks justified on the basis of it pivotal resminostat programme alone. The market ascribes little value to the immunotherapy combination programme with dominatostat now in Phase II. Although sentiment toward immuotherapy has deteriorated in the wake of the negative Incyte-Merck epacadostat ("IDO-1") data, we contend the dominatostat- pembrolizumab ("pembro") immunotherapy combo still holds promise. Preclinical studies and data from sub-optimally dosed drugs of the same class support a synergy between immune checkpoint inhibitors ("ICI") and dominatostat. Interim data expected from the dominatostat-pembro phase II ("SENSITIZE") melanoma study in H2/2018E could provide a substantial catalyst for the stock. We reiterate our OUTPERFORM recommendation and our target price of EUR10.

Sound basis for HDACi-ICI combos - Preclinical and clinical data strongly support HDACi immunostimulatory action. Positive responses reported for other Class I HDACi (entinostat) - ICI combinations in clinical trials in cancers including melanoma and lung cancer despite likely sub-optimal dosing resulting from drug-specific toxicities.

Improved safety enables optimal dosing - Superior dominatostat tolerability facilitates optimal dosing; therapeutic impact expected to exceed other Class I HDACi including entinostat.

Interim data catalyst in H2/2018E - Dominatostat-pembro combo in Phase II (SENSITIZE) trial in pembro-resistant metastatic melanoma. Interim data due in H2/2018E may provide catalyst prior to trial read out in 2019E.

Resminostat justifies valuation - The use of resminostat as a maintenance therapy is well supported by both clinical and biological proof-of-concept. With the programme at a pivotal phase and also recently endorsed by its Japanese partner, we are comfortable that the current valuation is supported by this programme alone.

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 dominatostat programmes. Assuming the company out-licenses dominatostat 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.

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 | healthcareresearch@goetzpartners.com / chris.redhead@goetzpartners.com

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