EXAI - Exscientia: Direct Exposure To AI Integration To Drug Discovery Development

Summary

• AI has begun to make headways in the field of drug discovery and development.
• Exscientia offers investors direct exposure to this wave of innovation.
• The company has attracted risk capital to unlock for sophisticated investors already.
• Net-net, rate buy.

Investment summary

Investors speculating on developmental-stage clinical assets are benefitted by the integration of technology into the discovery and design process. Computers and advancements in genetic modelling immediately spring to mind. More recently, however, the progressions of artificial intelligence ("AI") have added another layer of capability to the entire drug discovery spectrum. Here in this deep dive I'll illustrate the investment opportunity in Exscientia plc (EXAI), a British biotech focused on growing this substrata of the market, by linking benefits of AI in the drug development market to the company's core offering. Net-net, we rate EXAI a buy, but we aren't basing the buy of any formidable economics from the company just yet. This is a preclinical name that is yet to generate substantiative revenues or profitability yet. Hence, we are buying the technology, and its novel hypotheses that look to potentially disrupt drug discovery and development. The company's collaborations with Bristol Myers Squibb (BMY), investment from the Gates Foundation, Sanofi, and funding from SoftBank investors are key indicators of the company's attractiveness to unlock risk capital for sophisticated consortiums of investors.

AI to drive further expansion of drug discovery, development

Our readers will know via the extensive research we publish, that the entire spectrum of drug design and discovery is consistently evolving using novel methods and processes. Related to the points above, in all its wonder, AI has emerged as a powerful tool within this process. AI techniques [machine learning, deep learning, and natural language processing] can analyze vast amounts of data to identify novel targets, predict potential drug candidates, and ultimately optimize drug design in ways not previously achievable. Principally, it achieves this via analysis of large-scale data - such as genomic data, transcriptomic data, and protein structure data. Further, machine learning algorithms can identify patterns in these data sets to identify potential drug targets, that may otherwise have been overlooked by the more traditional methods currently in situ. EXAI demonstrates this well in its trial momentum exhibited to date.

Exhibit 1.

Looking at this in further detail, we've found that AI has already been used to develop [and consequently optimize] small molecules, peptides, and various antibodies. The main beneficiaries are the researchers themselves: AI can analyze biological activity and pharmacology of potential drug candidates, allowing the researchers to more efficiently screen compounds and prioritize research from there. Naturally, these benefits flow downstream to the actual drug development phases, equalling a higher ROI, notwithstanding the technology's ability to streamline and expedite clinical trials. Research from Morgan Stanley estimate a 20-40% cost reduction for preclinical developments, where the 'saved' capital can be rotated into funding of 4-8 novel molecules. Further to this point, MS also estimate this could lead to a ~15% increase in the rate of approved therapies from biotechs, thereby improving the revenue outlook for preclinical names into the future.

Exhibit 2. Morgan Stanley estimates improved economics for biotechs with AI integration into the drug development process

Hence, EXAI's offering is quite insulated and offers those speculating and positioning against clinical-stage assets a differentiated exposure to the segment. We are constructive on the company's long-term prospects given this thesis. Moreover, the Gates Foundation, with its concentration of breakthrough technologies in health, holds the stock in its portfolio.

Exhibit 3.

EXAI recent catalysts for long-term price change

By integrating AI into its works, EXAI has been front-running many competitors in the push to develop medical breakthroughs in otherwise complex disease segments [this is right up our alley, as our readers will know]. The two more promising advancements in recent times include:

1. Back in December, EXAI advised it had established criteria to identify patients more likely to respond to its EXS-21546 compound. EXS-21546 is a highly selective antagonist of the adenosine A2A receptor ("AA2A"). It was co-developed by EXAI and Evotec SE ( OTCPK:EVOTF ). Topline data released in June FY22' confirmed the target product profile of EXS-21546 was successfully achieved through the company's AI platform. This included potent and selective A2A receptor antagonism, with minimal brain exposure, and no CNS adverse events ("AEs"). Building upon these results, EXAI has subsequently initiated a phase 1/2 clinical trial of EXS-21546. It will examine the compound as a combination therapy with a checkpoint inhibitor, for patients with relapsed or refractory renal cell carcinoma ("RCC") and non-small cell lung cancer ("NSCLC"). This clinical trial will evaluate the safety, tolerability, and efficacy of this novel compound and its synergistic effects with a checkpoint inhibitor in these difficult-to-treat malignancies.
2. EXAI also synthesized a selective PKC theta inhibitor, EXS4318, back in August FY21'. For reference, PKC theta is a serine/threonine kinase enzyme belonging to the protein kinase C ("PKC") family. PKC plays a vital role in a variety of cellular signalling pathways, including the inflammation and immune ("I&I") responses. Due to its structural similarity to several related kinases, achieving high selectivity for PKC theta is challenging and essential to avoid off-target effects. Given these points, it should be noted that the target product profile for EXS4318 was particularly demanding, as it required sustained, high levels of target inhibition to drive efficacy. Subsequently, EXS4318 was identified within 11 months of initiating design, and is EXTA's first I&I candidate.
3. Moreover, the 4318 compound is also in-licensed with Bristol Myers, and entered phase 1 trials in the U.S. just this month. Most important to this analysis, and to investors, the broad deal with BMY is worth a potential $1.2Bn in total, with BMY handing $50mm to the company. Furthermore, EXAI is entitled to pre-commercial milestone payments on this segment, along with potential tiered royalties on net sales if approved, thus creating a potential lengthy tail of asset returns for the company. Further, for more info on EXAI's potential €4.6Bn collaboration with Sanofi, check Chetan Woodun's previous report on the same [see: here ]. It's also important to emphasize that SoftBank lead a series D funding round that provided a capital injection of $225mm to EXAI, with another $300mm on the table from SoftBank if/where required. Subsequently, we estimate EXAI is well capitalized to continue its growth and discovery initiatives. Moreover, the credible interest it has attracted, to unlock risk capital for these institutional investors, should not be overlooked by estimation. It will only be a matter of time before the company converts on a major breakthrough, notwithstanding the potential gains from already-existing developments, in our opinion.

Exhibit 4. EXS-21546 ("546") clinical strategy findings

Risks

Note, there are various risks associated with investing in EXAI at this stage in its growth cycle. The company has yet to commercialize any labels, and has relationships with key pharma players that may not eventuate. It's cash generating ability has yet to be demonstrated either, and there's still a ways to go in proving up the technology to the broad market. In addition, macroeconomic pressures, including a higher cost of capital, may compress inflows into the funding/investment of drug research and development. Each of these factors potentially hurt EXAI's propensity to grow and achieve key milestone payments. Investors should thoroughly understand these risks before making any investment decisions.

In short

Just as profitability and return on invested capital are heralded as the economic moats investors are in search for, innovation, and speed of innovation are equally as attractive. Within the field of drug discovery and development, persistent challenges to the paradigms underlining the broad process align with this principle. AI is the next frontier in medicine and health, and we look to embrace this via the publicly listed corporate securities of the companies aiming to provide breakthrough's in this domain. EXAI exhibits these qualities, and we rate it a buy based on its emerging technologies that are gaining traction amongst sophisticated investor circles. We advise a very small position to gain initial exposure, adding on price strengths and/or external catalysts in the company's growth engine. Rate buy.

For further details see: