EXAI - Exscientia Looks Promising In AI-Driven Drug Development

2023-12-08 08:34:55 ET

Summary

• Exscientia is a pharmaceutical company using AI-based precision engineering to revolutionize drug discovery and reduce drug creation by 70%.
• The company has strong financials, with a cash runway into 2026 and partnerships with industry giants such as Sanofi and Merck KGaA.
• Exscientia's AI-driven precision platform has promising applications in oncology and other medical areas, with a focus on personalized and effective treatments.
• EXAI's relative valuation appears cheap after considering it's well-positioned to continue developing its IP and its promising expected 2024 revenue growth.

Exscientia plc ( EXAI ) is a pharmaceutical company redefining the landscape of drug discovery matched with patient profile selection and personalized patient treatments using an AI-based precision engineering approach. EXAI has revolutionized the pharmaceutical field by reducing drug creation by 70%. EXAI collaborates with industry giants such as Sanofi, Merck KGaA, and Bristol-Myers Squibb ( BMY ). The company’s financials are robust, with a cash runway into 2026 and remarkable operational efficiency. Moreover, my multiples-based valuation analysis suggests EXAI is cheap relative to its sector. Given its promising prospects, I believe this underestimates EXAI’s potential, creating a potentially attractive price entry for new investors.

Business Overview

Exscientia focuses on automated AI-based precision engineering drug discovery, designing, and development. The firm is headquartered in Dundee, Scotland, and has offices in Oxford, Vienna, Boston, Miami, and Osaka. It was founded in 2012 and has its IPO in October 2021 on Nasdaq. EXAI has developed algorithms that reduce drug discovery and development by 70%. The company has collaborated to create drugs for oncology, immuno-oncology, immunology, and rare diseases. According to the latest quarterly report, most of the company’s revenues came from partnerships.

Also, EXAI has a partnered pipeline that addresses other medical areas, and they are in Phase 1/2. GTAEXS617 for advanced solid tumors is co-owned with GT Apeiron Therapeutics, and EXS73565 for inflammatory diseases in collaboration with Bristol-Myers Squibb. This deal includes payments for milestones achievements and royalties for product sales.

AI Product Pipeline

Nevertheless, EXAI has developed an AI-driven precision platform to solve drug design challenges, ideally through its IP portfolio. The company's internal pipeline focuses on oncology, and it has two drugs in the preclinical stage. EXS74539 targets LSD1, an enzyme related to cancer, specifically indicated for Acute Myeloid Leukemia [AML] and Small Cell Lung Cancer [SCLC], and EXS73565 targets MALT1 protein for multiple blood-related diseases.

EXAI´s approach introduces information from the patient's tissue in their AI systems. This way, the system can select the target, design the drug, experiment to evaluate it and make clinical assessments. EXAI uses AI to create medicines with a higher success probability and to define the best patient profile using tissue information. EXAI method, which includes machine learning algorithms, takes approximately 12 to 15 months to discover a clinical development drug candidate. The average time with traditional methods is 4.5 years.

The efficiency of this technological innovation will lead to a significant advancement in several medical areas, principally oncology. I believe this breakthrough will position EXAI in a prominent position in the pharmaceutical sphere due to the virtually huge amount of applications of its IP and its importance. Moreover, EXAI focuses on precision oncology by defining personalized and effective treatments with the more appropriate drug chosen according to the patient tissue data.

EXAI’s Strategic Partnerships

In March 2023, EXAI announced a partnership with Charité – Universitätsmedizin Berlin, a university hospital in Europe that will use the AI platform to treat hematological cancers. The collaboration includes estimating the performance of the EXAI’s platform by assessing the potential to select better treatments for patients and evaluating patient samples using a range of drugs to compare the response ex vivo. The mortality rates of hematological cancer remain high, and this partnership aims to improve therapy selection and patient outcomes.

This collaboration is based on the promising results of the EXALT-1 trial that showed improved outcomes for late-stage cancer patients using an AI-driven testing platform for personalized treatment design, an approach more effective than physicians' chosen treatments. EXAI aims to depurate and improve its platform using the results obtained by Charité, making it an extremely useful partnership to develop its AI platform further.

Additionally, a collaboration deal was reported between EXAI and the German Merck KGaA in September. The partnership will focus on oncology, neurology, and immunology, with targets to be identified from the early stages of the research. EXAI will receive $20 million upfront from Merck KGaA and a maximum of $674 million when achieving regulatory milestones and royalties for product sales. Furthermore, EXAI benefits from the advancements that will produce the deal announced in November between Roche ( OTCQX:RHHBY ) unit Genentech with Nvidia ( NVDA ) to accelerate machine learning algorithms and models on the Nvidia DGX Cloud for drug discovery and development using AI.

Promising Performance

In the Q3 2023 Earnings Call, the executives commented on the progress in their oncology programs, the first milestone achieved in the Sanofi collaboration, and the new partnership with Merck KGaA. They also discussed the prioritization strategy to focus on the programs with the greatest potential, such as the oncology targets LSD1 and CDK7. In my view, EXAI’s patient-centric, more precise approach and collaboration with major players in the pharmaceutical realm indicate EXAI's strong potential for growth and impact in the field.

One of the main points in the call was EXAI’s strong financial position with a cash runway into 2026, thanks to operational efficiencies and strategic partnerships. Cash, cash equivalents, and short-term bank deposits as of September 30, 2023, were $447.8 million. The revenue for the three and nine months that ended September 30, 2023, was $10.8 million and $21.6 million, compared to $7.7 million and $24.9 million for the same three and nine months in 2022. So, while the YoY quarterly revenues increased by roughly 40.3%, the first nine months of both years implied a 13.3% YoY decline. Thus, revenue-wise, the results are somewhat mixed but lean bullish due to the latest quarterly data being the most recent and promising.

Thus, I think it’s better to use the latest quarterly figures and annualize them to analyze the company’s financial outlook. For this, I estimated that EXAI burned $46.5 million in Q3 2023 by adding the cash flow from operations and CAPEX. This cash burn implies an annualized cash burn rate of $186.0 million, juxtaposed to EXAI’s cash position of $447.3 million, which means a cash runway of 2.4 years. This is promising as it aligns with management’s expectations of having enough cash until 2026.

However, it’s also worth noting that EXAI remains an unprofitable company as of Q3 2023. While analysts expect revenue to increase 102.8% YoY in 2024 to $73.71 million, its 2024 full-year EPS is still expected to be deeply negative at -$1.39. From a valuation point of view, this makes EXAI’s valuation viable only through multiples. Thus, looking at the company’s book value of $479.4 million and current market cap of $790.9, the implied P/B ratio is 1.65. The sector’s P/B ratio is 2.06, so EXAI trades below the market multiple. I don’t think this is a fair multiple, as EXAI seems poised for significant growth into 2024 and has an ample cash runway to develop its portfolio further. At the very least, I think it should be priced in line with the rest of the sector. That means EXAI’s fair value should be around $987.6 million, 24.9% higher than the current valuation.

Investment Thesis Risks

I think the main risk to EXAI is precisely its dependency on AI. After all, this is a rapidly evolving field, making EXAI an exciting company and susceptible to disruption. If another competitor develops a better AI approach than EXAI’s, it could quickly render the company’s value proposition obsolete and derail the bullish thesis I’ve outlined.

Moreover, partnership risks exist in EXAI’s current business model. Until most of its revenues come from its own set of FDA-approved drugs, it’ll depend to some extent on maintaining profitable relationships with other entities. I believe this shouldn’t be an issue, but if EXAI loses a major partnership, it could impact its results significantly. This could lead to revenue misses and endanger the stock price, making it an important risk that potential new investors need to consider.

Conclusion

Nevertheless, as a whole, I think it’s worth having a positive stance on EXAI at these levels. The company’s blend of biotechnology with AI is undoubtedly exciting and places it at the center of major disruptive trends. This gives EXAI significant optionality, and given its relatively cheap valuation multiple compared to the rest of the sector, it seems like a good “buy” at these levels. Still, investors need to consider the inherent risks in this company and size their positions accordingly. I don’t think EXAI is viable as a core position in an investment portfolio, but rather a smaller speculative part.

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