4Sc AG: promising biotech net-net, also falling knife and 5-year low

4Sc AG develops drugs against cancer. See these slides from February 2022. Their prime candidate drug is Resminostat, a small molecule that can be administered orally. It already has orphan status for use against mycosis fungoides and sezary syndrome, which are both cutaneous T-cell lymphoma, commonly abbreviated as CTCL.

Photo by Adam Nieścioruk on Unsplash

CTCL is rare. According to the company there are about 50k patients in the US with about 6k new diagnosed patients per year. Furthermore, the company writes there are no cures except for "allogenic stem cell transplantation which is applicable to only very few patients". It seems Resminostat is not a cure either but can be used to "prolong progression free survival" and to "improve quality of life" (reduce itching). It seems other treatments "rarely provide long lasting responses".

Currently the company is conducting a trial with 193 participants with top-line data expected in the first half of 2023. The study is in "pivotal" stage, so this should be the last study before registration. This drug is backed by Japanese partner Yakult Honsu for marketing in Japan.

Another drug candidate is "4SC-205", in phase 1 stage with partner Link Health Group for marketing in China, Hong Kong, Taiwan and Macau. There are also 2 drug candidates with worldwide partner agreements: "PP-001" against inflammatory eye diseases in stage phase 1/2 and "TLR7 Drug Candidates" against cancer in phase 1.

When certain milestones are met the company will receive up to about 200 million EUR from Resminostat and 4SC-205.

Not only this is a good net-net at 2.1 EUR per share but also it is a falling knife and a 5-year low. For some reason the stock does does not show up in these lists, but I do not think it would have had a good ranking there anyway.

See the annual report over 2020 and the interim report over the first half of 2021. Furthermore, see the trading update over the third quarter of 2021.

According to page 3 of the presentation there was about 29 million EUR of cash and equivalents, presumably at the end of January 2022. There were no debts. Also based on the interim balanced sheet I estimate the liquidation value of the current assets minus all liabilities at about 26-27 million EUR. Therefore I compute Liquidation Value/Market cap = 27/23 = 1.17.

In my opinion the balance sheet is strong. I estimate the company has about 2 years of runway.

Some of the financial assets are shares in US-listed Immunic Inc (IMUX) worth 6.0 million EUR on 30 June 2021. These shares result from a recent settlement related to an asset sale in 2016. See also this press release. According to page 7 of the interim report the company booked the proceeds of this settlement as revenue in the first half of 2021, at least a large part of it.

During the last 5 reported years the company spent 68.0 million EUR on research and development.

Governance

I have not found any dividend payments for this company. Furthermore, it seems to be a serial dilutor: For many years it has been doing large dilutions.

A search on the company name and keyword "fraud" did not reveal any relevant information.

Substantial shareholders (on 31 December 2020): Santo Holding (Deutschland) 48.4%, ATS Beteiligungsverwaltung 21.9%, First Capital Partner 3.7%.

I have not found any other related party transactions than management compensation. In 2020 the CEO earned 707k EUR including a fixed salary of 400k EUR.

My take: At 2.1 EUR per share this is a promising German biotech net-net most likely with substantial intellectual property but also with a low discount to liquidation value. Good for geographic and sector diversification. I have not found any governance issues. I think this is a good stock for a small position.

Disclosure: long 4Sc AG