Last week, OPTI announced two major milestones for marketed ingredient LP-LDL, currently sold as a probiotic in foods and food supplements for the reduction of cholesterol: (1) achievement of process validation under good manufacturing practices ("GMP"), a necessary step in developing LP-LDL as a pharmaceutical drug; (2) confirmation of generally regarded as safe ("GRAS") status by the FDA. Both milestones reflect OPTI's commitment to improving the quality of the science and manufacturing conditions for probiotics to bring them closer to pharmaceutical standards. They should increase LP-LDL's attractiveness to both food companies looking to differentiate their products with evidence-backed ingredients and pharma companies looking to target the microbiome with live bacteria. With both events taking OPTI closer to achieving our forecasts and hence valuation expectations, we reiterate our OUTPERFORM recommendation and target price of GBp97 per share.
Process validation under GMP manufacture proves that LP-LDL is produced consistently with pharmaceutical grade quality, a key requirement by health authorities and customers to commercialise an active ingredient as a drug. This paves the way for the development of LP-LDL as a live biotherapeutic product ("LBP"), which in contrast to probiotics are developed to have defined clinical benefit claims. While the first LBP has yet to be approved, the number of candidates in clinical and preclinical development has grown exponentially in the last few years, from around a dozen in 2015 to >70 in 2017, including a handful in late-stage testing (Phase II or III).
Under an existing deal with a US partner to develop LP-LDL as an LBP, OPTI will receive a milestone payment which we estimate at £100k - £200k. The achievement of GMP manufacture, coupled with LP-LDL's defined mechanism of action (production of bile salt hydrolase) and demonstrated safety and efficacy in human studies, should help OPTI attract additional pharma deals - particularly following the recent agreement signed between UK microbiome company 4d pharma and MSD (Merck & Co.) to discover and develop LBPs for vaccines. In our view, the latter highlights pharma's growing interest in harnessing the microbiome to develop new treatments or supplement and therefore enhance existing ones, for example where the mechanism of action of the selected probiotic is complementary to that of the medicine, as in the case of statins (used for the treatment of high cholesterol).
The confirmation of GRAS status by the FDA follows the positive opinion from an independent GRAS panel in February this year. We see this as a strong endorsement from the US regulator that LP-LDL is safe and can therefore be added to foods and drinks. The standards are high in the US, and only 3% - 5% of probiotics have obtained GRAS status. The designation should therefore help differentiate LP-LDL from the multitude of other ingredients in the market. We remind investors that OPTI has already signed deals to commercialise LP-LDL in the US, including with Seed Health (distribution) and US Pharma Lab (application).
We value OPTI using a sum-of-the-parts valuation ("SoTP") that includes risk-adjusted net present values ("rNPVs") for each marketed / late-stage ingredient and net cash at YE2019E. LP-LDL accounts for c.25% of our fair value, of which applications in food represent c.22% and those in pharma only c.3%, due to the high risk adjustment we apply to the latter. We intend to await first (positive) clinical data prior to increasing the probability of success from the current 10%, which we think is appropriate for a drug candidate close to entering Phase I development.