Race Oncology Limited (ASX:RAC) is an Australian pharmaceutical company focused on the development of its key drug, Zantrene, which is currently being studied for pre-clinical and clinical efficacy in several cancer indications.

Zantrene is a highly targeted precision oncology agent as well as a chemotherapy cardioprotective. The drug is the most potent small molecule inhibitor of the key epitransgenomic Fatso/Fat mass and obesity-associated (FTO) protein.

Zantrene’s dual blockbuster potential

The market opportunity for Zantrene is large with the global FTO addressable cancer market estimated to be more than US$120bn in 2020. RAC expects to generate oncology revenues from: (a) FTO-driven cancers including acute myeloid leukaemia (AML), melanoma, renal cancer, breast and pancreatic, and colorectal cancers; and (b) Protection from anthracycline and proteasome inhibitor cardiac damage which is an independent multi-billion dollar opportunity.

Notably, in pre-clinical models Zantrene protects the heart from anthracycline and proteasome inhibitor induced damage while providing improved anti-cancer treatments. We believe this is an unmatched differentiator for the company.

Success in AML is likely to drive growth in near term

RAC has completed a Phase II single agent clinical trial pertaining to the use of Zantrene in treating relapsed/refractory AML and is currently in another two Phase I/II trials exploring combination treatment in AML as well as treatment of extra-medullary AML. Furthermore, it is in the process of preparing to file an Investigational New Drug application in the US (US IND) for extramedullary AML, besides owning an orphan drug designation for the treatment of AML in the US.

We think that success in the AML field will be a springboard for the company to support its other growth pillars, viz., cardioprotection (breast and other cancers), melanoma and renal cancer programmes.

Valuation range of A$6.61-A$11.91 per share

We value RAC at A$3.4bn base case and A$6.1bn bull case. Adjusting for probability and accounting for future capital raises, this equates to A$6.61 per share base case and A$11.91 per share bull case. We have used a DCF approach assuming Zantrene is commercialised according to forecasted timelines. Commercialisation could occur either by RAC or a potential partner that would acquire Zantrene and/or RAC. Key risks to our model include clinical, regulatory, commercial and competition risks.