2020 set to be a commercially transformative year

Redhill Biopharma 3 December 2019 Update
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RedHill Biopharma

2020 set to be a commercially transformative year

Q319 company update

Pharma & biotech

3 December 2019

Price

US$6.42

Market cap

US$227m

Net cash ($m) at end Q319 plus Cosmo investment announced in October 2019

59.0

Shares in issue

352.6m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange (ADS 1:10)

Nasdaq

Share price performance

%

1m

3m

12m

Abs

(3.6)

(12.0)

(17.5)

Rel (local)

(5.1)

(17.3)

(26.0)

52-week high/low

US$9.0

US$5.2

Business description

RedHill Biopharma is a speciality company with an R&D pipeline focusing on gastrointestinal and inflammatory diseases; earlier-stage assets also target various cancers. The most advanced products are Talicia for H. pylori infection (approved by the FDA in November 2019), RHB-104 for Crohn’s disease, RHB-204 for nontuberculous mycobacteria infections and BEKINDA for gastroenteritis and IBS-D.

Next events

Launch of Aemcolo in the US

Q419

Launch of Talicia in the US

Q120

Initiation of pivotal Phase III activities with RHB-204 for NTM infections

H120

Analyst

Jonas Peciulis

+44 (0)20 3077 5728

RedHill Biopharma is a research client of Edison Investment Research Limited

On 22 November 2019, RedHill held an investor and analyst day in New York with the focus on the two new products about to be launched in the US. Talicia and Aemcolo are to be launched imminently (Q419 and Q120 respectively) and could be major products for RedHill. From a commercial perspective, this makes 2020 a potentially transformative year for RedHill, and good sales uptake could be a positive catalyst for the stock. The recent strategic investment of $36.3m by Cosmo Pharmaceuticals means that RedHill has a comfortable cash position to ramp up its US salesforce to optimise the launch. Our valuation is slightly higher at $575m or $16.3 per ADS.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

4.0

(45.5)

(0.26)

0.0

N/A

N/A

12/18

8.4

(38.8)

(0.17)

0.0

N/A

N/A

12/19e

7.0

(42.1)

(0.11)

0.0

N/A

N/A

12/20e

20.3

(48.2)

(0.11)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

Talicia: First proprietary product is ready for launch

The FDA has approved Talicia for the treatment of H. pylori infection in adults, which is a broad label and does not require the patients to have any symptoms nor complications (such as dyspepsia or peptic ulcer). This potentially positions Talicia to compete as a front-line treatment. H. pylori is a group 1 carcinogen as per WHO. 90–95% of gastric cancers are related to H. pylori. RedHill plans to launch Talicia in Q120 with its own salesforce in the US, which will increase to c 140 sales reps (from c 40 reps previously).

Aemcolo for underserved, but proven market

The newly in-licensed drug, Aemcolo, is a branded formulation of rifamycin 194mg in delayed-release tablets. It is a minimally-absorbed antibiotic formulation that the FDA approved for travellers’ diarrhoea (TD) caused by non-invasive strains of E. coli. Aemcolo is entering a proven market (minimally absorbable antibiotics for TD) with interesting market dynamics, in our view (detailed below). At its investor and analyst day, RedHill discussed in detail its commercial readiness and plans for the launch. Given that both Talicia and Aemcolo are due to be launched imminently, 2020 could potentially be a transformative year for RedHill as a commercial-stage company.

Valuation: $575m or $16.3 per ADS

Our RedHill valuation is slightly higher at $575m or $16.3 per ADS, versus $556m or $15.8 per ADS previously. Changes to our estimates were driven by the inclusion of Aemcolo in RedHill’s GI product portfolio, the increase in Talicia’s pricing and increased sales and marketing (S&M) due to the expansion of the salesforce in the US. We have also removed two projects from Yeliva’s programme (for multiple myeloma and hepatocellular carcinoma). Both trials were run by investigators and, according to updates on clinicaltrial.gov, both have been discontinued (details in the valuation section).

Highlights from the investor and analyst day

On 22 November 2019, RedHill held an investor and analyst day in New York with the focus on the two new products about to be launched in the US. The company spent a substantial amount of time providing an update on its commercial readiness and launch plans. It established its US commercial organisation in early 2017, which has so far been promoting several specialty GI products. One of RedHill’s strategic goals with this expansion was to be fully prepared for a launch of its own proprietary products. This goal was achieved with the FDA approval of Talicia announced on 4 November 2019. In October 2019, RedHill announced that it has in-licensed another GI product, Aemcolo, from Cosmo Pharmaceuticals. Both Talicia and Aemcolo are potentially major products for RedHill and both are about to be launched. From a commercial perspective, this makes 2020 a potentially transformative year for RedHill.

Talicia: First proprietary product about to be launched

The FDA has approved Talicia for the treatment of H. pylori infection in adults, which is a broad label and does not require the patients to have any symptoms or complications (such as dyspepsia or peptic ulcer). This potentially positions Talicia to compete as a front-line treatment.

Talicia is a proprietary three-drug combination of omeprazole, amoxicillin and rifabutin (10mg/250mg/12.5mg delayed-release capsules), the only rifabutin-based combination antibiotic treatment approved by the FDA. We have reviewed in detail the data from Talicia’s clinical trials in our previous reports. In the Phase III clinical trial conducted by RedHill, no resistance to rifabutin was observed, which will be the key competitive advantage compared to standard-of-care clarithromycin-based H. pylori treatment, for which the resistance is a major and growing issue.

RedHill plans to launch Talicia in Q120 with its own salesforce in the US, which will increase to c 140 sales reps (from c 40 reps previously). The company’s ex-US commercial strategy has not yet been disclosed, but we expect it will depend on Talicia’s performance in the US. Qualified Infectious disease product (QIDP) designation provides eight years of market exclusivity in the US, while the existing patent portfolio provides protection until 2034.

Aemcolo: New product in an underserved, but proven market

An interesting product in an interesting market

The newly in-licensed drug, Aemcolo is a branded formulation of rifamycin 194mg in delayed-release tablets. It is a minimally absorbed antibiotic formulation that the FDA approved for TD caused by non-invasive strains of E. coli. Aemcolo is entering a proven market (minimally absorbable antibiotics for TD) with interesting dynamics, in our view.

Aemcolo’s active pharmaceutical ingredient, rifamycin is structurally similar to rifaximin (Xifaxan), which was developed and marketed by Salix Pharmaceuticals (currently owned by Bausch Health Companies). Xifaxan is approved by the FDA for several indications including TD, but by far the most significant indications for Bausch with this drug are diarrhoea-predominant irritable bowel syndrome (IBS-D) and hepatic encephalopathy, which together accounted for $1.2bn in sales in the US in 2018 (EvaluatePharma). Bausch does not provide a more detailed split of sales, but presumably Xifaxan sales for TD are much smaller. This creates an interesting niche for smaller players like RedHill, which can enter an existing market (minimally absorbed antibiotics for TD) with a dedicated product and targeted sales strategy.

Another element related to Aemcolo’s commercial potential is the likelihood of its off-label use in indications that Xifaxan is approved for (IBS-D and hepatic encephalopathy). Promotion of off-label use is not legal in the US and RedHill was clear it would never consider such activities; however, the off-label use itself is not prohibited. Market conditions can sometimes lead to significant off-label use of drugs depending on interactions among all stakeholders, ie physicians should be convinced of drug’s interchangeability, while payors should be willing to provide coverage. Due to these uncertainties we do not model any off-label use sales for Aemcolo; however, there is some potential for that to happen.

Clinical trials with Aemcolo for IBS-D (run by Cosmo) and hepatic encephalopathy (investigator-led study) are ongoing. We believe that in due course Aemcolo should be available for these indications, although at present it is not clear whether the existing licensing deal between Cosmo and RedHill covers these additional indications. The press announcement states, ‘The license agreement also provides for the grant to RedHill of certain rights related to the potential development of additional indications for Aemcolo.’

Background to Aemcolo

Most of TD in developing areas is caused by bacterial pathogens (up to 8090%) and diarrheagenic E. coli are the most common bacterial cause (in approximately 3545% of cases). The International Society of Travel Medicine (ISTM) recommends rifaximin for moderate to severe cases. The last revision of guidelines was published in April 2017, while Aemcolo (rifamycin) was approved by the FDA in November 2018. More up to date information from CDC also includes rifamycin.

Minimally absorbable rifamycin-class drugs (rifamycin and rifaximin) are a differentiated treatment option for TD. Typical antibiotics include systemic azithromycin and fluoroquinolones, which have higher risk of systemic side effects. ISTM notes in its guidelines that rifaximin has the best safety profile compared to other first-line antibiotics for TD. Due to widespread use, the efficacy of systemic antibiotics for TD is also decreasing. Moreover, the systemic antibiotics are necessary to treat TD caused by invasive pathogens (Campylobacter, Salmonella, Shigella), so the increase in resistance can become very problematic, as the symptoms they cause can be much more severe. For all these reasons minimally absorbed antibiotics for non-invasive TD are a rational option, in our view.

Travellers to a high-risk region can obtain a prescription before the trip and then self-administer if the symptoms occur. While TD is typically a self-limiting disease, it can severely affect travel plans, which is the main incentive for travellers to obtain the prescription when visiting a high risk region. Aemcolo was approved after two controlled clinical trials. Both a randomised, placebo-controlled trial (n=264) and a randomised, non-inferiority study (n=835) against ciprofloxacin met their primary endpoints.

Exhibit 1: RedHill’s product portfolio and R&D pipelines

Source: RedHill

Key commercial takeaways

The two other topics that RedHill focused on at the investor and analyst day were its commercial preparedness and its launch plans for the two new antibiotic products. The company is expanding the US salesforce to c 140 sales reps from c 40 previously. RedHill provided a detailed rationale for the expansion, based on the optimal coverage of the states with high H. pylori prevalence and access to high volume prescribers. With the expanded commercial organisation RedHill plans to access c 24,000 physicians: 12,000 GI specialists, 10,000 primary care physicians and 2,000 mid-level practitioners.

RedHill also revealed pricing information for the first time. Talicia’s price will be $650 per prescription. Current retail prices for Prevpac and Pylera are around $950–1,050 per treatment, so Talicia’s pricing is attractive. Prevpac is a branded all-in-one clarithromycin-based standard-of-care H. pylori treatment and Pylera is a branded all-in-one bismuth-based standard-of-care H. pylori treatment. Talicia has the same advantages over these drugs as it does over the generic versions of standard-of-care antibiotics ie improved efficacy due to non-existing H. pylori resistance. In our Talicia model, we had assumed $400 per treatment; we have increased this to $650 per treatment.

Aemcolo will cost $157 per treatment. Xifaxan 200mg for travellers’ diarrhoea retails at around $650 for 30 tablets. The suggested treatment in Xifaxan’s label is one tablet three times a day for three days ie nine tablets in total. Aemcolo’s price is still well below one third of Xifaxan’s $650 price tag.

Financials

RedHill’s 9M19 sales of specialty GI products were $4.7m compared to $7.0m in 9M18. As FY18 was the first full year that RedHill promoted its speciality GI products, there are a limited number of data points from which to derive trends. We reduced our 2019 total sales estimate to $7.0m from $10.0m. Following FDA approval, we now include Talicia’s sales in our P&L from 2020. We also now include some conservative initial sales projections for Aemcolo. Our FY20 and FY21 total sales estimates are $20.3m and $34.2m, respectively.

In 9M19 RedHill maintained a high gross margin of 69%. 9M19 operating expenses of $26.7m were somewhat higher than last year’s $22.3m due to a one-off NDA filing fee to the FDA and increased spending at the US organisation. We slightly increased our FY19 spending, but as RedHill is significantly increasing its US salesforce, in the short term the operating loss should increase (we forecast $42.1m for FY19 and $48.2m for FY20). However, as both Talicia and Aemcolo are potentially high value products, the expected rapid growth in sales should offset the loss in a relatively short period of time. Such dynamics are normally expected during the launch period of novel, branded drugs. During the Q319 results presentation RedHill indicated that it expects the US business could reach break-even in FY21. As the company does not report its performance by business segment yet, we do not have detailed segmental estimates.

Reported cash and cash equivalents were $25.6m at the end of Q319, but that excludes the $36.3m investment from Cosmo Pharmaceuticals as the deal was announced in October 2019. After revising total sales and spending, we believe the existing cash position is sufficient until the end of FY20. This will allow RedHill to ramp up its salesforce, which is required to optimise the launch of the two new products. Both Talicia and Aemcolo will be launched in coming months (Q419/Q120), so by end of FY20 the initial performance will provide insights about the commercial potential of these products and should also serve as a catalyst for the share price.

Valuation

Our RedHill valuation is $575m or $16.3 per ADS, versus $556m or $15.8 per ADS previously. We have made several changes to our model. Our revised estimates were driven by the inclusion of Aemcolo in RedHill’s GI product portfolio, the increased pricing of Talicia in our model and the increase in sales and marketing due to the salesforce expansion in the US. Overall, this increased the NPV we calculate for the marketed GI products portfolio (Talicia and Aemcolo are also now included), however, we removed two projects from Yeliva’s programme that we had in our sum-of-the-parts table namely, Yeliva (SK2 inhibitor) for multiple myeloma (NCT02757326) and for hepatocellular carcinoma (NCT02939807). Both trials were run by investigators. The Phase I study in multiple myeloma was completed, but we do not have any further plans from the investigator with regards to development. The NCI funding for the Phase I HCC study was diverted to an investigator-sponsored study in another indication. The removal of the multiple myeloma and hepatocellular carcinoma trials only partially offset the increase in the total rNPV for RedHill after the upgraded estimates for its commercial GI portfolio. The Yeliva trial in cholangiocarcinoma, sponsored by RedHill, is progressing well and the patient enrolment is expected to be completed in the coming months.

Exhibit 2: RedHill sum-of-the-parts valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/share ($)

Probability

rNPV ($m)

rNPV/share ($)

GI specialty products (including Talicia and Aemcolo)

Marketed

297.2

8.4

100%

297.2

8.4

RHB-104 - Crohn’s disease

2023

145

85.6

2.4

50%

42.8

1.2

RHB -204 - NTM infections

2024

50

56.3

1.6

30%

14.4

0.4

Bekinda - Gastroenteritis

2022

21

34.9

1.0

85%

29.2

0.8

- IBS-D

2023

201

164.5

4.7

60%

125.7

3.6

Yeliva - Cholangiocarcinoma

2024

115

192.7

5.5

10%

13.9

0.4

Net cash (FY20e)

51.8

100%

51.8

1.5

Valuation

883.1

23.6

575.1

16.3

Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D = irritable bowel syndrome; NTM = nontuberculous mycobacteria.

Exhibit 3: Financial summary

$'000s

 

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,007

8,360

7,000

20,260

Cost of Sales

(2,126)

(2,837)

(2,100)

(7,091)

Gross Profit

1,881

5,523

4,900

13,169

Research and development

(32,969)

(24,862)

(20,684)

(22,976)

EBITDA

 

 

(51,891)

(39,241)

(42,051)

(48,084)

Operating Profit (before amort. and except.)

 

 

(51,972)

(39,331)

(42,145)

(48,182)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(51,972)

(39,331)

(42,145)

(48,182)

Net Interest

6,428

511

0

0

Profit Before Tax (norm)

 

 

(45,544)

(38,820)

(42,145)

(48,182)

Profit Before Tax (reported)

 

 

(45,544)

(38,820)

(42,145)

(48,182)

Tax

0

0

0

0

Profit After Tax (norm)

(45,544)

(38,820)

(42,145)

(48,182)

Profit After Tax (reported)

(45,544)

(38,820)

(42,145)

(48,182)

Average Number of Shares Outstanding (m)

176.6

231.2

387.3

422.1

EPS - normalised ($)

 

 

(0.26)

(0.17)

(0.11)

(0.11)

EPS - normalised fully diluted ($)

 

 

(0.26)

(0.17)

(0.11)

(0.11)

EPS - (reported) ($)

 

 

(0.26)

(0.17)

(0.11)

(0.11)

Dividend per share ($)

0.0

0.0

0.0

0.0

Gross Margin (%)

46.9

66.1

70.0

65.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

5,667

5,623

9,592

9,551

Intangible Assets

5,285

5,320

5,355

5,390

Tangible Assets

230

163

92

16

Investments

152

140

4,145

4,145

Current Assets

 

 

51,676

56,788

55,980

10,516

Stocks

653

769

1,300

1,300

Debtors

4,818

2,834

2,834

2,834

Cash

16,455

29,005

51,846

6,382

Other*

29,750

24,180

0

0

Current Liabilities

 

 

(11,830)

(10,381)

(12,302)

(12,302)

Creditors

(11,830)

(10,381)

(12,302)

(12,302)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(448)

(844)

(4,525)

(4,525)

Long term borrowings

0

0

0

0

Other long term liabilities

(448)

(844)

(4,525)

(4,525)

Net Assets

 

 

45,065

51,186

48,745

3,241

CASH FLOW

Operating Cash Flow

 

 

(44,769)

(34,462)

(37,081)

(45,406)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(146)

(23)

(23)

(23)

Acquisitions/disposals

0

0

0

0

Financing

25,653

42,263

36,300

0

Other**

(18,069)

4,772

23,645

(35)

Dividends

0

0

0

0

Net Cash Flow

(37,331)

12,550

22,841

(45,464)

Opening net debt/(cash)

 

 

(53,786)

(16,455)

(29,005)

(51,846)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(16,455)

(29,005)

(51,846)

(6,382)

Source: RedHill Biopharma accounts, Edison Investment Research. Note: *Bank deposits and financial assets at fair value. **Includes bank deposits converted to cash and cash equivalents.


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This report has been commissioned by RedHill Biopharma and prepared and issued by Edison, in consideration of a fee payable by RedHill Biopharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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