Co-promotion deal and key catalysts in 2017

Redhill Biopharma 12 January 2017 Update

Redhill Biopharma

Co-promotion deal and key catalysts in 2017

Co-promotion agreement

Pharma & biotech

12 January 2017

Price

NIS3.99

Market cap

NIS682m

Priced at 10 January 2017

NIS3.85:US$

Net cash ($m) at end Q316 ($40.5m) + funds raised in December 2016 and exercise of employee options and warrants

73.7

Shares in issue

171m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange (ADS/share 1:10)

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(7.8)

(27.8)

(10.2)

Rel (local)

(8.1)

(31.1)

(25.1)

52-week high/low

NIS6.0

NIS3.3

Business description

RedHill Biopharma is an Israel-based pharma company with a broad R&D pipeline focusing on inflammatory and gastrointestinal diseases, while earlier-stage assets also target various cancers. The most advanced products are RHB-105 for H. pylori infection, RHB-104 for Crohn’s disease and multiple sclerosis and Bekinda for gastroenteritis and IBS-D.

Next events

Second DSMB review of RHB-104 Phase III in CD

Q217

Bekinda Phase III for gastroenteritis top-line results

Mid-2017

Bekinda IBS-D Phase II top-line results

Mid-2017

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Juan Pedro Serrate

+44 (0)20 3681 2534

On 27 December the company completed a successful $38m fund-raising and announced a co-promotion deal in the US, which may turn RedHill into a commercial-stage, revenue-generating gastrointestinal specialty pharma company. In addition, the company revealed final results from the Phase IIa trial for RHB-104 in multiple sclerosis, which echoed positive interim findings earlier in 2016. Next steps will depend on further detailed analysis. Our post fund-raise valuation is NIS1.5bn ($378m) ahead of several key late-stage catalysts in 2017.

Year end

Revenue ($m)

PBT* ($m)

EPS* ($)

DPS ($)

P/E (x)

Yield (%)

12/14

7.0

(10.7)

(0.12)

0.0

N/A

N/A

12/15

0.0

(21.1)

(0.19)

0.0

N/A

N/A

12/16e

0.0

(25.1)

(0.17)

0.0

N/A

N/A

12/17e

0.1

(32.9)

(0.20)

0.0

N/A

N/A

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

Co-promotion deal in the US with focus on GI

A recent major announcement was for a co-promotion deal between RedHill and Concordia Healthcare, according to which RedHill will gain certain rights to promote a gastrointestinal specialty drug Donnatal (phenobarbital, hyoscyamine sulfate, atropine sulfate, scopolamine hydrobromide) in selected regions in the US. Donnatal is a proprietary combination of established compounds, which has anticholinergic (slows down the motility of intestinal muscles) and barbiturate (mild sedation) effects and has been classified by the FDA as possibly effective in irritable bowel syndrome and acute enterocolitis. Donnatal was acquired by Concordia in 2014 and had sales of $71m in H116 (7.7% of Concordia’s sales).

Strategic shift to commercial business

Although few commercial details were released, the co-promotion deal marks RedHill’s transition into a lower risk, vertically integrated, revenue-generating business. Donnatal is an established product with an existing market, so the first goal, in our view, is to get the margins right and set up a profitable US business and then look for growth. Part of the rationale is that RedHill will be able to use the US commercial business to market its own GI specialty products currently in R&D: Bekinda for gastroenteritis and irritable bowel disease with diarrhoea (IBS-D), RHB-105 for H. pylori infection, RHB-104 for Crohn’s disease (CD).

Valuation: Funding secures cash reach past catalysts

We do not yet include the co-promotion deal in our valuation, but will revisit it when more details emerge. Our valuation on an absolute basis increases from NIS1.25bn to NIS1.5bn (from $323m to $378m) including the $38m in new funds (from issuing ADSs equivalent to c 30% of the then existing shares) and rolling our model forward. On a per-share basis, we have slightly decreased our valuation from NIS9.8/share to NIS8.5/share (from $25.4 to $22.2/ADS). The new funds secure cash to easily cover near-term catalysts: the second DSMB review in Q217 with an early stop option for RHB-104 in Phase III for CD, Bekinda top-line Phase III results in gastroenteritis in mid-2017 and top-line Phase II results in IBS-D in mid-2017.

Exhibit 1: Financial summary

$'000s

2010

2011

2012

2013

2014

2015

2016e

2017e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

23

16

12

7,014

3

0

100

Cost of Sales

0

0

0

0

0

0

0

(60)

Gross Profit

0

23

16

12

7,014

3

0

40

Research and development

(736)

(5,414)

(6,455)

(8,100)

(12,700)

(17,771)

(20,437)

(28,014)

EBITDA

 

 

(1,733)

(7,858)

(9,016)

(10,748)

(10,620)

(21,966)

(25,200)

(32,976)

Operating Profit (before amort. and except.)

(1,733)

(7,873)

(9,040)

(10,772)

(10,647)

(22,002)

(25,237)

(33,014)

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

0

Operating Profit

(1,733)

(7,873)

(9,040)

(10,772)

(10,647)

(22,002)

(25,237)

(33,014)

Net Interest

(811)

(7,630)

(1,286)

144

(64)

912

187

109

Profit Before Tax (norm)

 

 

(2,544)

(15,503)

(10,326)

(10,628)

(10,711)

(21,090)

(25,050)

(32,904)

Profit Before Tax (reported)

 

 

(2,544)

(15,503)

(10,326)

(10,628)

(10,711)

(21,090)

(25,050)

(32,904)

Tax

0

0

0

0

0

0

0

0

Profit After Tax (norm)

(2,544)

(15,503)

(10,326)

(10,628)

(10,711)

(21,090)

(25,050)

(32,904)

Profit After Tax (reported)

(2,544)

(15,503)

(10,326)

(10,628)

(10,711)

(21,090)

(25,050)

(32,904)

Average Number of Shares Outstanding (m)

0.0

48.1

52.6

62.4

86.6

110.8

147.3

167.6

EPS - normalised ($)

 

 

(265.00)

(0.32)

(0.20)

(0.17)

(0.12)

(0.19)

(0.17)

(0.20)

EPS - normalised and fully diluted ($)

 

(265.00)

(0.32)

(0.20)

(0.17)

(0.12)

(0.19)

(0.17)

(0.20)

EPS - (reported) ($)

 

 

(265.00)

(0.32)

(0.20)

(0.17)

(0.12)

(0.19)

(0.17)

(0.20)

Dividend per share ($)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

100.0

100.0

100.0

100.0

100.0

N/A

40.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

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

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,208

1,450

1,533

1,739

2,837

6,318

7,281

8,249

Intangible Assets

1,200

1,245

1,345

1,555

2,615

6,060

7,060

8,060

Tangible Assets

8

132

113

103

146

124

87

55

Investments

0

73

75

81

76

134

134

134

Current Assets

 

 

9,215

17,172

17,498

12,358

26,019

60,510

75,661

43,390

Stocks

0

0

0

0

0

0

0

0

Debtors

150

89

198

488

3,074

2,372

1,978

1,978

Cash

9,050

14,070

16,814

11,851

5,892

21,516

55,372

41,412

Other

15

3,013

486

19

17,053

36,622

18,311

0

Current Liabilities

 

 

(141)

(513)

(1,078)

(2,415)

(1,720)

(5,514)

(4,664)

(4,707)

Creditors

(141)

(513)

(1,078)

(2,415)

(1,720)

(5,514)

(4,664)

(4,707)

Short term borrowings

0

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(11,337)

(886)

0

0

0

0

0

0

Long term borrowings

(10,619)

0

0

0

0

0

0

0

Other long term liabilities

(718)

(886)

0

0

0

0

0

0

Net Assets

 

 

(1,055)

17,223

17,953

11,682

27,136

61,314

78,278

46,932

CASH FLOW

Operating Cash Flow

 

 

(1,632)

(4,691)

(6,795)

(8,436)

(12,229)

(17,826)

(23,911)

(31,266)

Net Interest

0

0

0

0

0

0

0

0

Tax

0

0

0

0

0

0

0

0

Capex

(0)

(136)

(8)

(14)

(70)

(14)

0

(5)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

0

13,838

6,550

2,280

24,369

54,792

40,455

0

Other

566

6,628

2,997

1,207

(18,029)

(21,328)

17,311

17,311

Dividends

0

0

0

0

0

0

0

0

Net Cash Flow

(1,066)

15,639

2,744

(4,963)

(5,959)

15,624

33,856

(13,960)

Opening net debt/(cash)

 

 

(597)

1,569

(14,070)

(16,814)

(11,851)

(5,892)

(21,516)

(55,372)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

(0)

Closing net debt/(cash)

 

 

469

(14,070)

(16,814)

(11,851)

(5,892)

(21,516)

(55,372)

(41,412)

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

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

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