Continued GI product growth, CD PhIII data in 3M

RedHill BioPharma 24 May 2018 Update (1-4pgs)
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RedHill BioPharma

Continued GI product growth, CD PhIII data in 3M

Q118 update

Pharma & biotech

24 May 2018

Price*

US$6.96

Market cap

US$148m

*Priced at 16 May 2018 NIS3.57/US$

Net cash ($m) at end Q118 (including short term investments)

36.4

Shares in issue

21.3m

Free float

90.8%

Code

RDHL

Primary exchange

TASE

Secondary exchange

NASDAQ

Share price performance

%

1m

3m

12m

Abs

43.6

14.7

(30.8)

Rel (local)

41.2

15.1

(39.0)

52-week high/low

US$10.8

US$4.6

Business description

RedHill is a speciality company with an R&D pipeline focusing on gastrointestinal (GI) and inflammatory diseases, while earlier-stage assets also target various cancers. The most advanced products are TALICIA for H. pylori infection, RHB-104 for CD, RHB-204 for NTM infections, and BEKINDA for gastroenteritis and IBS-D. RedHill also promotes three GI products in the US.

Next events

Top-line results from first Phase III trial with RHB-104 for Crohn’s disease

August 2018

Top-line results from confirmatory Phase III trial with TALICIA for H. pylori

Q418

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

H218

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Alice Nettleton

+44 (0)20 3681 2527

With its Q118 results, RedHill reported GI product revenues growing by 22% q-o-q to $2.4m in Q118. It also provided updates on its Phase III programmes. The last patient has been assessed against the primary endpoint in the RHB-104 first Phase III trial in Crohn’s disease (CD), and top-line data are expected by August (including) this year. Additionally, more than 70% of patients have been enrolled for the TALICIA confirmatory Phase III trial in H. pylori infection. Management now expects top-line data from this trial in Q418. We value the company at $404.5m (NIS1.5bn) or $19.0/ADS (NIS6.8/share).

Year end

Revenue ($m)

PBT* ($m)

EPS* ($)

DPS ($)

P/E (x)

Yield (%)

12/16

0.1

(29.4)

(0.23)

0.0

N/A

N/A

12/17

4.0

(45.5)

(0.26)

0.0

N/A

N/A

12/18e

16.6

(39.3)

(0.18)

0.0

N/A

N/A

12/19e

30.2

(35.8)

(0.17)

0.0

N/A

N/A

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

Continued GI product growth is encouraging

GI revenues grew 22% to $2.4m in Q118 compared with $2.0m in Q417. This was only the second complete quarter in which all three GI products were marketed by RedHill (Donnatal, EnteraGam and Esomeprazole Strontium DR Capsules 49.3mg). No product breakdown was provided but, according to management, growth came from all three products, where Donnatal contributed the most. The gross profit margin was 62% compared with 54% in Q417, surpassing our expectations. Sales visibility is still limited so we maintain our forecasts. Currently, 100% revenues are from the three GI products, but management is in discussions to in-license additional products (likely to be already approved products).

Cost-reduction programme underway, R&D update

In line with the company’s ongoing cost-reduction programme, operating loss in Q118 was $10.0m compared with $14.4m in Q417. Net cash used in operating activities was $9.5m compared to $14.2m in Q417. This is moving towards management’s target of $8.5m average cash burn per quarter for 2018. The pivotal Phase III study for RHB-204 in non-tuberculous mycobacteria (NTM) infections should start in H218, depending on non-clinical supportive studies and additional input from the FDA. RedHill is in discussions with the FDA regarding the design of the upcoming BEKINDA trials: gastroenteritis (confirmatory Phase III) and IBS-D (likely 2x Phase III trials).

Valuation: Revised to $404.5m or $19.0/ADS

Our valuation has slightly decreased to $404.5m or $19.0/ADS from $410m or $19.2/ADS previously. This is due to a lower net cash position, which was partially offset by rolling the model forward. The cash position at 31 March 2018 was $36.4m, which according to our model will reach to the end of 2018. Key near-term catalysts are top-line results from the Phase III trial with RHB-104 in CD, top-line results from confirmatory Phase III trial with TALICIA for H. pylori and continued sales growth.

Next catalyst: RHB-104 CD Phase III results

According to recent news, the last patient has been assessed against the primary endpoint in the RHB-104 first Phase III trial in Crohn’s disease (CD). The primary efficacy endpoint is remission at week 26. Top-line data are expected by August (including) this year. As RedHill pointed out, a review of the blinded blended efficacy data suggests that the total number of treatment successes is consistent with the predefined expected treatment outcome (effect of at least 15% defined in the protocol). However, the data are currently unblinded. After that, as communicated previously, RedHill will likely need to carry out a second Phase III trial before regulatory submission.

As a reminder, the ongoing Phase III trial was initiated in 331 moderate to severe CD patients. To gather as many insights as possible, the company is also running an open-label extension study to assess the safety and efficacy in those patients who remained with active CD after the treatment in the original trial. RHB-104 is a patented combination of three antibiotics (clarithromycin, rifabutin and clofazimine) in an oral capsule for the treatment of CD. The product is in Phase III development for CD, an area where current therapies have limited efficacy and pronounced side effects, and are often very costly. An increasing amount of data supports the link between MAP infection in CD patients and RedHill believes it could induce and prolong remission time by treating the infection. This idea has an interesting background and has previously been explored in several clinical trials by other parties, such as a large Phase III trial funded by Pharmacia/Pfizer. In our initiation report, we reviewed the MAP hypothesis in CD, existing clinical data and RHB-104’s fit in the current landscape.

Financials: GI products deliver 22% growth q-o-q

RedHill reported revenues of $2.4m in Q118 (all US), which represented 22% growth from Q417 (see Exhibit 1), which is largely in line with our expectations. This was the second full quarter with all three products so this growth rate is now more informative (Donnatal launched Q217, EnteraGam Q317 and Esomeprazole Strontium DR 49.4mg Q417). According to management, all three products have grown in sales. However, it is still too early to judge uptake. Management did not release information about product split, and there was also no guidance released yet. The gross profit margin in Q118 was 62% compared with 54% in Q417 and better than we expected. The increase was mainly related to Donnatal. Although this is improved and management commented that it could be even higher for the GI speciality products, due to the early stage of commercialisation we maintain a 50% gross profit margin in our GI product forecast. We also maintain our previous estimates for 2018 and 2019, which are $16.6m and $30.2m respectively, until we have greater visibility on sales.

Exhibit 1: RedHill’s sales and gross profit

Source: RedHill, Edison Investment Research

RedHill employs a sales force of approximately 40 people based in North Carolina, which according to management is targeting thousands of US gastroenterologists as well as some primary care physicians and internists. The company believes that building relationships with physicians now will make it easier to introduce new products into the US market in the future, including its proprietary GI products, if approved: BEKINDA for gastroenteritis and IBS-D, RHB-105 for H.pylori infection and RHB-104 for CD.

Management is in ongoing discussions to in-license new GI products, which could be introduced in 2019 before the potential launch of TALICIA and may contribute to top-line growth. We assume they are approved or marketed products, and could provide upside to our sales forecasts. In addition, due to economies of scale RedHill’s margins would likely grow, as growing the GI portfolio would bring in more sales, while keeping the infrastructure close to the size it is currently.

Operating loss in Q118 was reported as $9.9m, which is a decrease from Q417 ($14.4m) but more in line with Q317 ($9.0m), which did not include the Q4 costs of establishing the US sales force. We maintain our estimates for R&D, S&M and G&A for 2018 at $26.6m, $14.0 and $7.0m, respectively. Net cash used in operating activities was $9.5m compared to $14.2m in Q417, and $10.2m in Q317. This Q118 cash burn is closer to management’s target of $8.5m average cash burn per quarter for 2018. Management expects a further decrease of expenses as a result of its previously announced cost reduction plan, which is still being implemented. This measure will help to reduce cash burn along with the increased top-line revenue growth.

Although RedHill does not provide guidance on cash reach, our model suggests cash will last until end-2018, past two key R&D catalysts and more sales data points. RedHill’s cash position at 31 March 2018 was $36.4m (including bank deposits and short term financial assets), compared with $46.2m at 31 December 2017. For 2019 we calculate an additional cash need of $33.8m, which we show in our model as illustrative long-term debt.

Valuation

Our valuation has decreased slightly to $404.5m or $19.0/ADS from $410m or $19.2/ADS previously. This is due to a lower net cash position, which was partially offset by rolling the model forward. All our assumptions remain unchanged until we have further visibility on GI product sales and the upcoming clinical data readouts, which are due by August (including) 2018 (RHB-104 first Phase III trial for CD) and Q418 (TALICIA confirmatory Phase III trial in H. pylori).

Exhibit 2: Sum-of-the parts RedHill valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/share ($)

Probability

rNPV ($m)

rNPV/share ($)

TALICIA, - H. pylori infection

2021*

86

103.9

4.9

70%

70.4

3.3

RHB-104, - Crohn’s disease

2023

145

67.7

3.2

40%

20.7

1.0

- NTM infections

2022

50

55.6

2.6

30%

14.0

0.7

BEKINDA, - Gastroenteritis

2022

21

28.2

1.3

85%

23.5

1.1

- IBS-D

2023

201

137.3

6.4

60%

100.4

4.7

YELIVA, - Cholangiocarcinoma

2024

115

159.2

7.5

10%

10.5

0.5

- r/r MM

2025

565

243.5

11.4

10%

60.6

2.8

- Advanced HCC

2025

649

145.8

6.8

10%

44.5

2.1

GI specialty products: Donnatal, EnteraGam & Esomeprazole

Market

48

24.4

1.1

100%

24.4

1.1

Net cash (end-Q118)

35.4

100%

35.4

1.7

Valuation

1,001

45.2

404.5

19.0

Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D: irritable bowel syndrome; r/r MM: refractory/relapse multiple myeloma; Advanced HCC: hepatocellular carcinoma; *TALICIA could potentially reach the market before 2021 given its fast-track status and depending on the timelines for the upcoming confirmatory Phase III trial.

Exhibit 3: Financial summary

$'000s

2016

2017

2018e

2019e

December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

101

4,007

16,584

30,157

Cost of Sales

0

(2,126)

(8,292)

(15,079)

Gross Profit

101

1,881

8,292

15,079

Research and development

(25,241)

(32,969)

(26,584)

(29,084)

EBITDA

 

 

(30,499)

(51,891)

(39,210)

(35,670)

Operating Profit (before amort. and except.)

(30,543)

(51,972)

(39,317)

(35,801)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(30,543)

(51,972)

(39,317)

(35,801)

Net Interest

1,173

6,428

0

0

Profit Before Tax (norm)

 

 

(29,370)

(45,544)

(39,317)

(35,801)

Profit Before Tax (reported)

 

 

(29,370)

(45,544)

(39,317)

(35,801)

Tax

0

0

0

0

Profit After Tax (norm)

(29,370)

(45,544)

(39,317)

(35,801)

Profit After Tax (reported)

(29,370)

(45,544)

(39,317)

(35,801)

Average Number of Shares Outstanding (m)

128.5

175.3

213.6

213.8

EPS - normalised (c)

 

 

(22.85)

(25.99)

(18.41)

(16.74)

EPS - normalised

 

 

(0.24)

(0.26)

(0.18)

(0.17)

EPS - (reported) ($)

 

 

(0.23)

(0.26)

(0.18)

(0.17)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

46.9

50.0

50.0

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

 

 

6,397

5,667

6,211

6,995

Intangible Assets

6,095

5,285

5,820

6,605

Tangible Assets

165

230

239

238

Investments

137

152

152

152

Current Assets

 

 

67,815

51,676

6,497

5,471

Stocks

0

653

653

653

Debtors

1,661

4,818

4,818

4,818

Cash

53,786

16,455

1,026

0

Other*

12,368

29,750

0

0

Current Liabilities

 

 

(5,356)

(11,830)

(4,276)

(3,849)

Creditors

(5,356)

(11,830)

(4,276)

(3,849)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(6,155)

(448)

(448)

(34,200)

Long term borrowings

0

0

0

(33,752)

Other long term liabilities

(6,155)

(448)

(448)

(448)

Net Assets

 

 

62,701

45,065

7,983

(25,583)

CASH FLOW

Operating Cash Flow

 

 

(28,258)

(44,769)

(44,528)

(33,862)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(85)

(146)

(116)

(131)

Acquisitions/disposals

0

0

0

0

Financing

36,017

25,653

0

0

Other**

24,596

(18,069)

29,215

(785)

Dividends

0

0

0

0

Net Cash Flow

32,270

(37,331)

(15,429)

(34,778)

Opening net debt/(cash)

 

 

(21,516)

(53,786)

(16,455)

(1,026)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(53,786)

(16,455)

(1,026)

33,752

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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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Tel Aviv +44 (0)20 3734 1007 Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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