Cosmo deal – new asset, stronger balance sheet

RedHill Biopharma 22 October 2019 Update
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RedHill Biopharma

Cosmo deal – new asset, stronger balance sheet

Company news

Pharma & biotech

22 October 2019

Price

US$6.57

Market cap

US$186m

Net cash ($m) as of Cosmo deal announcement (dated 18 October 2019)

59.0

Shares in issue

283.7m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange (ADS 1:10)

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(13.6)

(18.9)

(22.0)

Rel (local)

(14.0)

(19.7)

(28.2)

52-week high/low

US$9.35

US$5.18

Business description

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

Next events

Expected FDA response on TALICIA’s NDA

2 November

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

Q419

FDA meetings to discuss Phase III trial with RHB-104 in CD

H219

Analyst

Jonas Peciulis

+44 (0)20 3077 5728

On 18 October 2019, RedHill announced a strategic investment and in-licensing deal with Cosmo Pharmaceuticals, a European specialty GI pharma and diagnostics company (sales of €66m in 2018). RedHill will receive an exclusive licence for the US rights to a branded antibiotic, Aemcolo (rifamycin), which was approved by the FDA for the treatment of traveller’s diarrhoea in November 2018. In return, RedHill will pay Cosmo the stock equivalent of $12m upfront, a royalty percentage on net sales in the high 20s and commercial milestone payments up to $100m. Cosmo has also agreed to make a $36.3m investment in RedHill at $7/ADS (a 13.5% premium to the prior close; 20% stake after investment). The deal expands RedHill’s specialty GI drug portfolio in the US and strengthens its balance sheet ahead of the expected launch of TALICIA (PDUFA date: 2 November 2019). Our valuation is $556m or $15.8/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

10.0

(39.5)

(0.10)

0.0

N/A

N/A

12/20e

13.0

(36.8)

(0.09)

0.0

N/A

N/A

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

Strategic fit, new largest shareholder

The specific structure of the deal seems to be a strategic fit both companies. Following the transaction RedHill will have cash of $59m (no debt), which provides a higher degree of comfort given it is preparing for a potential launch of TALICIA for H. pylori infection. The newly in-licensed drug, Aemcolo (rifamycin 194mg delayed-released tablets), is a minimally absorbed antibiotic that the FDA approved for traveller’s diarrhoea, so it is a good fit for RedHill’s GI-focused drug portfolio. The drug has not yet been launched in the US, but consensus expects sales of $152m in 2024 (EvaluatePharma). For Cosmo, which is now the largest shareholder, RedHill appears to be the right partner with the right commercial capacity in the US.

Now all eyes are on PDUFA date of 2 November 2019

RedHill is approaching a milestone event with the FDA due to release its assessment of the company’s most advanced, internally developed combination therapy, TALICIA. Based on the data released, we assign a 90% probability of FDA approval due to the clean dataset from the Phase III trials. From a commercial perspective, RedHill is ready with a US salesforce in operation since mid-2017. Please see our previous reports for more detail on the market opportunity.

Valuation: $556m or $15.8 per ADS

RedHill Biopharma is a research client of Edison Investment Research Limited

Our RedHill valuation is $556m or $15.8 per ADS, versus $518m or $18.3 per ADS previously. Our absolute valuation is higher because we have included the new investment and rolled our model forward. The valuation per share is slightly lower due to a dilution effect, as our pre-issue valuation per share was higher than the market value. For the time being we make no other changes to our estimates.

RedHill Biopharma is a research client of Edison Investment Research Limited

Exhibit 1: Financial summary

$000s

 

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

4,007

8,360

10,000

13,000

Cost of Sales

(2,126)

(2,837)

(3,500)

(4,550)

Gross Profit

1,881

5,523

6,500

8,450

Research and development

(32,969)

(24,862)

(22,684)

(22,976)

EBITDA

 

 

(51,891)

(39,241)

(39,451)

(36,732)

Operating Profit (before amort. and except.)

 

 

(51,972)

(39,331)

(39,545)

(36,831)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(51,972)

(39,331)

(39,545)

(36,831)

Net Interest

6,428

511

0

0

Profit Before Tax (norm)

 

 

(45,544)

(38,820)

(39,545)

(36,831)

Profit Before Tax (reported)

 

 

(45,544)

(38,820)

(39,545)

(36,831)

Tax

0

0

0

0

Profit After Tax (norm)

(45,544)

(38,820)

(39,545)

(36,831)

Profit After Tax (reported)

(45,544)

(38,820)

(39,545)

(36,831)

Average Number of Shares Outstanding (m)

176.6

231.2

387.3

422.1

EPS - normalised ($)

 

 

(0.26)

(0.17)

(0.10)

(0.09)

EPS - normalised fully diluted ($)

 

 

(0.26)

(0.17)

(0.10)

(0.09)

EPS - (reported) ($)

 

 

(0.26)

(0.17)

(0.10)

(0.09)

Dividend per share ($)

0.0

0.0

0.0

0.0

Gross Margin (%)

46.9

66.1

65.0

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

57,197

23,085

Stocks

653

769

1,300

1,300

Debtors

4,818

2,834

2,834

2,834

Cash

16,455

29,005

53,063

18,951

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

49,962

15,810

CASH FLOW

Operating Cash Flow

 

 

(44,769)

(34,462)

(35,864)

(34,054)

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

24,058

(34,112)

Opening net debt/(cash)

 

 

(53,786)

(16,455)

(29,005)

(53,063)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(16,455)

(29,005)

(53,063)

(18,951)

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.


General disclaimer and copyright

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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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.

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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

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United States of America

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Level 4, Office 1205

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NSW 2000, Australia

General disclaimer and copyright

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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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