Basilea Pharmaceutica — Data-driven catalysts ahead

Basilea reported growth of 5.5% in total revenues to CHF63.2m in H119 (H118: CHF59.9m), driven largely by the strong sales performance of antifungal drug, Cresemba. Total revenues include CHF52.9m (+91%) contributions from Cresemba and Zevtera, which represent a mix of royalties on sales, product sales, contract revenues and milestones. Given that Zevtera still accounts for a minority of these combined revenues (we assume ≤9%), the revenue performance reflects stronger than anticipated Cresemba revenues (≥91%). The commercialisation of Cresemba and Zevtera (ex US) is largely in the hands of multiple licensing and/or distribution partners. Revenues as reported can be split into product revenues, contract revenues, R&D services and other revenues (which mainly comprises the BARDA reimbursements). Exhibit 1 provides details of the H119 revenue breakdown. Basilea has multiple licensing deals in place for its commercially available anti-infective products, Cresemba and Zevtera. More than 100 countries are covered by strong regional and global partnerships. So far Basilea has received $245m in total upfront and milestone payments. Under the terms of existing agreements, it could receive a total of $1.1bn in potential regulatory and sales milestones if the assets reach predetermined targets. Other revenue of CHF10.0m (H118: CHF13.3m), comprises mainly BARDA reimbursements related to the Phase III ceftobiprole trials required for a US registration.

Basilea has updated its FY19 total revenue and operating loss guidance. It now guides to total revenues of CHF128–133m, with contributions from Cresemba and Zevtera updated to CHF105-110m from CHF100–110m previously. Estimated FY19 operating loss is CHF22–27m from CHF20–30m, which is commensurate with the lower BARDA revenue expectations related to lower US ceftobiprole Phase III TARGET clinical trial expenses. BARDA is partially funding (c 70%) the US registrational trials, which will end with the completion of the ERADICATE trial in H221. Basilea reported operating loss of CHF13.2m in H119 (H118: CHF20.4m) with costs benefiting from a reduction in R&D expenses. We have increased our R&D expense forecast for 2020 to CHF105m from CHF90m reflecting the ramp up in preclinical and clinical studies we anticipate across the pipeline. This translates into a forecasted operating loss of CHF8.6m in 2020. In H119, net cash used for operating activities decreased to CHF45.4m (H118: CHF60.4m reflected one-time effects in the period – $10m upfront payment to ArQule plus cost of in-licensing some preclinical assets).

Cresemba (isavuconazole) is a broad-spectrum antifungal for the treatment of severe, life-threatening fungal infections. It is available in the US and major European countries through regional partners including Astellas in the US, and Pfizer in most of Europe. In-market sales for Cresemba amounted to $170m in the 12 months ending 31 March 2019 (+42% vs comparable period; we note in-market sales at 31 March 2018 were just over $120m). Exhibit 2 highlights the steady growth in sales in the US and the increasing contribution from the key EU5 markets. By year-end, Basilea expects Cresemba to be available in 40 countries, and in 60 countries by end 2021. Further launches will aid growth in 2021 and beyond. We note that prior to loss of exclusivity, global sales of best-in-class antifungals are split c 25% US and c 75% RoW, highlighting the opportunity ex-US for Cresemba.

Zevtera/Mabelio (ceftobiprole) is a broad-spectrum antibiotic for the treatment of Gram-positive infections, including methicillin-resistant Staphylococcus aureus (MRSA), which are resistant to a number of existing antibiotics, and Gram-negative bacterial infections, including Pseudomonas. The product is available in major European countries (approved for both community and hospital-acquired bacterial pneumonia) and some international markets through multiple partners. Further roll-outs are expected (ex-US) in 2019 and 2020. However, the major commercial opportunity for Zevtera resides in the US market. The US filing is contingent on data from two cross-supportive studies: TARGET in acute bacterial skin and skin structure infections (ABSSSI) and ERADICATE in Staphylococcus aureus bacteraemia (SAB) bloodstream infections. Data from ERADICATE are expected in H221 and a US launch date of 2022/23 is feasible, with an initial focus on SAB and ABSSSI.

In August 2019, Basilea reported that ceftobiprole met primary and secondary efficacy endpoints in the TARGET study, demonstrating non-inferiority to standard-of-care vancomycin plus aztreonam in the intent-to-treat population. In the difficult US intravenous IV market, Basilea believes Zevtera’s profile can be differentiated in the key SAB indication by its breadth of activity against methicillin-resistant/sensitive Staphylococcus aureus (MRSA and MSSA), both Gram-negative and Gram-positive pathogens, and effectiveness in the pulmonary setting vs existing products vancomycin and daptomycin respectively. With such strong data from the TARGET study, it could be used to support label extensions outside the US. However, this will be done on a country-by-country basis and will be dependent on the partner and the potential economic gain of label expansion into ABSSSI.

Basilea’s approach to the development and commercialisation of its oncology portfolio will depend on the clinical profile of its assets and whether data are supportive of use in a wider range of cancer indications. Phase II asset, derazantinib, a pan-FGFR (fibroblast growth factor receptor) inhibitor could be the first oncology asset to market, which we forecast in 2023 on the basis of an additional Phase III registration trial in iCCA. The Phase II study (FIDES-01) for derazantinib in intrahepatic cholangiocarcinoma (iCCA) reported promising interim data in January 2019; full data are expected in mid-2020. We note that if these data are overwhelmingly positive, they could form the basis of an accelerated approval in iCCA. In the near term, Basilea will look to add maximum value to derazantinib through broadening its utility beyond iCCA, and a Phase Ib/II trial (FIDES-02) in urothelial carcinoma (UC) patients has now been initiated. Across four sub studies in FIDES-02, derazantinib will be investigated as a monotherapy or in combination with Tecentriq (Roche’s PD-L1 targeting antibody, an immunotherapy) and will enrol up to c 300 patients with FGFR-driven disease (first line and above). With the momentum in cancer treatment algorithms shifting towards targeted therapies and immunoncology, we believe this is a comprehensive strategy for adding further value to derazantinib.

Activating FGFR aberrations are found frequently in UC tumours (up to 32%), from genetic mutations, rearrangements or amplifications that lead to over-activation of FGFRs and disease progression. With annual mortality from bladder cancers across North America and Europe estimated at c 85,000, the opportunity is significant (source: GloboCan). We currently only value the opportunity for derazantinib in iCCA, but highlight that it has the potential to present upside to our base case assumptions. Interim data from the first patient cohort are expected in H220. Prudent trial execution will be key to crystallising value from derazantinib, as the emerging landscape in FGFR drug discovery is competitive. In April 2019, Janssen’s FGFR inhibitor, Balversa (erdafitinib), was the first-in-class drug approved by the US FDA for the treatment of UC (second line and above; FGFR2/3 +ve). Consensus currently forecasts that Balversa sales could reach $1.2bn by 2024 (source: EvaluatePharma).

Beyond its ability to inhibit FGFRs, derazantinib’s ability to inhibit colony stimulating factor 1 receptor (CSF1R) could provide additional synergies in combination with a PD-(L)1 antibody compared to other FGFR inhibitors in the clinic. CSF1R has emerged as an attractive target in immunoncology as it mediates the differentiation of macrophages into a tumour-promoting phenotype (M2) from a tumouricidal phenotype (M1). It is thought that inhibition of CSF1R could improve immune responses to tumours. However, tolerability is a key, as the promise of increased clinical activity is accompanied by the increased risk of side effects, which can lead to dose interruptions or the discontinuation of treatment.

BAL101553 is an internally developed microtubule-targeting tumour checkpoint modulator that is currently in three clinical studies, with a primary focus on treating patients with glioblastoma multiforme (GBM). Top-line data are expected in H219 from a Phase IIa expansion study (48-hour IV dose) in patients with recurrent GBM and platinum-resistant ovarian cancer. Additionally, a Phase I dose-escalation study (oral dose) in recurrent GBM patients is expected to complete enrolment in H219, with full results available in H120. The Phase I study initiated by the Adult Brain Tumor Consortium (ABTC) is also being conducted in the US, investigating BAL101553 in combination with radiotherapy in patients with newly diagnosed GBM, who have a reduced sensitivity to the standard-of-care chemotherapy drug temozolomide (Temodal). Further studies are likely to centre on Basilea’s biomarker stratified approach to clinical oncology, with preclinical and clinical data suggesting that the plus-end binding protein (EB1) appears to be a predictive biomarker for a response.

Our updated Basilea valuation is CHF1,077m (from CHF1,082m) and reflects a slight adjustment of our 2019 revenue and operating loss expectations. Notably, we reduce BARDA-related revenues and R&D expense. We update FX, roll forward our DCF and revise for net debt of CHF19.5m at 30 June 2019. The breakdown of our valuation is shown in Exhibit 3.