CASI Pharmaceuticals — Evomela shows a strong launch

CASI Pharmaceuticals (US: CASI)

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CASI Pharmaceuticals — Evomela shows a strong launch

CASI announced earnings for Q319 that included the first revenue generated by Evomela (melphalan) since its launch in mid-August: $2.7m. This is a highly encouraging number given it only represents a few weeks of sales. The product is approved as a conditioning agent in patients with multiple myeloma prior to stem cell transplant, and it is currently the only form of melphalan commercially available in China. This marks the transition of CASI into a commercial stage company

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Healthcare

CASI Pharmaceuticals

Evomela shows a strong launch

Earnings update

Pharma & biotech

16 December 2019

Price

US$3.16

Market cap

US$305m

¥7.00/US$

Net cash ($m) at 30 September 2019

63.8

Shares in issue

96.4m

Free float

44.9%

Code

CASI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.0)

(8.7)

(26.0)

Rel (local)

(6.2)

(13.3)

(38.1)

52-week high/low

US$4.45

US$2.85

Business description

CASI Pharmaceuticals is a pharmaceutical company that has acquired or licensed a series of drugs that it intends to market in China. These include proprietary drugs licensed from Spectrum Pharmaceuticals and a portfolio of ANDAs. The goal is to seek approval through new pathways that have been opened in the quickly changing Chinese regulatory environment.

Next events

Octreotide CTA filing

Late 2019/early 2020

CID-103 CTA filing

Late 2019/early 2020

CNCT19 Phase I start

Early 2020

Analyst

Nathaniel Calloway

+1 646 653 7036

CASI Pharmaceuticals is a research client of Edison Investment Research Limited

CASI announced earnings for Q319 that included the first revenue generated by Evomela (melphalan) since its launch in mid-August: $2.7m. This is a highly encouraging number given it only represents a few weeks of sales. The product is approved as a conditioning agent in patients with multiple myeloma prior to stem cell transplant, and it is currently the only form of melphalan commercially available in China. This marks the transition of CASI into a commercial stage company

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

0.0

(10.1)

(0.16)

0.0

N/A

N/A

12/18

0.0

(20.0)

(0.24)

0.0

N/A

N/A

12/19e

9.6

(30.5)

(0.31)

0.0

N/A

N/A

12/20e

15.1

(27.1)

(0.26)

0.0

N/A

N/A

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

First Evomela sales surpass expectations

Evomela was approved in China on 12 August 2019 and is the first commercial product of the company, so the currently reported sales only represent approximately six weeks of the drug on the market. We are increasing our peak revenue assumptions for the product to $35.4m from $15.5m because this launch suggests a higher demand for the product than we anticipated.

CASI in-licenses octreotide LAI for China

CASI continues to opportunistically in license Chinese rights with its recent deal to develop and distribute a long-acting injectable (LAI) formulation of octreotide. Octreotide is a synthetic form of the hormone somatostatin, which is used in the treatment of acromegaly and diarrhea associated with certain tumors. The company signed an agreement with Pharmathen, which has already received approval in a number of European countries for this product. The product is similar to Sandostatin LAR from Novartis, which had global sales of $1.6bn in 2018.

NMPA signs off on CD19 CAR-T trial

In early December 2019 the company announced that the China National Medical Product Administration (NMPA) has signed off on the clinical trial application (CTA) for CNCT19, a CD19 targeting CAR-T therapy licensed by CASI. Clinical development of the product will be performed by CASI’s partner Juventas Cell therapy. CASI stated that it expect the Phase I study of the drug to start enrolling in early 2020.

Valuation: Increased to $720m or $7.47 per share

We have increased our valuation to $720m or $7.47 per basic share, from $688m or $7.19. This is driven by an increase in our revenue assumptions for Evomela and the inclusion of octreotide in our model, and offset by a delay in expected revenue from the generic ANDA portfolio. We now expect the company to require $50m in additional capital to reach profitability in 2023.

Evomela off to a very strong start

We find the initial launch sales in the first few weeks for Evomela to be highly encouraging. The $2.7m reported for Q319 represents only approximately six weeks of sales. We expect a fraction of these patients to have been warehoused in anticipation of the approval, but do not expect them to have been warehoused for long given the treatment demands of the disease.

We have previously questioned the size of the market for hematology products in China, Hematologic cancers such as multiple myeloma have significantly lower incidence rates in China and other East Asian countries, according to most epidemiological data. Globocan estimates the age-adjusted incidence of multiple myeloma in China at 0.9 per 100,000, compared to 4.1 in the US. It is worth noting that the epidemiological data available on China is generally of low quality and focused on major metropolises. Despite the lower incidence, given the higher population China still represents the second largest multiple myeloma population (20,000 per year) after the US (25,000). The question then becomes what fraction of this population has access to care. These early sales have exceeded our estimates on these fronts and suggest that a larger population of patients has access to therapy than we previously appreciated.

Evomela background

Evomela is a proprietary formulation of the chemotherapy agent melphalan that is typically used as a conditioning agent prior to hematopoietic stem cell transplant (HSCT) in patients with multiple myeloma. This formulation of melphalan was developed to improve on the infusion properties of the product by pairing the drug with the Captisol solubilization agent developed by Ligand Pharmaceuticals. Ligand is entitled to a 20% royalty on sales from this contribution.

CASI obtained a license for the Chinese rights to Evomela from Spectrum Pharmaceuticals in 2014, along with similar rights to Spectrum’s other drugs Marqibo and Zevalin. To get the product approved, CASI took advantage of the newly designed regulatory framework in the country designed to speed the approval process for foreign approved drugs. Because Evomela would be the first approved version of melphalan in China, this entitled the drug to priority review and allowed the company to forego any additional clinical studies.

A conditioning regimen is the process a patient goes through to prepare his or her body for an HSCT. In the case of multiple myeloma, melphalan is used to kill as much of the malignant bone marrow as possible, before the patient receives the transplant. The drug is also approved in the US for the minor indication of patients with multiple myeloma who cannot take oral medications. Melphalan is used commonly for conditioning in the US and Europe. However, sales of Evomela reported by Spectrum have been slow: $35.2m in 2017, and $28.3m in 2018, all US sales. This is presumably due to competition from inexpensive generic melphalan. We assume these difficulties are what motivated Spectrum in March 2019 to sell Evomela (and its other hematology products) to Acrotech Biopharma.

CASI to distribute octreotide LAI in China

CASI announced on 7 November 2019 that it entered into an agreement with Pharmathen to develop and distribute octreotide LAI (long acting injectable) in China. The agreement included a €1m upfront payment and €2m in future milestone payments. CASI will be responsible for securing approval for the drug in China and it stated that it intends to file for a clinical trial authorization (CTA) from the NMPA in 2019.

Octreotide is a synthetic form of the hormone somatostatin. Somatostatin’s role in the body is to inhibit the effect of growth hormone, and it is used medically to counteract the effect of high levels of growth hormone in patients with acromegaly (also known as gigantism). Acromegaly is generally caused by the presence of a growth hormone secreting tumor present on the pituitary. Patients must maintain a constant level of somatostatin for it to be effective, which has led to the development of long acting injectable forms of the drug. The first long acting formulation developed was Sandostatin LAR from Novartis, which had sales of $1.6bn in 2018. The expiration of the patent for Sandostatin LAR in 2017 has opened up the field to competitors, such as the formulation available from Pharmathen, which is currently approved in Germany and the Czech Republic, and is under review in the UK and France.

In addition to acromegaly, octreotide has been approved in the US to treat carcinoid syndrome. Carcinoid syndrome is a set of symptoms such as diarrhea and flushing secondary to carcinoid tumors caused by the overproduction of a range of hormones. Carcinoids are only diagnosed at 3.8 per 100,000, and carcinoid syndrome only occurs in approximately 10% of these cases.1 We do not expect carcinoids to be the primary value driver for the product.

  Maggard MA (2004) Updated Population-Based Review of Carcinoid Tumors. Ann Surg 240, 117-122.

We expect acromegaly to be the primary market for the drug. The prevalence of acromegaly in China has not been studied to our knowledge, but it has an estimated prevalence of between 2.8 and 13.7 per 100,000 depending on geography.2 In South Korea, the prevalence was estimated at 3.9 per 100,000.3

  Lavrentaki A, et al. (2017) Epidemiology of acromegaly: review of population studies. Pituitary 20, 4-9.

  Kwon O, et al. (2013) Nationwide survey of acromegaly in South Korea. Clin Endocrinol (Oxf) 78, 577-585.

Sandostatin is already approved in China in both LAR and standard formulations, and it was recent the target of recent pricing negotiations the Chinese government had with drug makers. In October 2018, it was announced that the government has negotiated for price reductions for Sandostatin and 16 other drugs for inclusion on in the National Reimbursement Drug List. The agreed price for the product was ¥5,800 for a 20mg vial, which corresponds to ¥75,400 per year for an acromegaly patient.

Valuation

We have increased our valuation to $720m or $7.47 per basic share, from $688m or $7.19. This increase is driven by an increase in our valuation of Evomela (to $75.2m from $29.0m) and the inclusion of octreotide LAI ($12.2m). We have increased our peak sales estimates for Evomela to $35.4m from $15.5m based on the sales seen in the launch. The demand for the product appears to be significantly higher than our initial estimates. Our valuation for octreotide LAI assumes that the company will be able to capture 10% of the acromegaly market in China. We expect the company to compete on price with Novartis and other generics, and assume the product will launch in 2023 with a price of approximately $6,000 per patient-year, or roughly 60% of the current Sandostatin price in China. We assume that Pharmathen will charge an ex-manufacturer price of 30% the list price. The company will need to perform a clinical study to support approval, which we estimate will cost $2m, using rough estimates of 100 patients at a cost of $20,000 each. Additionally, our valuation is lifted by rolling forward our NPVs.

These factors are offset by adjustments made to our estimates of the generic ANDA portfolio, which have reduced its valuation to $497m from $512m. The progress in getting marketing approval for the company’s ANDA portfolio has been slower than expected, and we expect the first small sales from generics in late 2020. We suspect that delays in advancing this portfolio are in part because of prioritizing its resources for the Evomela launch and the vigorous pace to business development, and we may further update this timeline in the future based on company feedback.

Exhibit 1: Valuation of CASI

Portfolio

Asset

Region

Peak sales ($m)

Margin

Clinical risk adjustment

Value
($m)

Spectrum

Evomela

China

35.4

49%

100%

75.15

Marqibo

China

8.5

57%

90%

8.42

Zevalin

China

23.8

64%

90%

45.15

Generics

ANDA portfolio

China & US

200.3

46%

100%

497.11

Octreotide LAI

China

15.7

41%

80%

11.19

Internal

ENMD-2076

China & US

25.2

51%

20%

2.08

CID-103

China & US & Europe

770.6

59%

5%

14.65

CNCT19

China

306.2

54%

5%

23.22

Total

676.98

Net cash and equivalents (Q319 - octreotide upfront) ($m)

62.70

Noncontrolling interest

(20.02)

Total firm value ($m)

719.66

Total shares (m)

96.35

Value per basic share ($)

7.47

Dilutive warrants and options (est.) (m)

29.46

Value per diluted share ($)

6.46

Source: CASI reports, Edison Investment Research

Financials

Although we were impressed with the initial sales of Evomela, Q319 was characterized by a series of costs associated with the launch. COGS were exceptionally high at $2.6m due to a ‘transitional supply agreement’ that was signed and other non-recurring charges. The company stated that it expects this to normalize in future periods. The company also reported G&A expenses of $8.0m, up from $7.0m sequentially, due to costs associated with the launch. We have carried forward some of these G&A costs, as we see an increasing demand for this overhead as the company continues its business development. The increased operational demands and the delay in revenue from the generics portfolio has resulted in a delay in profitability from 2021 to 2023. We now expect the company to require $50m in additional capital, which we include in 2020 as illustrative debt.

Exhibit 2: Financial summary

$'000s

2017

2018

2019e

2020e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

INCOME STATEMENT

Revenue

 

 

0.0

0.0

9,637.2

15,097.7

Cost of Sales

0.0

0.0

(4,360.5)

(3,860.2)

Gross Profit

0.0

0.0

5,276.6

11,237.4

EBITDA

 

 

(9,983.1)

(19,402.4)

(32,141.1)

(22,815.4)

Normalised operating profit

 

 

(10,100.9)

(19,767.9)

(32,639.1)

(27,342.7)

Amortization of acquired intangibles

0.0

(1,305.4)

(1,588.7)

(1,588.7)

Exceptionals

0.0

0.0

0.0

0.0

Share-based payments

(650.4)

(6,118.1)

(7,330.6)

(7,330.6)

Reported operating profit

(10,751.3)

(27,191.4)

(41,558.4)

(36,261.9)

Net Interest

1.0

(280.1)

1,197.0

194.3

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

(19.9)

0.0

914.1

0.0

Profit Before Tax (norm)

 

 

(10,119.8)

(20,048.1)

(30,528.0)

(27,148.3)

Profit Before Tax (reported)

 

 

(10,770.2)

(27,471.6)

(39,447.3)

(36,067.6)

Reported tax

0.0

0.0

0.0

0.0

Profit After Tax (norm)

(10,119.8)

(20,048.1)

(30,528.0)

(27,148.3)

Profit After Tax (reported)

(10,770.2)

(27,471.6)

(39,447.3)

(36,067.6)

Minority interests

0.0

0.0

(30.3)

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

(10,119.8)

(20,048.1)

(30,558.2)

(27,148.3)

Net income (reported)

(10,770.2)

(27,471.6)

(39,477.5)

(36,067.6)

Basic average number of shares outstanding (m)

62

85

98

103

EPS - basic normalised (c)

 

 

(16.45)

(23.65)

(31.10)

(26.31)

EPS - diluted normalised (c)

 

 

(16.45)

(23.65)

(31.10)

(26.31)

EPS - basic reported (c)

 

 

(17.51)

(32.41)

(40.17)

(34.95)

Dividend (c)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

1,288.5

20,845.4

56,970.5

80,238.3

Intangible Assets

0.0

18,784.7

17,268.0

15,679.3

Tangible Assets

1,046.5

1,750.6

22,636.5

47,493.0

Investments & other

242.0

310.0

17,066.0

17,066.0

Current Assets

 

 

43,812.4

92,564.6

49,854.4

47,214.1

Stocks

0.0

0.0

4,300.8

1,269.1

Debtors

0.0

0.0

1,584.2

2,481.8

Cash & cash equivalents

43,489.9

85,117.0

39,613.4

39,107.2

Other

322.5

7,447.6

4,356.0

4,356.0

Current Liabilities

 

 

(5,062.1)

(3,873.9)

(8,988.7)

(8,353.3)

Creditors

(4,316.1)

(968.0)

(6,867.7)

(6,232.3)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings

0.0

(1,499.5)

0.0

0.0

Other

(746.0)

(1,406.4)

(2,121.0)

(2,121.0)

Long Term Liabilities

 

 

(1,498.8)

(73.6)

(1,292.0)

(51,292.0)

Long term borrowings

(1,498.8)

0.0

0.0

(50,000.0)

Other long term liabilities

0.0

(73.6)

(1,292.0)

(1,292.0)

Net Assets

 

 

38,540.1

109,462.5

96,544.2

67,807.2

Minority interests

0.0

0.0

20,459.0

20,459.0

Shareholders' equity

 

 

38,540.1

109,462.5

76,085.2

47,348.2

CASH FLOW

Op Cash Flow before WC and tax

(9,983.1)

(19,402.4)

(32,141.1)

(22,815.4)

Working capital

3,572.4

(9,780.4)

(2,453.0)

1,498.7

Exceptional & other

8.5

598.9

6,812.1

0.0

Tax

0.0

0.0

0.0

0.0

Net operating cash flow

 

 

(6,402.2)

(28,583.9)

(27,782.0)

(21,316.7)

Capex

(934.7)

(1,131.1)

(21,383.8)

(29,383.8)

Acquisitions/disposals

0.0

(20,642.4)

(19,886.9)

0.0

Net interest

0.0

0.0

194.3

194.3

Equity financing

23,733.9

92,269.8

1,393.0

0.0

Dividends

0.0

912.0

0.0

0.0

Other

0.0

0.0

20,000.0

0.0

Net Cash Flow

16,397.0

42,824.4

(47,465.4)

(50,506.2)

Opening net debt/(cash)

 

 

(25,601.7)

(41,991.7)

(83,617.5)

(39,613.2)

FX

0.0

(1,197.5)

3,461.0

0.0

Other non-cash movements

(7.0)

(1.0)

0.0

0.0

Closing net debt/(cash)

 

 

(41,991.7)

(83,617.5)

(39,613.2)

10,893.0

Source: CASI reports, Edison Investment Research

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This report has been commissioned by CASI Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by CASI Pharmaceuticals. 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.

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NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by CASI Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by CASI Pharmaceuticals. 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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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

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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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Hurricane Energy — Strong Lancaster EPS performance

Hurricane has announced an update on the strong ongoing performance of the Lancaster early production system (EPS), with recent individual well tests supporting guidance of 20,000bod for FY20 (before operational downtime). It has also been granted a five-year extension to its P1368 licence, covering Lancaster and Lincoln, resulting in changes to its 2020 work programme. One or more sub-vertical wells will be drilled on both Lincoln (in 2020) and Lancaster (in 2021) to determine the maximum vertical extent of the reservoir, while the Greater Warwick Area horizontal wells will no longer be drilled next year. Hurricane estimates FY19 oil production of 3.1mmbbl, representing an average of 13,300bod, generating revenue of c $165m and year-end unrestricted cash of c $150m. We plan to update our numbers shortly to reflect FY19/20 guidance.

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