Executing on China rollout

CASI Pharmaceuticals 3 April 2019 Update
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CASI Pharmaceuticals

Executing on China rollout

Earnings update

Pharma & biotech

3 April 2019

Price

US$2.85

Market cap

US$273m

Net cash ($m) at YE18

83.62

Shares in issue

95.7m

Free float

44.83

Code

CASI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(14.7)

(27.8)

(33.3)

Rel (local)

(16.6)

(36.8)

(39.9)

52-week high/low

US$8.2

US$2.8

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

Evomela launch

Mid-2019

Analyst

Nathaniel Calloway

+1 646 653 7036

CASI Pharmaceuticals is a research client of Edison Investment Research Limited

CASI continues to execute on its strategy to commercialize a portfolio of US-approved drugs in China. It recently received clinical trial authorization (CTA) from the National Medical Products Administration (NMPA) for Marqibo and Zevalin, and established a distribution partnership for Evomela, which it expects to launch mid-2019. However, estimates for entecavir and TDF have been tempered due to a new procurement scheme in China, which is driving down the prices of certain drugs.

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

9.0

(16.8)

(0.17)

0.0

N/A

N/A

12/20e

33.5

(1.4)

(0.01)

0.0

N/A

N/A

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

CTA approval for Marqibo and Zevalin

CASI recently received approval of its CTA applications for both Marqibo and Zevalin from the NMPA in China. Because the drugs are approved in the US, the company will only need a single Chinse pivotal study to support approval. Importantly, the timely approval of these CTA applications is encouraging for both CASI’s ability to navigate these new Chinse regulatory pathways and the NMPA’s capacity and willingness to progress these products.

Distribution partner selected for Evomela

CASI also announced that it reached an agreement with China Resources Guokang Pharmaceuticals (CRGK) for the distribution of Evomela in China. Evomela received marketing approval by the NMPA in December 2018 through the agency’s priority review process as the only formulation of melphalan available in the country. Distribution relationships are very important for the commercial success of drugs in China given the highly fragmented distribution landscape. CRGK is a subsidiary of China Resources Pharmaceuticals (2018 revenue: HK$189bn).

Generic prices driven down by new pricing scheme

China has initiated a new pilot drug purchasing scheme in which the major municipalities will purchase drugs in bulk from a single supplier for all the hospitals in these regions. The tender process resulted in price cuts on average of 52% for the 31 drugs included, including a 90% price cut for entecavir. CASI’s other hepatitis B virus drug TDF was also included in the scheme, and we expect substantial pricing pressure on these products in the future.

Valuation: Lowered to $675m or $7.06 per basic share

We have lowered our valuation to $675m ($7.06 per basic share), from $759m ($8.11 per basic share), due to adjustments to estimates for entecavir (China revenue down 75%) and TDF (down 50%), offset by rolling forward our NPVs.

Marqibo and Zevalin to enter pivotal trials shortly

CASI Pharmaceuticals recently announced that CTAs for Marqibo and Zevalin had been approved. The products are regulated in China as innovative import drugs, which require pharmacokinetic studies and Phase III clinical trials for approval. The CTA is an important regulatory step in China that allows the company to initiate these studies. The innovative import drug approval pathway is a relatively new designation designed to facilitate the approval of drugs that are already approved in other territories. Also, historically there have been significant delays in the approval of CTAs through regulatory agencies. Therefore it is encouraging that these CTA applications were processed in such a timely manner. This will enable the company to proceed with clinical trials on schedule, although at the current time CASI has not announced any of the details of how these studies may be designed.

Evomela to be distributed by major partner in China

CASI’s distribution agreement with CRGK is an important milestone for the commercialization of Evomela. Although there are significant efforts from the government to consolidate the industry, it remains highly fragmented, with over 13,500 distribution companies. Historically, distribution networks have been highly complex with multiple layers of distributors and middlemen, and these distribution relationships typically control access to the market. However, we find the partnership with CRGK highly encouraging in this case because it is a subsidiary of the major distributer China Resources Pharmaceuticals (CRP, 3320.HK). CRP reported revenue of HK$189bn and a profit of HK$4.04bn in 2018. CRP is a major distributor of western medicines, with a network in 31 provinces and 90,000 downstream customers. The company has multiple other partnerships with major pharmaceutical companies including Sanofi, Reckitt Benckiser and others. In particular CRGK also has a distribution agreement with BeiGene (BEIG), which recently received approval for zanubrutinib in China for the treatment of blood cancers and will be targeting a similar set of customers to Evomela. We believe this distribution agreement is highly encouraging and a major step in Evomela’s commercialization. The company has guided to a commercial launch in mid-2019

Pilot purchasing program in China likely to affect entecavir and TDF pricing

The Chinese government recently initiated a pilot drug purchasing program aimed at reducing the price of generic drugs. The program consists of a pact between major cities (including Beijing, Shanghai and Guangzhou) to purchase certain generic drugs in bulk, forcing companies to compete for contracts, but also making the wining companies the sole distributor to hospitals in these regions. This resulted in an average price reduction of 52%. Importantly for CASI, the program cut the price of entecavir by 90% when the contract was won by Chia-tai Tianqing Pharma. Historically entecavir has received high reimbursement rates through programs to address the hepatitis B virus (HBV) epidemic in China. Additionally, the company’s other HBV treatment tenofovir disoproxil fumarate (TDF) was also included in the scheme. We expect this to significantly affect CASI as these drugs were key drivers of its generics sales, and we have adjusted our sales estimates to reflect this: we expect combined peak sales in China of $20m (21% of all generics sales in China), down from previous estimates of $57m (48%).

The NMPA has been engaged in a multi-year program to improve generic drug safety following several prominent case of adulterated drugs. Part of this program was to move away from the previous system, which had 5,000 generic drug manufacturers competing for individual hospital contracts, as pricing pressure and poor oversight was cited as a causative factor of counterfeit drugs.

The program instituted a series of controls termed the generic quality consistency evaluation (GQCE). Hospital purchases were to be limited to companies that had passed the GQCE. However, the recent procurement scheme has been criticized both inside and outside China as potentially exacerbating some of the issues the generic drug reforms were attempting to address, such as quality and supply.

Although the new purchasing scheme will likely close most hospital supply chains, CASI will be able to market entecavir and TDF as premium branded generic drugs. Because of the aforementioned quality control issues, patients often pay cash for premium drug products in China, and we do not expect this trend to end, although we do believe that there will still be significant pricing pressure on these premium generic drugs. However, it is difficult to predict the precise implications of the new procurement scheme at this time.

Valuation

We have lowered our valuation to $675m ($7.06 per basic share), from $759m ($8.11 per basic share), due to adjustments to our pricing assumptions for entecavir and TDF. We have reduced our peak sales estimates in China for entecavir by 75% ($9m peak sales) as we expect significant price competition, but we believe that it will be able to maintain some premium pricing (as opposed to a 90% price reduction). We currently do not have pricing data on TDF but have similarly reduced peak sales estimates for TDF by 50% (to $11m) on par with the average price cuts in the program. Although we expect the company to market these drugs as premium products, we also account for increased pricing pressure and competition in these markets due to the new procurement scheme. Combined, these reduce our peak sales estimates for the generics portfolio by 11% (to $212m from $250m). This effect is offset by rolling forward our NPVs to the most recent period. We may make further adjustments to our market assumptions for generics in the future if other drugs from the company’s portfolio are including in the procurement scheme. For illustrative purposes, a 10% reduction in Chinese sales (from the current base) would translate to a $23m reduction in our NPVs.

Exhibit 1: Valuation of CASI Pharmaceuticals

Portfolio

Asset

Region

Peak sales
($m)

Margin

Clinical risk adjustment

Value
($m)

Spectrum

Evomela

China

15.5

46%

100%

27.69

Marqibo

China

8.3

58%

90%

8.65

Zevalin

China

23.9

64%

90%

48.61

Generics

China and US

212.0

49%

100%

504.93

Internal

ENMD-2076

China and US

25.2

51%

20%

1.90

Total

591.78

Net cash and equivalents (YE18) ($m)

83.62

Total firm value ($m)

675.40

Total shares (m)

95.72

Value per basic share ($)

7.06

Dilutive warrants and options (est.) (m)

30.21

Value per diluted share ($)

6.09

Source: CASI reports, Edison Investment Research


Financials

CASI reported an operational loss of $27.2m for 2018, driven primarily by SG&A expenses of $18.0m as it builds out its manufacturing and commercial apparatus in China, although $6.1m of this was share-based payments. R&D spending for the period (including acquired in process development) was $8.5m ($9.2m including acquired in process development), which was higher than our estimates ($7.1m), primarily associated with higher than expected preclinical development activities. We have increased our future R&D expectations. We expect initial revenue in 2019 of $9.0m, although this assumes initial sales from the generics pipeline during this period. The company previously secured a manufacturing partner for entecavir and is undergoing a factory buildout in Wuxi, and our estimates may be affected by the timing of these programs. This revenue is slightly tempered from our previous report ($10.9m revenue previously forecast in 2019) due to the impact of entecavir and TDF sales reductions.

The company ended the year with $85.1m in cash and liquid investments (and $1.5m in debt), which we expect will be sufficient to bring the company to profitability in 2021. However, the company may raise additional capital in the future to finance further acquisitions, and it has indicated that this is its intent. Moreover, the company has committed $50m in cash to the launch of its Wuxi production facility, with $21m due in the first quarter of 2019 (note: this payment was previously expected to occur in Q418), and $29m due in three years.

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

8,964.9

33,546.7

Cost of Sales

0.0

0.0

(2,479.5)

(8,127.2)

Gross Profit

0.0

0.0

6,485.4

25,419.5

EBITDA

 

 

(9,983.1)

(19,402.4)

(16,440.4)

3,124.0

Normalised operating profit

 

 

(10,100.9)

(19,767.9)

(16,790.5)

(1,432.8)

Amortisation of acquired intangibles

0.0

(1,305.4)

(1,388.8)

(1,388.8)

Exceptionals

0.0

0.0

0.0

0.0

Share-based payments

(650.4)

(6,118.1)

(6,118.1)

(6,118.1)

Reported operating profit

(10,751.3)

(27,191.4)

(24,297.5)

(8,939.8)

Net Interest

1.0

(280.1)

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

(19.9)

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(10,119.8)

(20,048.1)

(16,790.5)

(1,432.8)

Profit Before Tax (reported)

 

 

(10,770.2)

(27,471.6)

(24,297.5)

(8,939.8)

Reported tax

0.0

0.0

0.0

0.0

Profit After Tax (norm)

(10,119.8)

(20,048.1)

(16,790.5)

(1,432.8)

Profit After Tax (reported)

(10,770.2)

(27,471.6)

(24,297.5)

(8,939.8)

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

(10,119.8)

(20,048.1)

(16,790.5)

(1,432.8)

Net income (reported)

(10,770.2)

(27,471.6)

(24,297.5)

(8,939.8)

Basic average number of shares outstanding (m)

62

85

98

103

EPS - basic normalised (c)

 

 

(16.45)

(23.65)

(17.20)

(1.40)

EPS - diluted normalised (c)

 

 

(16.45)

(23.65)

(17.20)

(1.40)

EPS - basic reported (c)

 

 

(17.51)

(32.41)

(24.89)

(8.72)

Dividend (c)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

1,288.5

20,845.4

40,490.2

63,928.4

Intangible Assets

0.0

18,784.7

17,395.9

16,007.0

Tangible Assets

1,046.5

1,750.6

22,784.3

47,611.3

Investments & other

242.0

310.0

310.0

310.0

Current Assets

 

 

43,812.4

92,564.6

56,449.1

31,014.1

Stocks

0.0

0.0

611.4

2,004.0

Debtors

0.0

0.0

1,473.7

5,514.5

Cash & cash equivalents

43,489.9

85,117.0

46,916.4

16,048.0

Other

322.5

7,447.6

7,447.6

7,447.6

Current Liabilities

 

 

(5,062.1)

(3,873.9)

(5,582.6)

(6,407.4)

Creditors

(4,316.1)

(968.0)

(4,176.2)

(5,001.0)

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)

(1,406.4)

(1,406.4)

Long Term Liabilities

 

 

(1,498.8)

(73.6)

(73.6)

(73.6)

Long term borrowings

(1,498.8)

0.0

0.0

0.0

Other long term liabilities

0.0

(73.6)

(73.6)

(73.6)

Net Assets

 

 

38,540.1

109,462.5

91,283.1

88,461.4

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

38,540.1

109,462.5

91,283.1

88,461.4

CASH FLOW

Op Cash Flow before WC and tax

(9,983.1)

(19,402.4)

(16,440.4)

3,124.0

Working capital

3,572.4

(9,780.4)

1,123.1

(4,608.7)

Exceptional & other

8.5

598.9

0.0

0.0

Tax

0.0

0.0

0.0

0.0

Net operating cash flow

 

 

(6,402.2)

(28,583.9)

(15,317.3)

(1,484.6)

Capex

(934.7)

(1,131.1)

(21,383.8)

(29,383.8)

Acquisitions/disposals

0.0

(20,642.4)

0.0

0.0

Net interest

0.0

0.0

0.0

0.0

Equity financing

23,733.9

92,269.8

0.0

0.0

Dividends

0.0

912.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Net Cash Flow

16,397.0

42,824.4

(36,701.1)

(30,868.5)

Opening net debt/(cash)

 

 

(25,601.7)

(41,991.7)

(83,617.5)

(46,916.4)

FX

0.0

(1,197.5)

0.0

0.0

Other non-cash movements

(7.0)

(1.0)

0.0

0.0

Closing net debt/(cash)

 

 

(41,991.7)

(83,617.5)

(46,916.4)

(16,048.0)

Source: CASI reports, Edison Investment Research

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 Edison analyst 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.

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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

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 Edison analyst 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.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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.

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Germany

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

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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

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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