Circassia Pharmaceuticals — Joining the dots

Circassia Pharmaceuticals — Joining the dots

Circassia’s recent interims demonstrated 55% y-o-y revenue growth to £28.4m and a 75% R&D expense reduction (to £6.9m from £27.2m in H117) while growing the commercial infrastructure that now includes China. Investors should see a path to profitability, but we note recent licensing opportunities in the respiratory therapeutic area could accelerate this.

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Circassia Pharmaceuticals

Joining the dots

Pharma & biotech

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8 November 2018

Price

58.85p

Market cap

£210m

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Share details

Code

CIR

Listing

LSE

Shares in issue

357.2m

Business description

Circassia Pharmaceuticals operates as a specialty pharmaceutical company focusing on respiratory disease. It offers an asthma management diagnostic product (NIOX) and, in collaboration with AstraZeneca, the COPD therapies Tudorza, which is on the US market, and Duaklir, which is under review by the FDA.

Bull

A viable commercial respiratory franchise.

A rare path to near-term profitability among UK biotechs.

AstraZeneca collaboration and cash of c £51m.

Bear

Past R&D failures still cloud the stock.

Time to profitability dependent on organic growth.

Incomplete respiratory portfolio.

Analyst

Andy Smith

+44 (0)20 3077 5700

Circassia’s recent interims demonstrated 55% y-o-y revenue growth to £28.4m and a 75% R&D expense reduction (to £6.9m from £27.2m in H117) while growing the commercial infrastructure that now includes China. Investors should see a path to profitability, but we note recent licensing opportunities in the respiratory therapeutic area could accelerate this.

Circassia’s transformation

Circassia has moved past R&D disappointments and transformed into a respiratory specialty pharmaceutical company with the potential for profitability. Circassia’s revenues (from its respiratory products Tudorza for COPD and NIOX) grew to £28.4m in H118 from £18.3m in H117. Just as important was the cost discipline, as illustrated by a 26% y-o-y fall in operational costs, helped by a 75% reduction in R&D spend. Circassia ended H118 with £50.8m in cash (£59.5m at YE17).

Big opportunities in respiratory space

Changing priorities at the UK’s biggest pharma companies could bring opportunities in the respiratory space. GlaxoSmithKline’s (GSK’s) recent Q318 results included a pruning of its once-dominant respiratory pipeline of three experimental products; media reports (by GSK’s head of oncology) have suggested a side-lining of the franchise with resources diverted to other therapeutic areas. In addition, after nine quarters of product sales declines, AstraZeneca is divesting its formerly most treasured but deprioritised respiratory brands such as Alvesco for asthma.

Therapeutic specialty and in-licensing record

Circassia in-licensing deprioritised complementary respiratory products from big pharma would make commercial sense, and is a logical fit beyond Circassia’s COPD product focus. Circassia’s commercial infrastructure will be leveraged once the second product from the AstraZeneca transaction, Duaklir, is approved, but a more complete respiratory portfolio, containing an inhaled corticosteroid (alone or in combination), could expand the franchise to asthma and further utilise the salesforce. In addition, the AstraZeneca deal has given Circassia a track record of structuring transactions that involve deferred and option payments, loans and share purchases without significant shareholder dilution.

Valuation: Few specialty respiratory peers

There are few opportunities for commercial respiratory exposure and, with an EV of c £151m, past R&D issues may still be discounting Circassia’s valuation.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

23.1

(64.9)

(20.0)

N/A

N/A

N/A

12/17

46.3

(40.4)

(11.0)

N/A

N/A

N/A

12/18e

56.4

(27.2)

(6.9)

N/A

N/A

N/A

12/19e

76.3

(26.9)

(6.7)

N/A

N/A

N/A

Source: Reuters

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

dison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2018]. "FTSE(r)" 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.

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

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

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