Ph III with TALICIA data readout end-2018

Redhill Biopharma 2 October 2018 Update
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RedHill Biopharma

Ph III with TALICIA data readout end-2018

Q2 company update

Pharma & biotech

2 October 2018

Price

US$8.1

Market cap

US$207m

*Priced at 21 September 2018   NIS3.58/US$

Net cash ($m) at end Q218 plus share issue in August 2018

43

Shares in issue

255.1m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange

NASDAQ

Share price performance

%

1m

3m

12m

Abs

18.9

2.6

(10.3)

Rel (local)

16.2

(3.7)

(23.4)

52-week high/low

US$11.3

US$4.6

Business description

RedHill is a speciality company with an R&D pipeline focusing on gastrointestinal and inflammatory diseases, while earlier-stage assets also target various cancers. The most advanced products are TALICIA for H. pylori infection, RHB-104 for CD, RHB-204 for NTM infections, and BEKINDA for gastroenteritis and IBS-D. RedHill also promotes four GI products in the US.

Next events

Top-line results from confirmatory Phase III trial with TALICIA for H. pylori

Q418

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

Q119*

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Alice Nettleton

+44 (0)20 3077 5700

In the past few weeks, RedHill has reached several R&D milestones: completion of enrolment for the Phase III TALICIA study for H. pylori infection (data end-2018), advancement to the second stage of the Phase IIa YELIVA study for cholangiocarcinoma, and a positive FDA meeting to discuss BEKINDA for IBS-D (now Phase III-ready). In addition, on 14 August RedHill announced a successful equity raise of $25m gross ($23.5m net), which will be used to fund the company’s ongoing R&D programmes. Our valuation is slightly higher at $432m (NIS1.5bn) but lower on a per share basis $16.9/ADS (NIS6.1/share) after the share issue.

Year end

Revenue ($m)

PBT* ($m)

EPS* ($)

DPS ($)

P/E (x)

Yield (%)

12/16

0.1

(29.4)

(0.23)

0.0

N/A

N/A

12/17

4.0

(45.5)

(0.26)

0.0

N/A

N/A

12/18e

12.4

(39.2)

(0.17)

0.0

N/A

N/A

12/19e

30.2

(36.7)

(0.14)

0.0

N/A

N/A

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

TALICIA confirmatory Ph III top-line readout end-2018

On 4 September 2018, RedHill announced that enrolment for the TALICIA confirmatory Phase III trial was complete. This trial is studying TALICIA as a first-line treatment for eradication of H. pylori regardless of ulcer status. Top-line data are expected in Q418 and will be an important catalyst for the share price. If the data are positive, RedHill will be able to file an NDA with the FDA, which could result in approval in H219 according to management (with an expedited six-month review period).

Financials: $23.5m net extends cash runway to H219

Q218 reported revenues of $2.4m (all US) was largely flat (-4%) versus Q118. During the Q2 results call RedHill indicated that sales developments were largely in line with management expectations and y-o-y growth was strong. Given the early stage of commercialisation, quarter-on-quarter fluctuations can be expected. We have reduced our sales estimates for 2018 from $16.6m to $12.4m, but maintain our longer-term potential forecast. The reported gross margin improved in Q218 (69% vs 62% in Q1) and cash burn was in line with the company’s target for 2018 which is $8.5m/quarter. RedHill’s recent share issue raised $23.5m net, which according to management brings the current cash position to $43m (as of 30 August 2018). Based on our model this extends the cash runway well into 2019.

Valuation: Revised to $432m or $16.9/ADS

Our revised valuation of RedHill is $432m or $16.9/ADS vs $423m or $19.8/ADS. The increase in total equity value is due to the improved cash position, which was partially offset by the somewhat lower 2018 sales forecast. The valuation per share is lower to reflect the increased number of shares. Near-term catalysts for the share price are: the top-line data readout from the TALICIA pivotal Phase III trial in Q418, further sales growth, and any additional data announced from RedHill from the Crohn’s trial (see our last note).

Next catalyst: TALICIA confirmatory Phase III readout

TALICIA (RHB-105) is a patented combination of rifabutin, amoxicillin and omeprazole and is being developed as a first-line treatment for patients diagnosed with H. pylori infection regardless of ulcer status, an indication potentially broader than competitors. The first Phase III study delivered positive final results in March 2016, which showed that TALICIA eradicated H. pylori in 89.4% of patients (p < 0.001) compared to the historical 70% after standard-of-care and 63% in subsequent open-label treatment of the placebo arm patients in the same trial. Following a meeting with the FDA, a confirmatory Phase III trial was initiated in June 2017. The study enrolled 455 subjects and is comparing TALICIA versus a regimen of amoxicillin and omeprazole alone. Top-line results are expected before the end of 2018 and, subject to positive full data, the study should allow for the NDA application.

We reviewed the rationale for TALICIA, existing clinical data and competitive advantages against other antibiotic regimens in our initiation report. TALICIA has Qualified Infectious Disease Product (QIDP) designation from the FDA, which endows both fast-track development status and priority review status and, if approved, eight years’ US market exclusivity.

Mytesi: Fourth commercial GI product agreement

On 28 June 2018, RedHill entered into a new co-promotion agreement which means this will be the fourth gastrointestinal product to be promoted by US-focused sales force of c 40 representatives. The new agreement is with Napo Pharmaceuticals (wholly owned subsidiary of Jaguar Health) and allows RedHill to co-promote the marketed product Mytesi (crofelemer) in the US. According to RedHill Mytesi is the only FDA approved anti-diarrheal for the symptomatic relief of non-infectious diarrhoea in adults living with HIV/AIDS on anti-retroviral therapy. As with the previous deals, financials were not disclosed, but the press release states that RedHill will be compensated based on performance. RedHill started to promote Mytesi post-Q218 (25 July 2018) and indicated that the potential of the product could become more apparent over the next two quarters.

Mytesi, previously known as Fulyzaq, was approved by the FDA in 2012 for the symptomatic relief of non-infectious diarrhoea in adults living with HIV/AIDS on anti-retroviral therapy. Napo initially licensed the development and commercialisation rights for Fulyzaq to Salix Pharmaceuticals in 2008, which filed for FDA approval. Salix was subsequently acquired by Valeant Pharmaceuticals (now Bausch Health) in 2015. Prior to this acquisition, Napo filed a lawsuit on 5 May 2011 claiming that Salix had not provided sufficient support for the product. After a protracted argument, in 2016 Salix/Valeant returned all rights to the asset to Napo.

Sales under Salix/Valeant peaked at $12m in 2015 (EvaluatePharma). Napo relaunched Mytesi in early 2017, and ramping up its sales effort, especially as Mytesi is now Jaguar Health’s largest product by revenues. The aforementioned events mean that current sales seem to be lower than at peak, but increased commercial activities supporting this product, including the engagement of RedHill, could see a rebound in sales given the fairly rapid growth seen in 2012-15.

Exhibit 1: Estimated Mytesi revenues

Financials

Total revenues of $2.4m in Q218 were flat q-o-q, but up y-o-y ($0.5m). RedHill reports two types of revenue: commercialisation revenue and promotional services revenue. Commercialisation revenue (consisting of EnteraGam sales only; other products are being co-promoted), was lower at $1.2m (vs $1.6m in Q118). However, promotional services revenue increased to $1.2m (vs $0.8m in Q118), which are revenues from the co-promotion agreements for Donnatal, Esomeprazole Strontium DR capsules 49.3mg. During the Q218 results call RedHill reiterated its intention to bring the US operations to cash flow breakeven as soon as possible, although no specific guidance has been provided yet.

Exhibit 2: RedHill’s total revenues and gross profits

Source: RedHill, Edison Investment Research. Note: arrows indicate start of promotional or sales activities for each product. Q218 revenues do not include any revenues from Mytesi promotional activities (promotion started in July 2018).

Near-term fluctuations can be expected given the early stage of commercialisation, we maintain our long-term potential of these products intact. As a result, we have slightly reduced our sales estimates for 2018 to from $16.6m to $12.4m (Exhibit 3).

The reported gross profit margin improved slightly in Q218 to 69% vs 62% in Q118. The operating loss in Q218 was $9.6m vs $13.5m in Q217 following the implementation of the cost-cutting programme. Q218 R&D costs were $6.0m versus $8.4m a year ago. Net cash used in operating activities was $8.4m compared with $9.4m in Q118. Cash burn in the quarter was at the target $8.5m average rate per quarter for 2018. Our slightly lowered total cost estimates for H218, coupled with the somewhat lower 2018 sales estimate, has a slightly negative effect on EPS in 2018 and a slightly positive one in 2019.

Exhibit 3: Changes to forecasts

Year end December ($000)

2018

Old

2018

New

% change

2019

Old

2019

New

% change

Revenue

16.584

12.392

-25%

30.157

30.157

+0%

Gross Profit

8.292

6.196

-25%

15.079

15.079

+0%

Research and development

(26.584)

(24.920)

-6%

(29.084)

(29.084)

+0%

Selling, general and administration

(21.025)

(20.464)

-3%

(21.796)

(22.692)

+4%

EBITDA

(39.210)

(39.081)

-0%

(35.670)

(36.565)

+3%

Operating Profit

(39.317)

(39.188)

-0%

(35.801)

(36.697)

+3%

Profit Before Tax

(39.317)

(39.188)

-0%

(35.801)

(36.697)

+3%

Profit After Tax

(39.317)

(39.188)

-0%

(35.801)

(36.697)

+3%

EPS (€)

(0.18)

(0.17)

-9%

(0.17)

(0.14)

-14%

Source: RedHill’s accounts, Edison Investment Research

Although RedHill does not provide guidance on cash reach, our model suggests cash will last until H219, past several R&D events and more sales data points. RedHill reported a cash position of $27.7m at 30 June 2018 (including bank deposits and short-term financial assets). On 14 August post the period end, RedHill raised $23.5m net, which according to management brings the current cash position to $43m. For 2019 we calculate an additional cash need of $11.0m, which we show in our model as illustrative long-term debt, but we note that this assumes continuing rapid y-o-y sales growth of the product portfolio.

Valuation

Our RedHill valuation is increased to $432m from $423m. This is due to the increased cash position after the fundraise in August 2018 of $23.5m (net) and rolling the model forward, which was partially offset by our reduced 2018 sales estimates. However, on a per share basis, the rNPV has reduced from $19.8/share to $16.9/share due to the increased number of shares issued in the equity raise in August 2018 (4,166,667 American Depositary Shares were issued, which results in a new total number of ADS of 25,510,610 – 1 ADS = 10 shares).

Our detailed assumptions for each of the indications are discussed in our last outlook report. Top-line readout from the confirmatory Phase III trial with TALICIA for H. pylori is another key catalyst in the near term (expected Q418).

Exhibit 4: Sum-of-the parts RedHill valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/share ($)

Probability

rNPV ($m)

rNPV/share ($)

TALICIA, - H. pylori infection

2021*

86

108.2

4.2

70%

73.3

2.9

RHB-104, - Crohn’s disease

2023

145

70.5

2.8

50%

29.7

1.2

- NTM infections

2022

50

57.9

2.3

30%

14.6

0.6

BEKINDA, - Gastroenteritis

2022

21

29.4

1.2

85%

24.5

1.0

- IBS-D

2023

201

143.0

5.6

60%

104.6

4.1

YELIVA, - Cholangiocarcinoma

2024

115

165.6

6.5

10%

10.9

0.4

- r/r MM

2025

565

253.6

9.9

10%

63.1

2.5

- Advanced HCC

2025

649

151.9

6.0

10%

46.4

1.8

GI specialty products: Donnatal, EnteraGam & Esomeprazole

Market

48

21.4

0.8

100%

21.4

0.8

Net cash (end-Q218) + share issue

43.0

100%

43.0

1.7

Valuation

1,044.4

39.3

431.6

16.9

Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D: irritable bowel syndrome; r/r MM: refractory/relapse multiple myeloma; Advanced HCC: hepatocellular carcinoma; NTM: nontuberculous mycobacteria. *TALICIA could potentially reach the market before 2021, given its fast-track status and depending on the timelines for the upcoming confirmatory Phase III trial.

Exhibit 5: Financial summary

$'000s

 

2016

2017

2018e

2019e

December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

101

4,007

12,392

30,157

Cost of Sales

0

(2,126)

(6,196)

(15,079)

Gross Profit

101

1,881

6,196

15,079

Research and development

(25,241)

(32,969)

(24,920)

(29,084)

EBITDA

 

 

(30,499)

(51,891)

(39,081)

(36,565)

Operating Profit (before amort. and except.)

(30,543)

(51,972)

(39,188)

(36,697)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(30,543)

(51,972)

(39,188)

(36,697)

Net Interest

1,173

6,428

0

0

Profit Before Tax (norm)

 

 

(29,370)

(45,544)

(39,188)

(36,697)

Profit Before Tax (reported)

 

 

(29,370)

(45,544)

(39,188)

(36,697)

Tax

0

0

0

0

Profit After Tax (norm)

(29,370)

(45,544)

(39,188)

(36,697)

Profit After Tax (reported)

(29,370)

(45,544)

(39,188)

(36,697)

Average Number of Shares Outstanding (m)

128.5

175.3

234.4

255.5

EPS - normalised (c)

 

 

(22.85)

(25.99)

(16.72)

(14.36)

EPS – normalised ($)

 

 

(0.24)

(0.26)

(0.17)

(0.14)

EPS - (reported) ($)

 

 

(0.23)

(0.26)

(0.17)

(0.14)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

46.9

50.0

50.0

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

 

 

6,397

5,667

6,211

6,995

Intangible Assets

6,095

5,285

5,820

6,605

Tangible Assets

165

230

239

238

Investments

137

152

152

152

Current Assets

 

 

67,815

51,676

30,121

5,471

Stocks

0

653

653

653

Debtors

1,661

4,818

4,818

4,818

Cash

53,786

16,455

24,650

0

Other*

12,368

29,750

0

0

Current Liabilities

 

 

(5,356)

(11,830)

(4,272)

(3,850)

Creditors

(5,356)

(11,830)

(4,272)

(3,850)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(6,155)

(448)

(448)

(11,465)

Long term borrowings

0

0

0

(11,017)

Other long term liabilities

(6,155)

(448)

(448)

(448)

Net Assets

 

 

62,701

45,065

31,612

(2,850)

CASH FLOW

Operating Cash Flow

 

 

(28,258)

(44,769)

(44,404)

(34,752)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(85)

(146)

(116)

(131)

Acquisitions/disposals

0

0

0

0

Financing

36,017

25,653

23,500

0

Other**

24,596

(18,069)

29,215

(785)

Dividends

0

0

0

0

Net Cash Flow

32,270

(37,331)

8,195

(35,668)

Opening net debt/(cash)

 

 

(21,516)

(53,786)

(16,455)

(24,650)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(53,786)

(16,455)

(24,650)

11,017

Source: Source: Edison Investment Research, RedHill accounts. Note: *Bank deposits and financial assets at fair value. **Includes bank deposits converted to cash and cash equivalents.

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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 Limited (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. 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Herzilya Pituach, 46766

Israel

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

Tel Aviv +44 (0)20 3734 1007 Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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