Positive Phase III with BEKINDA for gastroenteritis

RedHill Biopharma 17 July 2017 Update
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RedHill Biopharma

Positive Phase III with BEKINDA for gastroenteritis

Company update

Pharma & biotech

 

17 July 2017

Price*

US$8.81/ NIS3.09

Market cap

US$150m/ NIS531m

*Priced as at 14 July 2017. NIS3.53/US$

Net cash ($m) at end Q117 (including short-term investments)

61

Shares in issue

171.6m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange (ADS/share 1:10)

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(5.5)

(10.6)

(23.7)

Rel (local)

(6.3)

(15.4)

(32.9)

52-week high/low

US$16.3

US$8.2

Business description

RedHill BioPharma is a specialty pharma co with an R&D pipeline focusing on GI and inflammatory and gastrointestinal diseases, while earlier-stage assets also target various cancers. The most advanced products are RHB-105 for H. pylori infection, RHB-104 for Crohn’s disease and multiple sclerosis and BEKINDA for gastroenteritis and IBS-D. RedHill also promotes two GI products in the US.

Next events

Second DSMB review of RHB-104 Phase III trial in Crohn’s disease

Late July, 2017

BEKINDA IBS-D Ph II top-line results

Sept 2017

FDA meeting and decision regarding second Phase III trial with BEKINDA

By October 2017

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Juan Pedro Serrate

+44 (0)20 3681 2534

RedHill BioPharma delivered a flurry of news recently, including a major R&D milestone when a Phase III trial with BEKINDA 24mg showed that the drug was beneficial to gastroenteritis/gastritis patients. There are several inflection points still to come in 2017: a data readout from the BEKINDA Phase II trial with IBS-D patients, a second DSMB review of RHB-104 Phase III in Crohn’s disease trial with an early termination option, and the meeting with the FDA to decide the further strategy with BEKINDA for gastroenteritis. We have increased our valuation to $390m (NIS1.42bn).

Year end

Revenue ($m)

PBT* ($m)

EPS* ($)

DPS ($)

P/E (x)

Yield (%)

12/15

0.0

(21.1)

(0.19)

0.0

N/A

N/A

12/16

0.1

(29.4)

(0.23)

0.0

N/A

N/A

12/17e

0.1

(39.8)

(0.23)

0.0

N/A

N/A

12/18e

0.8

(36.6)

(0.21)

0.0

N/A

N/A

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

R&D milestone: Successful Phase III with BEKINDA

On 14 June 2017, RedHill announced positive top-line results from its GUARD Phase III trial with gastroenteritis patients receiving BEKINDA 24mg, which is a once-daily, bi-modal release, oral formulation of antiemetic drug ondansetron. The primary endpoint was met with statistical significance and, as RedHill indicated, it will know whether another Phase III trial is needed after its meeting with the FDA, expected by October 2017. If approved, it could be the first once-daily formulation of ondansetron for acute gastroenteritis to reach the US and European markets.

Promotion of Donnatal and EnteraGam initiated

In line with guidance, RedHill began promotion of Donnatal and EnteraGam in the US in June 2017. This will be a key area of focus for us in the upcoming Q217 report, although we expect a more general update rather than any financial details at this early stage of commercialisation. As planned, RedHill has also initiated a second Phase III trial with RHB-105 (now branded as TALICIA) for H. pylori Infection, which will enrol 444 patients. This follows a successful Phase III trial, which showed that TALICIA eradicated H. pylori in 89.4% patients compared to historical 70% after standard-of-care and 63% in subsequent open-label treatment of the placebo arm patients in same trial (see our initiation report).

Valuation: Several inflection points in 2017 remain

We have increased our valuation to $390m (NIS1.42bn) or $22.7/ADS (NIS8.3/share), from $378m (NIS1.40bn) or $22.0/ADS (NIS7.9/share), partly due to rolling our model forward, but mainly after increasing our success probability for BEKINDA from 70% to 85%. RedHill expects more newsflow through H217. The second DSMB review of the first Phase III trial with RHB-104 for Crohn’s disease is expected mid-2017 and will include an option for early termination; top-line results from the Phase II trial with BEKINDA for diarrhoea-predominant irritable bowel syndrome (IBS-D) are expected in September 2017; and the meeting with the FDA to decide the further development strategy with BEKINDA is expected by October.

BEKINDA 24mg Phase III top-line results positive

In the GUARD study BEKINDA was administered to gastroenteritis/gastritis patients in order to prevent vomiting. The trial was randomised, double-blind, placebo-controlled and enrolled 321 adults and children over the age of 12 and randomised at a ratio of 60:40 to receive either BEKINDA or placebo, respectively.

The primary endpoint was the proportion of patients without further vomiting, without rescue medication, and who were not given intravenous hydration from 30 minutes post first dose of the study drug until 24 hours post dose compared to placebo.

The secondary endpoints included frequency of vomiting, proportion of patients receiving rescue antiemetic therapy or intravenous fluids; requiring hospitalisation or returning to emergency department, time to resumption of normal activities and several others.

So far, RedHill has released top-line results, with the final study report to come in Q317. The reported results included:

The primary endpoint was met with statistical significance even though RedHill noted that there was a high positive outcome rate in the placebo arm, which hindered achieving an even higher statistical significance.

In the intent-to-treat population1 65.6% of BEKINDA treated patients (n = 192) met the primary outcome compared to 54.3% of placebo patients (n = 129) (21% improvement in efficacy, p = 0.04). Correcting for randomisation error, the difference was larger with 65.8% (BEKINDA) compared to 53.9% (placebo) (p = 0.03).

  Intent-to-treat population (ITT) analysis includes every subject, who is randomized according to randomized treatment assignment. It ignores noncompliance, protocol deviations, withdrawal, and anything that happens after randomization. The logic is that such method would likely mimic the real world and the estimate of treatment effect is generally conservative.

In per-protocol (PP) analysis2 69.5% of BEKINDA treated patients (n = 177) met the primary outcome compared to 54.9% of placebo patients (n = 122) (27% improvement in efficacy, p = 0.01).

  Per-protocol population is defined as a subset of the ITT population who completed the study without any major protocol violations.

BEKINDA 24mg was also shown to be safe and well-tolerated.

Next steps

BEKINDA top-line data are positive; however, as RedHill indicated, additional clinical studies may be required prior to potential submission of a New Drug Application (NDA), which will be clarified after meeting with the FDA, expected by October 2017. In an ideal scenario no additional trials would be needed, and the company could file for the NDA right away, which is a scenario we use in our model. However, if an additional trial is needed, we still see a high chance of success partly based on the results from the current study, but also on the fact that ondansetron (BEKINDA’s API) is already being used off label (originally it was developed for nausea and vomiting associated with chemotherapy, radiotherapy and operations) and has been shown to have a beneficial effect in children suffering from gastroenteritis.3 This implies that there is already at least some consensus that the drug is likely beneficial for gastroenteritis patients and RedHill is aiming to back it with data and receive a label with this indication. If approved, it could be the first once-daily oral formulation of ondansetron for acute gastritis and gastroenteritis to reach the US and European markets. Given that generic ondansetron is already routinely used off-label in this setting, BEKINDA’s ability to gain market share will rely on its competitive advantage, which is an extended release formulation and it will be used on-label compared to standard ondansetron.

  Z. Fedorowicz et al. Antiemetics for reducing vomiting related to acute gastroenteritis in children and adolescents. The Cochrane Library, 7 September 2011.

BEKINDA 12mg is also being studied in the Phase II trial for diarrhoea-predominant irritable bowel syndrome (IBS-D) in Phase II. Enrolment of patients has been completed and top-line results are expected in September 2017. We reviewed BEKINDA’s potential in this indication in our initiation report.

Valuation

Our RedHill valuation has increased to $390m (NIS1.42bn) or $22.7/ADS (NIS8.3/share), from $378m (NIS1.40bn) or $22.0/ADS (NIS7.9/share) previously, due to rolling our model forward, but mainly due to increasing our success probability for BEKINDA in gastroenteritis from 70% to 85%. Our typical Phase III probability of success is 90-95%. Cautiously we use 85% to reflect the uncertainty as to the need for another Phase III trial.

Our financial forecasts are unchanged and we keep all other assumptions in our model unchanged, as detailed in our initiation report. We do not yet include the Donnatal co-promotion and EnteraGam deals in our valuation, but will revisit them when more details emerge about the commercial setup and initial sales potential. Existing funds provide cash reach well into 2018. We assume $5.0m of illustrative financing for 2018, included nominally as long-term debt on the balance sheet (as per Edison’s policy).

Exhibit 1: Sum-of-the parts RedHill valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/ADS ($)

Probability (%)

rNPV ($m)

rNPV/ADS ($)

RHB-105 H. pylori infection

2021

86

89.4

5.2

70%

60.2

3.5

RHB-104 – Crohn’s disease

2023

145

53.8

3.1

40%

13.5

0.8

– Multiple sclerosis

2025

422

195.4

11.4

20%

50.6

2.9

BEKINDA – Gastroenteritis

2019

21

36.2

2.1

85%

30.7

1.8

– IBS-D

2023

201

122.4

7.1

40%

65.4

3.8

YELIVA – r/r MM

2025

565

230.7

13.4

10%

46.9

2.7

– Advanced HCC

2025

649

129.9

7.6

10%

32.3

1.9

– DLBCL

2025

156

66.2

3.9

10%

17.6

1.0

Rizaport – Migraine

Market

20

11.5

0.7

100%

11.5

0.7

Net cash end Q117 (including other financial assets)

61.0

100%

3.6

Valuation

996.6

54.5

389.6

22.7

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; DLBCL = diffuse large B-cell lymphoma.

Exhibit 2: Financial summary

$000s

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

3

101

100

750

Cost of Sales

0

0

(60)

(450)

Gross Profit

3

101

40

300

Research and development

(17,771)

(25,241)

(34,254)

(30,931)

EBITDA

 

 

(21,866)

(30,499)

(39,836)

(36,534)

Operating Profit (before amort. and except.)

(22,002)

(30,543)

(22,002)

(30,543)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(22,002)

(30,543)

(39,887)

(36,588)

Net Interest

912

1,173

109

0

Profit Before Tax (norm)

 

 

(21,090)

(29,370)

(39,777)

(36,588)

Profit Before Tax (reported)

 

 

(21,090)

(29,370)

(39,777)

(36,588)

Tax

0

0

0

0

Profit After Tax (norm)

(21,090)

(29,370)

(39,777)

(36,588)

Profit After Tax (reported)

(21,090)

(29,370)

(39,777)

(36,588)

Average Number of Shares Outstanding (m)

110.8

110.8

128.5

169.6

EPS – normalised ($)

 

 

(0.19)

(0.23)

(0.23)

(0.21)

EPS – normalised and fully diluted ($)

 

 

(0.19)

(0.24)

(0.23)

(0.21)

EPS – (reported) ($)

 

 

(0.19)

(0.23)

(0.23)

(0.21)

Dividend per share ($)

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

40.0

40.0

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

 

 

6,318

6,397

6,386

6,405

Intangible Assets

6,060

6,095

6,130

6,165

Tangible Assets

124

165

119

103

Investments

134

137

137

137

Current Assets

 

 

60,510

67,815

32,947

1,978

Stocks

0

0

0

0

Debtors

2,372

1,661

1,978

1,978

Cash

21,516

53,786

30,969

0

Other

36,622*

12,368*

0

0

Current Liabilities

 

 

(5,514)

(5,356)

(8,575)

(7,575)

Creditors

(5,514)

(5,356)

(8,575)

(7,575)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(1,237)

(6,155)

(6,155)

(11,114)

Long term borrowings

0

0

0

(4,959)

Other long term liabilities

(1,237)

(6,155)

(6,155)

(6,155)

Net Assets

 

 

60,077

62,701

24,603

(10,306)

CASH FLOW

Operating Cash Flow

 

 

(17,826)

(28,258)

(35,145)

(35,855)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(14)

(85)

(5)

(38)

Acquisitions/disposals

0

0

0

0

Financing

54,792

36,017

0

0

Other

(21,328)

24,596**

12,333**

(35)

Dividends

0

0

0

0

Net Cash Flow

15,624

32,270

(22,817)

(35,928)

Opening net debt/(cash)

 

 

(5,892)

(21,516)

(53,786)

(30,969)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(21,516)

(53,786)

(30,969)

4,959

Source: Edison Investment Research, RedHill accounts. Note: *Short-term investments. **Includes short-term investments converted to cash and cash equivalents.

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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

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Level 12, Office 1205

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Israel

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Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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. 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Tel Aviv +44 (0)20 3734 1007 Medinat Hayehudim 60

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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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