Successful Phase II with BEKINDA for IBS-D

Redhill Biopharma 27 November 2017 Update
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RedHill BioPharma

Successful Phase II with BEKINDA for IBS-D

Company update

Pharma & biotech

27 November 2017

Price*

US$5.16/ NIS1.84

Market cap

US$110m/ NIS392m

*Priced at 22 November 2017

NIS3.57/US$

Net cash ($m) at end Q317 + proceeds of $20.6m net from share issue

60.2

Shares in issue

212.7m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange (ADS/share 1:10)

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(44.9)

(42.4)

(55.3)

Rel (local)

(45.4)

(46.2)

(62.2)

52-week high/low

US$11.6

US$5.0

Business description

RedHill BioPharma is a speciality pharma company 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 NTM infections and BEKINDA for gastroenteritis and IBS-D. RedHill also promotes three GI products in the US.

Next events

Top line results from first Phase III trial with RHB-104 for Crohn’s disease

Mid-2018

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

H218

Initiation of pivotal Phase III trial with RHB-104 for NTM infections

H118

Analyst

Jonas Peciulis

+44 (0)20 3077 5728

In October 2017, RedHill announced that one of its core assets, BEKINDA, significantly alleviated symptoms of patients with diarrhoea-predominant irritable bowel syndrome (IBS-D) in a Phase II trial. Although not comparable directly, the data look good in relation to two other recent drugs, Viberzi and Xifaxan, which had combined sales of $382m in 2016 after the launch in 2015 for this indication. We have increased our success probability for BEKINDA in IBS-D and now value RedHill at $449m or $21.1/ADS.

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

7.5

(47.4)

(0.25)

0.0

N/A

N/A

12/18e

30.0

(34.4)

(0.14)

0.0

N/A

N/A

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

BEKINDA: Primary endpoint met in Phase II trial

BEKINDA (formerly RHB-102) is a once-daily, oral formulation of ondansetron. The Phase II trial was a randomised, two-arm study that enrolled 126 patients split 60:40 to receive either BEKINDA 12mg or a placebo for eight weeks. The primary endpoint was stool consistency compared to the baseline, as per the FDA guidance definition. 54.7% of patients in the active arm responded to treatment compared to 35.3% in the placebo group. This is a significant difference of 19.4% and compares well with other recent drugs approved for IBS-D – Viberzi (eluxadoline, Allergan) and Xifaxan (rifaximin, Valeant), for which the respective percentage rates were 13.5% and 10.5% (noting the limitations of making comparisons across different trials). Both Viberzi and Xifaxan were approved for IBS-D in 2015 and in 2016 had solid sales of $93m and $289m, respectively, in IBS-D (EvaluatePharma).

Two data readouts from Phase III trials in 2018

In 2018 all eyes will be on two Phase III data readouts. Top line results from the first Phase III trial RHB-104 for Crohn’s disease (CD) are expected in mid-2018. The study is fully enrolled (n=331) as of November 2017. RHB-104 is a patented combination of three antibiotics (clarithromycin, rifabutin and clofazimine) in an oral capsule for the treatment of Crohn’s disease patients. If proven effective, this could be a paradigm shifting treatment option in CD, in our view. A second set of top line data from confirmatory Phase III with TALICIA (RHB-105) for H. pylori infection is due in H218. TALICIA is a proprietary oral combination of two antibiotics (rifabutin and amoxicillin) and a proton pump inhibitor (omeprazole). In the first Phase III trial TALICIA achieved an 89.4% eradication rate meeting the primary endpoint of superiority over a 70% historical efficacy rate.

Valuation: Revised to $449m or $21.1/ADS

Our valuation increases to $449m from $414m (on a per share basis it decreases to $21.1/ADS due to share issue) mainly driven by the increased success probability for BEKINDA from 40% to 60% after the positive Phase II. Cash has improved after the share issue raised $20.6m net. Other near-term R&D events are the initiation of confirmatory Phase III with BEKINDA for gastroenteritis and the initiation of a Phase III trial with RHB-104 for nontuberculous mycobacteria infections (NTM).

Financials and valuation

We have increased our RedHill valuation to $449m (NIS1.63bn) from $414m (NIS1.50bn). On a per share basis our valuation is reduced to $21.1/ADS (NIS7.7/share) from $24.1/ADS (NIS8.5/share) due to the share issue. The main reasons for the higher absolute valuation is the increase in success probability for BEKINDA in IBS-D from 40% to 60%, rolling our model forward, which was slightly offset by our lowered commercial GI product sales expectations for 2017.

RedHill raised approximately $20.6m net in November by issuing c 4.1m American Depositary Shares (ADS=10 shares; 24% of the previously outstanding share number). This extends cash reach into 2019, according to our model.

RedHill’s reported Q317 sales of $1.5m are assumed to be mainly from the two marketed GI products EnteraGam and Donnatal ($0.5m booked in the last two weeks of June 2017), while marketing of Esomeprazole Strontium DR capsules 49.3mg began in September 2017. R&D costs were up by 15% to $8.1m y-o-y (down 4% q-o-q) due to ongoing late stage clinical studies. Q317 G&A and S&M combined expenses were $6.5m, up by $5.0m y-o-y mainly due to the new US commercial organisation. The Q317 operating loss was $14.0m versus $8.5m a year ago. As noted, the main reason for the increase in cash burn is the establishment of the US commercial business. RedHill has indicated that it expects cash burn to decrease going forward with the growing sales of the GI products.

We note that RedHill did not provide the split of the products behind the $1.5m in sales because they are still at an early stage of commercialisation. In our previous report we looked in detail at the potential of Donnatal and EnteraGam and described the assumptions on which we have included the two products in our model. Both products have been marketed by previous owners, therefore we see potential for a rapid sales build up. We forecast around $15m sales from both products in 2017, but noted that visibility was still low. Given the first full quarter of sales was $1.5m, we have cut our 2017 expectations to $7.5m also allowing room for the company’s third product, Esomeprazole Strontium DR capsules 49.3mg. At present we keep our 2018 sales estimates intact. We have fine-tuned our other financial forecasts and now expect an operating loss of $49.8m in 2017 and $34.4m in 2018 compared to $41.4m and $32.5m previously.

Exhibit 1: RedHill sum-of-the parts valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/ADS ($)

Probability (%)

rNPV ($m)

rNPV/ADS ($)

RHB-105 H. pylori infection

2021

86

93.5

4.4

70%

63.0

3.0

RHB-104 – Crohn’s disease

2023

145

56.3

2.6

40%

14.1

0.7

– Multiple sclerosis

2025

422

204.4

9.6

20%

52.9

2.5

BEKINDA – Gastroenteritis

2019

21

37.9

1.8

85%

32.1

1.5

– IBS-D

2023

201

128.0

6.0

60%

88.2

4.2

YELIVA – r/r MM

2025

565

241.3

11.4

10%

49.1

2.3

– Advanced HCC

2025

649

135.9

6.4

10%

33.8

1.6

– DLBCL

2025

156

69.3

3.3

10%

18.4

0.9

Rizaport – Migraine

Market

20

12.2

0.6

100%

12.2

0.6

Donnatal & EnteraGam – specialty GI products

Market

51

24.6

1.2

100%

24.6

1.2

Net cash end Q217 (including other financial assets)

60.2

100%

60.2

2.8

Valuation

1,063.4

47.2

448.5

21.1

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

December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

3

101

7,500

30,000

Cost of Sales

0

0

(4,550)

(9,100)

Gross Profit

3

101

2,950

20,900

Research and development

(17,771)

(25,241)

(34,254)

(30,931)

EBITDA

 

 

(21,866)

(30,499)

(49,725)

(34,166)

Operating Profit (before amort. and except.)

(22,002)

(30,543)

(49,804)

(34,386)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(22,002)

(30,543)

(49,804)

(34,386)

Net Interest

912

1,173

2,434

0

Profit Before Tax (norm)

 

 

(21,090)

(29,370)

(47,370)

(34,386)

Profit Before Tax (reported)

 

 

(21,090)

(29,370)

(47,370)

(34,386)

Tax

0

0

0

0

Profit After Tax (norm)

(21,090)

(29,370)

(47,370)

(34,386)

Profit After Tax (reported)

(21,090)

(29,370)

(47,370)

(34,386)

Average Number of Shares Outstanding (m)

110.8

128.5

190.4

253.6

EPS - normalised ($)

 

 

(0.19)

(0.23)

(0.25)

(0.14)

EPS - normalised & fully diluted ($)

 

 

(0.19)

(0.24)

(0.25)

(0.14)

EPS - (reported) ($)

 

 

(0.19)

(0.23)

(0.25)

(0.14)

Dividend per share ($)

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

39.3

69.7

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

7,728

10,044

Intangible Assets

6,060

6,095

7,130

8,165

Tangible Assets

124

165

461

1,742

Investments

134

137

137

137

Current Assets

 

 

60,510

67,815

44,161

8,734

Stocks

0

0

250

250

Debtors

2,372

1,661

4,200

4,200

Cash

21,516

53,786

19,216

4,284

Other*

36,622

12,368

20,495

0

Current Liabilities

 

 

(5,514)

(5,356)

(9,979)

(9,574)

Creditors

(5,514)

(5,356)

(9,979)

(9,574)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(1,237)

(6,155)

(4,300)

(4,300)

Long term borrowings

0

0

0

0

Other long term liabilities

(1,237)

(6,155)

(4,300)

(4,300)

Net Assets

 

 

60,077

62,701

37,610

4,904

CASH FLOW

Operating Cash Flow

 

 

(17,826)

(28,258)

(45,633)

(32,892)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(14)

(85)

(375)

(1,500)

Acquisitions/disposals

0

0

0

0

Financing

54,792

36,017

20,600

0

Other**

(21,328)

24,596

(9,162)

19,460

Dividends

0

0

0

0

Net Cash Flow

15,624

32,270

(34,570)

(14,932)

Opening net debt/(cash)

 

 

(5,892)

(21,516)

(53,786)

(19,216)

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)

 

 

(21,516)

(53,786)

(19,216)

(4,284)

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

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Edison 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. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Disclosure regarding the scheme to enhance the awareness of investors to public companies in the technology and biomed sectors that are listed on the Tel Aviv Stock Exchange and participate in the scheme (hereinafter respectively “the Scheme”, “TASE”, “Participant” and/or “Participants”). Edison Investment Research (Israel) Ltd, the Israeli subsidiary of Edison Investment Research Ltd (hereinafter respectively “Edison Israel” and “Edison”), has entered into an agreement with the TASE for the purpose of providing research analysis (hereinafter “the Agreement”), regarding the Participants and according to the Scheme (hereinafter “the Analysis” or “Analyses”). The Analysis will be distributed and published on the TASE website (Maya), Israel Security Authority (hereinafter “the ISA”) website (Magna), and through various other distribution channels. The Analysis for each participant will be published at least four times a year, after publication of quarterly or annual financial reports, and shall be updated as necessary after publication of an immediate report with respect to the occurrence of a material event regarding a Participant. As set forth in the Agreement, Edison Israel is entitled to fees for providing its investment research services. The fees shall be paid by the Participants directly to the TASE, and TASE shall pay the fees directly to Edison. Subject to the terms and principals of the Agreement, the Annual fees that Edison Israel shall be entitled to for each Participant shall be in the range of $35,000-50,000. As set forth in the Agreement and subject to its terms, the Analyses shall include a description of the Participant and its business activities, which shall inter alia relate to matters such as: shareholders; management; products; relevant intellectual property; the business environment in which the Participant operates; the Participant's standing in such an environment including current and forecasted trends; a description of past and current financial positions of the Participant; and a forecast regarding future developments in and of such a position and any other matter which in the professional view of the Edison (as defined below) should be addressed in a research report (of the nature published) and which may affect the decision of a reasonable investor contemplating an investment in the Participant's securities. To the extent it is relevant, the Analysis shall include a schedule of scientific analysis of an expert in the field of life sciences. An "equity research abstract" shall accompany each Equity Research Report, describing the main points addressed. The full scope reports and reports where the investment case has materially changed will include a thorough analysis and discussion. Short update notes, where the investment case has not materially changed, will include a summary valuation discussion. The Agreement with TASE regarding the participation of Edison in the scheme for the research analysis of public companies does not and shall not constitute an approval or consent on the part of TASE or the ISA or any other exchange on which securities of the Company are listed, or any other securities’ regulatory authority which regulates the issuance of securities by the Company to the content of the Report or to the recommendation contained therein. A summary of this report is also published in the Hebrew language. In the event of any contradiction, inconsistency, discrepancy, ambiguity or variance between the English Report and the Hebrew summary of said Report, the English version shall prevail; and a note to this effect shall appear in any Hebrew summary of a Report. Edison is regulated by the Financial Conduct Authority. According to Article 12.3.2, Chapter 12 of the Conduct of Business Sourcebook, Edison, which produces or disseminates non-independent research, must ensure that it: 1) is clearly identified as a marketing communication; and 2) contains a clear and prominent statement that (or, in the case of an oral recommendation, to the effect that) it: a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and b) is not subject to any prohibition on dealing ahead of the dissemination of investment research. The financial promotion rules apply to non-independent research as though it were a marketing communication.

EDISON INVESTMENT RESEARCH DISCLAIMER

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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

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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