TALICIA launch for H. pylori in sight

Redhill Biopharma 28 May 2019 Update
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RedHill Biopharma

TALICIA launch for H. pylori in sight

Q119 company results

Pharma & biotech

28 May 2019

Price

US$7.8

Market cap

US$222m

NIS3.60/US$

Net cash ($m) at end-Q119

45.5

Shares in issue

283.7m

Free float

90%

Code

RDHL

Primary exchange

TASE

Secondary exchange (ADS 1:10)

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(2.0)

1.0

10.2

Rel (local)

0.3

(0.5)

6.1

52-week high/low

US$11.4

US$5.2

Business description

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

Next events

Expected FDA response on TALICIA’s NDA

Q419

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

H219

Analysts

Jonas Peciulis

+44 (0)20 3077 5728

Alice Nettleton

+44 (0)20 3077 5700

RedHill Biopharma is a research client of Edison Investment Research Limited

In May 2019, RedHill submitted an NDA for TALICIA for the treatment of H. pylori infection. If all goes according to plan, the drug could be launched by end-2019. This follows positive top-line results from the TALICIA confirmatory Phase III study in first-line treatment of H. pylori infection regardless of ulcer status announced late last year. RedHill plans to use its existing commercial platform to market TALICIA to healthcare practitioners. Other projects in the R&D pipeline are also progressing and the promotion of the company’s GI product portfolio in the US continues. Our valuation is $518m or $18.3 per ADS ($17.3 per ADS previously).

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

4.0

(45.5)

(0.26)

0.0

N/A

N/A

12/18

8.4

(38.8)

(0.17)

0.0

N/A

N/A

12/19e

10.0

(36.5)

(0.13)

0.0

N/A

N/A

12/20e

13.0

(35.8)

(0.13)

0.0

N/A

N/A

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

TALICIA’s NDA was submitted

On 7 May 2019, RedHill announced that it had submitted a new drug application (NDA) to the FDA under the 505(b)(2) regulatory pathway for TALICIA for the treatment of H. pylori infection. The review process should be fast due to the TALICIA’s Qualified Infectious Disease Product designation, which grants priority review with a response expected within six months. This means RedHill is on track to receive a response from the FDA, and perhaps even launch the drug, by end-2019. Our model includes revenues in 2020, but some initial sales could be booked in 2019. If approved, RedHill plans to use its existing commercial platform to market TALICIA to healthcare practitioners and expects a minimal incremental cost of launch (several senior new hires were announced in May). Commercial manufacturing is already in scale-up mode and RedHill is ready to start discussions with payors.

Update on other R&D projects

Following the positive first Phase III with RHB-104 for Crohn’s disease reported in August 2018, RedHill plans to meet with the FDA in mid-2019 to discuss further development. A pivotal Phase III trial with RHB-204 for pulmonary nontuberculous mycobacteria (NTM) infections is expected to start in H219. RedHill is also working on the design of the confirmatory Phase III studies with BEKINDA for gastroenteritis and diarrhoea-predominant irritable bowel syndrome (IBS-D), but no specific timelines have been provided.

Valuation: $518m or $18.3 per ADS

Our revised valuation of RedHill is slightly higher than previously at $518m or $18.3 per ADS vs $491m or $17.3 per ADS. The increase is mainly due to rolling our model forward. At end-Q119, cash and cash equivalents were $45.5m, which should cover RedHill’s operating activities into 2020, according to our model. The potential FDA approval in H219 of TALICIA for H. pylori is the main catalyst in the near term.

Positive results from two Phase III trials with TALICIA

Top-line results from the TALICIA (rifabutin, amoxicillin and omeprazole) confirmatory Phase III study (ERADICATE Hp2) in first-line treatment of H. pylori infection regardless of ulcer status were announced on 3 December 2018. They demonstrate that the primary endpoint was met, which was the H. pylori eradication rate with TALICIA vs active comparator of amoxicillin + omeprazole. The TALICIA treatment group achieved an 84% eradication rate (n=228) vs 58% with the active comparator (n=227), with a high level of significance (p<0.0001). In addition, TALICIA was found to be safe and well tolerated, which is key because the main safety issues seen with rifabutin were not observed in the study. This is likely due to the lower doses used in the study, as concerns about rifabutin toxicity (myelotoxicity) mainly come from treating other infections and using higher doses. The results of this second Phase III study were comparable with the first Phase III ERADICATE Hp study (n=118), which in March 2016 showed that TALICIA eradicated H. pylori in 89.4% of patients (p<0.001). We provided a detailed discussion about the market opportunity for TALICIA in our last update and outlook reports.

R&D pipeline progress

RedHill also provided an update on the remaining projects in its R&D pipeline.

Positive results from the first Phase III with RHB-104 (clarithromycin, rifabutin and clofazimine) for Crohn’s disease were reported in August 2018, which we described in detail in our previous notes. RedHill is assessing additional data and, once finalised, will meet with the FDA, potentially in mid-2019, to discuss further development.

A pivotal Phase III trial with RHB-204 (clarithromycin, clofazimine and rifabutin) for first-line pulmonary nontuberculous mycobacteria (NTM) infections is expected to start in H219. This is still subject to completion of the ‘ongoing supportive non-clinical program’ and additional input from the FDA. The upcoming Phase III study could be sufficient for the approval of RHB-204 as a standalone, first-line treatment for pulmonary NTM infections caused by Mycobacterium avium complex (MAC). From a historical perspective, the NTM infections indication is the latest addition to RedHill’s R&D pipeline and we reviewed the potential of RHB-204 for these difficult-to-diagnose and difficult-to-treat NTM infections in our outlook report.

RedHill is also working on two indications for BEKINDA (bimodal extended release, once-daily, ondansetron) – acute gastroenteritis and diarrhoea-predominant irritable bowel syndrome (IBS-D). The company met with the FDA after the positive results from the first Phase III trial with BEKINDA for gastroenteritis and is now designing a confirmatory Phase III study in this indication. Similarly, RedHill is finalising the design of two pivotal Phase III studies with BEKINDA for IBS-D after a positive Phase II trial. No specific timelines have been provided.

YELIVA (SK2 Inhibitor) is undergoing a Phase IIa study in cholangiocarcinoma, with the study expected to be fully enrolled (n=39) by the end of 2019. In addition, YELIVA is being explored in two other investigator-led clinical trials in refractory/relapsed multiple myeloma and advanced hepatocellular carcinoma. Please refer to our outlook report for more detail on these projects.

Exhibit 1: RedHill’s commercial and R&D pipeline

Source: RedHill

Financials

RedHill commercialises and promotes a portfolio of GI products in the US. In Q119 revenues were $1.7m vs $1.4m in Q418 and $2.5m in Q118. 2018 was the first full year that RedHill promoted its GI products, and there is therefore still a limited number of data points for forecasts. The GI products were launched in mid-2017, with the latest addition of Mytesi in June 2018. Total 2018 sales were $8.4m. Q119 sales were lower y-o-y, but higher q-o-q. During a commercial product launch, fluctuations in sales on a quarterly basis are expected. We therefore maintain our growth expectations for 2019 and 2020, but revise our top-line estimates slightly downwards to $10.0m and $13.0m, respectively.

The Q119 gross margin increased to 76% from 66% in FY18. RedHill explained that this was due to a variation in product mix, but provided no specific guidance on a sustainable level going forward. We therefore keep 65% in our model as previously.

The Q119 operating loss was $9.2m, slightly down from $10.0m in Q118, mainly due to lower R&D costs as several large clinical trials ended in 2018, as well as growing sales. We have lowered our 2019 R&D cost estimate as some of the trials are still in the design phase. Our 2019 and 2020 operating loss estimates are now $36.5m and $35.8m, respectively.

The end-Q119 cash and cash equivalents were $45.5m which, as before, should cover RedHill’s operating activities into 2020 according to our model. This includes the potential launch of TALICIA, if the approval process proceeds according to plan.

Valuation

Our RedHill valuation has increased slightly to $518m or $18.3 per ADS from $491m or $17.3 per ADS, mainly due to rolling our model forward. We maintain most of our long-term valuation assumptions, although we have increased the phasing of R&D in our RHB-204 for NTM infections project by one year based on the latest update on when the study could start (described above). Our detailed assumptions for each of the indications are discussed in our last outlook report. Potential FDA approval of TALICIA for H. pylori in H219 is the main catalyst in the near term.

Exhibit 2: Sum-of-the-parts RedHill valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/share ($)

Probability

rNPV ($m)

rNPV/share ($)

TALICIA, - H. pylori infection

2020

86

144.9

5.1

90%

130.1

4.6

RHB-104, - Crohn’s disease

2023

145

80.6

2.8

50%

36.4

1.3

RHB -204, - NTM infections

2024

50

53.0

1.9

30%

14.2

0.5

BEKINDA, - Gastroenteritis

2022

21

32.9

1.2

85%

27.6

1.0

- IBS-D

2023

201

154.9

5.5

60%

113.3

4.0

YELIVA, - Cholangiocarcinoma

2024

115

181.4

6.4

10%

13.9

0.5

- r/r MM

2025

565

277.1

9.8

10%

70.8

2.5

- Advanced HCC

2025

649

167.0

5.9

10%

52.7

1.9

GI specialty products

Market

48

13.2

0.5

100%

13.2

0.5

Net cash (last reported)

45.5

100%

45.5

1.6

Valuation

1,150.4

38.9

517.8

18.3

Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D = irritable bowel syndrome; r/r MM = refractory/relapsed multiple myeloma; HCC = hepatocellular carcinoma; NTM = nontuberculous mycobacteria.

Exhibit 3: Financial summary

$'000s

 

2016

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

101

4,007

8,360

10,000

13,000

Cost of Sales

0

(2,126)

(2,837)

(3,500)

(4,550)

Gross Profit

101

1,881

5,523

6,500

8,450

Research and development

(25,241)

(32,969)

(24,862)

(22,684)

(22,976)

EBITDA

 

 

(30,499)

(51,891)

(39,241)

(36,451)

(35,682)

Operating Profit (before amort. and except.)

(30,543)

(51,972)

(30,543)

(51,972)

(39,331)

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(30,543)

(51,972)

(39,331)

(36,545)

(35,781)

Net Interest

1,173

6,428

511

0

0

Profit Before Tax (norm)

 

 

(29,370)

(45,544)

(38,820)

(36,545)

(35,781)

Profit Before Tax (reported)

 

 

(29,370)

(45,544)

(38,820)

(36,545)

(35,781)

Tax

0

0

0

0

0

Profit After Tax (norm)

(29,370)

(45,544)

(38,820)

(36,545)

(35,781)

Profit After Tax (reported)

(29,370)

(45,544)

(38,820)

(36,545)

(35,781)

Average Number of Shares Outstanding (m)

128.5

128.5

176.6

231.2

283.8

EPS - normalised ($)

 

 

(0.23)

(0.26)

(0.17)

(0.13)

(0.13)

EPS - normalised ($)

 

 

(0.24)

(0.26)

(0.17)

(0.13)

(0.13)

EPS - (reported) ($)

 

 

(0.23)

(0.26)

(0.17)

(0.13)

(0.13)

Dividend per share ($)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

46.9

66.1

65.0

65.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

6,397

5,667

5,623

5,587

5,546

Intangible Assets

6,095

5,285

5,320

5,355

5,390

Tangible Assets

165

230

163

92

16

Investments

137

152

140

140

140

Current Assets

 

 

67,815

51,676

56,788

23,832

5,134

Stocks

0

653

769

1,300

1,300

Debtors

1,661

4,818

2,834

2,834

2,834

Cash

53,786

16,455

29,005

19,698

1,000

Other*

12,368

29,750

24,180

0

0

Current Liabilities

 

 

(5,356)

(11,830)

(10,381)

(11,457)

(11,457)

Creditors

(5,356)

(11,830)

(10,381)

(11,457)

(11,457)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(6,155)

(448)

(844)

(1,300)

(15,664)

Long term borrowings

0

0

0

0

(14,364)

Other long term liabilities

(6,155)

(448)

(844)

(1,300)

(1,300)

Net Assets

 

 

62,701

45,065

51,186

16,662

(16,440)

CASH FLOW

Operating Cash Flow

 

 

(28,258)

(44,769)

(34,462)

(32,929)

(33,004)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(85)

(146)

(23)

(23)

(23)

Acquisitions/disposals

0

0

0

0

0

Financing

36,017

25,653

42,263

0

0

Other**

24,596

(18,069)

4,772

23,645

(35)

Dividends

0

0

0

0

0

Net Cash Flow

32,270

(37,331)

12,550

(9,307)

(33,062)

Opening net debt/(cash)

 

 

(21,516)

(53,786)

(16,455)

(29,005)

(19,698)

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

 

(53,786)

(16,455)

(29,005)

(19,698)

13,364

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


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This report has been commissioned by RedHill Biopharma and prepared and issued by Edison, in consideration of a fee payable by RedHill Biopharma. 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.

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This report has been commissioned by RedHill Biopharma and prepared and issued by Edison, in consideration of a fee payable by RedHill Biopharma. 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.

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New Zealand

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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.

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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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