Redhill Biopharma — 2020 set to be a commercially transformative year

On 22 November 2019, RedHill held an investor and analyst day in New York with the focus on the two new products about to be launched in the US. The company spent a substantial amount of time providing an update on its commercial readiness and launch plans. It established its US commercial organisation in early 2017, which has so far been promoting several specialty GI products. One of RedHill’s strategic goals with this expansion was to be fully prepared for a launch of its own proprietary products. This goal was achieved with the FDA approval of Talicia announced on 4 November 2019. In October 2019, RedHill announced that it has in-licensed another GI product, Aemcolo, from Cosmo Pharmaceuticals. Both Talicia and Aemcolo are potentially major products for RedHill and both are about to be launched. From a commercial perspective, this makes 2020 a potentially transformative year for RedHill.

The FDA has approved Talicia for the treatment of H. pylori infection in adults, which is a broad label and does not require the patients to have any symptoms or complications (such as dyspepsia or peptic ulcer). This potentially positions Talicia to compete as a front-line treatment.

Talicia is a proprietary three-drug combination of omeprazole, amoxicillin and rifabutin (10mg/250mg/12.5mg delayed-release capsules), the only rifabutin-based combination antibiotic treatment approved by the FDA. We have reviewed in detail the data from Talicia’s clinical trials in our previous reports. In the Phase III clinical trial conducted by RedHill, no resistance to rifabutin was observed, which will be the key competitive advantage compared to standard-of-care clarithromycin-based H. pylori treatment, for which the resistance is a major and growing issue.

RedHill plans to launch Talicia in Q120 with its own salesforce in the US, which will increase to c 140 sales reps (from c 40 reps previously). The company’s ex-US commercial strategy has not yet been disclosed, but we expect it will depend on Talicia’s performance in the US. Qualified Infectious disease product (QIDP) designation provides eight years of market exclusivity in the US, while the existing patent portfolio provides protection until 2034.

The newly in-licensed drug, Aemcolo is a branded formulation of rifamycin 194mg in delayed-release tablets. It is a minimally absorbed antibiotic formulation that the FDA approved for TD caused by non-invasive strains of E. coli. Aemcolo is entering a proven market (minimally absorbable antibiotics for TD) with interesting dynamics, in our view.

Aemcolo’s active pharmaceutical ingredient, rifamycin is structurally similar to rifaximin (Xifaxan), which was developed and marketed by Salix Pharmaceuticals (currently owned by Bausch Health Companies). Xifaxan is approved by the FDA for several indications including TD, but by far the most significant indications for Bausch with this drug are diarrhoea-predominant irritable bowel syndrome (IBS-D) and hepatic encephalopathy, which together accounted for $1.2bn in sales in the US in 2018 (EvaluatePharma). Bausch does not provide a more detailed split of sales, but presumably Xifaxan sales for TD are much smaller. This creates an interesting niche for smaller players like RedHill, which can enter an existing market (minimally absorbed antibiotics for TD) with a dedicated product and targeted sales strategy.

Another element related to Aemcolo’s commercial potential is the likelihood of its off-label use in indications that Xifaxan is approved for (IBS-D and hepatic encephalopathy). Promotion of off-label use is not legal in the US and RedHill was clear it would never consider such activities; however, the off-label use itself is not prohibited. Market conditions can sometimes lead to significant off-label use of drugs depending on interactions among all stakeholders, ie physicians should be convinced of drug’s interchangeability, while payors should be willing to provide coverage. Due to these uncertainties we do not model any off-label use sales for Aemcolo; however, there is some potential for that to happen.

Clinical trials with Aemcolo for IBS-D (run by Cosmo) and hepatic encephalopathy (investigator-led study) are ongoing. We believe that in due course Aemcolo should be available for these indications, although at present it is not clear whether the existing licensing deal between Cosmo and RedHill covers these additional indications. The press announcement states, ‘The license agreement also provides for the grant to RedHill of certain rights related to the potential development of additional indications for Aemcolo.’

Most of TD in developing areas is caused by bacterial pathogens (up to 80–90%) and diarrheagenic E. coli are the most common bacterial cause (in approximately 35–45% of cases). The International Society of Travel Medicine (ISTM) recommends rifaximin for moderate to severe cases. The last revision of guidelines was published in April 2017, while Aemcolo (rifamycin) was approved by the FDA in November 2018. More up to date information from CDC also includes rifamycin.

Minimally absorbable rifamycin-class drugs (rifamycin and rifaximin) are a differentiated treatment option for TD. Typical antibiotics include systemic azithromycin and fluoroquinolones, which have higher risk of systemic side effects. ISTM notes in its guidelines that rifaximin has the best safety profile compared to other first-line antibiotics for TD. Due to widespread use, the efficacy of systemic antibiotics for TD is also decreasing. Moreover, the systemic antibiotics are necessary to treat TD caused by invasive pathogens (Campylobacter, Salmonella, Shigella), so the increase in resistance can become very problematic, as the symptoms they cause can be much more severe. For all these reasons minimally absorbed antibiotics for non-invasive TD are a rational option, in our view.

Travellers to a high-risk region can obtain a prescription before the trip and then self-administer if the symptoms occur. While TD is typically a self-limiting disease, it can severely affect travel plans, which is the main incentive for travellers to obtain the prescription when visiting a high risk region. Aemcolo was approved after two controlled clinical trials. Both a randomised, placebo-controlled trial (n=264) and a randomised, non-inferiority study (n=835) against ciprofloxacin met their primary endpoints.

The two other topics that RedHill focused on at the investor and analyst day were its commercial preparedness and its launch plans for the two new antibiotic products. The company is expanding the US salesforce to c 140 sales reps from c 40 previously. RedHill provided a detailed rationale for the expansion, based on the optimal coverage of the states with high H. pylori prevalence and access to high volume prescribers. With the expanded commercial organisation RedHill plans to access c 24,000 physicians: 12,000 GI specialists, 10,000 primary care physicians and 2,000 mid-level practitioners.

RedHill also revealed pricing information for the first time. Talicia’s price will be $650 per prescription. Current retail prices for Prevpac and Pylera are around $950–1,050 per treatment, so Talicia’s pricing is attractive. Prevpac is a branded all-in-one clarithromycin-based standard-of-care H. pylori treatment and Pylera is a branded all-in-one bismuth-based standard-of-care H. pylori treatment. Talicia has the same advantages over these drugs as it does over the generic versions of standard-of-care antibiotics ie improved efficacy due to non-existing H. pylori resistance. In our Talicia model, we had assumed $400 per treatment; we have increased this to $650 per treatment.

Aemcolo will cost $157 per treatment. Xifaxan 200mg for travellers’ diarrhoea retails at around $650 for 30 tablets. The suggested treatment in Xifaxan’s label is one tablet three times a day for three days ie nine tablets in total. Aemcolo’s price is still well below one third of Xifaxan’s $650 price tag.

RedHill’s 9M19 sales of specialty GI products were $4.7m compared to $7.0m in 9M18. As FY18 was the first full year that RedHill promoted its speciality GI products, there are a limited number of data points from which to derive trends. We reduced our 2019 total sales estimate to $7.0m from $10.0m. Following FDA approval, we now include Talicia’s sales in our P&L from 2020. We also now include some conservative initial sales projections for Aemcolo. Our FY20 and FY21 total sales estimates are $20.3m and $34.2m, respectively.

In 9M19 RedHill maintained a high gross margin of 69%. 9M19 operating expenses of $26.7m were somewhat higher than last year’s $22.3m due to a one-off NDA filing fee to the FDA and increased spending at the US organisation. We slightly increased our FY19 spending, but as RedHill is significantly increasing its US salesforce, in the short term the operating loss should increase (we forecast $42.1m for FY19 and $48.2m for FY20). However, as both Talicia and Aemcolo are potentially high value products, the expected rapid growth in sales should offset the loss in a relatively short period of time. Such dynamics are normally expected during the launch period of novel, branded drugs. During the Q319 results presentation RedHill indicated that it expects the US business could reach break-even in FY21. As the company does not report its performance by business segment yet, we do not have detailed segmental estimates.

Reported cash and cash equivalents were $25.6m at the end of Q319, but that excludes the $36.3m investment from Cosmo Pharmaceuticals as the deal was announced in October 2019. After revising total sales and spending, we believe the existing cash position is sufficient until the end of FY20. This will allow RedHill to ramp up its salesforce, which is required to optimise the launch of the two new products. Both Talicia and Aemcolo will be launched in coming months (Q419/Q120), so by end of FY20 the initial performance will provide insights about the commercial potential of these products and should also serve as a catalyst for the share price.

Our RedHill valuation is $575m or $16.3 per ADS, versus $556m or $15.8 per ADS previously. We have made several changes to our model. Our revised estimates were driven by the inclusion of Aemcolo in RedHill’s GI product portfolio, the increased pricing of Talicia in our model and the increase in sales and marketing due to the salesforce expansion in the US. Overall, this increased the NPV we calculate for the marketed GI products portfolio (Talicia and Aemcolo are also now included), however, we removed two projects from Yeliva’s programme that we had in our sum-of-the-parts table namely, Yeliva (SK2 inhibitor) for multiple myeloma (NCT02757326) and for hepatocellular carcinoma (NCT02939807). Both trials were run by investigators. The Phase I study in multiple myeloma was completed, but we do not have any further plans from the investigator with regards to development. The NCI funding for the Phase I HCC study was diverted to an investigator-sponsored study in another indication. The removal of the multiple myeloma and hepatocellular carcinoma trials only partially offset the increase in the total rNPV for RedHill after the upgraded estimates for its commercial GI portfolio. The Yeliva trial in cholangiocarcinoma, sponsored by RedHill, is progressing well and the patient enrolment is expected to be completed in the coming months.