Apontis Pharma — A phoenix rises

Apontis Pharma is a specialty pharma company focused purely on the German market, where it has a rich commercial heritage. Namely, it is the core business that originally stems from Schwarz Pharma Germany and then later UCB Innere Medizin. It was acquired by private equity company Paragon Partners from UCB in 2018, which is now partially exiting through the IPO. Apontis’s primary focus is marketing its portfolio of single pills throughout Germany. It has a dedicated salesforce of 130 sales reps and longstanding relationships with c 23k physicians (primarily GPs). Management estimates that its salesforce conducted c 138,000 in-person office visits to physicians in 2020, from pre-pandemic levels of around c 200,000, so Apontis is clearly poised to benefit from the easing of lockdown measures. Co-marketing and distribution agreements with Novartis and co-promotion agreement with AstraZeneca form a significant part of the business as outlined by the revenue mix in Exhibit 1.

Apontis intends to use the IPO proceeds from the issue of new shares to hit its targets, and prior to listing management indicated net proceeds will be invested as follows to achieve this:

Successfully growing its franchise of single pill products is key to Apontis hitting these revenue and margin targets, with c 80% of the IPO proceeds being earmarked for this purpose. Apontis’s single pill products are combinations of commonly co-prescribed, generic cardiovascular disease (CVD) drugs that have been reformulated into one branded pill. In essence, these can be considered someway between being a standard generic drug and a reformulated branded drug.

Despite their relative simplicity, the benefits of using a single pill are in fact multifaceted: 1) for patients, they reduce co-payments and pill burden, which improves adherence; 2) for physicians, this results in better treatment outcomes and a reduction in prescribing volume; and 3) for payors, this results in savings of up to 34% on a total cost basis (€1–3k/patient/year) (source: company data, START study).

Using regional prescription data, and looking at volume and pricing dynamics, Apontis has designed and/or selected loose combinations of CVD medications that could offer high gross margins when combined into a single pill, due to a reduction in fixed rebates paid to dispensing pharmacies and wholesalers. Currently Apontis has eight marketed single pills, which are primarily combinations of various antihypertensives (blood pressure lowering) and hypolipidemic (cholesterol lowering) agents. These have been internally developed or Apontis has obtained regional marketing rights.

Combined sales from the single pill portfolio totalled €19.0m in 2020 (2019: €11.5m), representing c 49% of overall revenues, and were the largest contributor to gross profit (€14.3m, c 57%). Based on the current prescription data presented by management, we estimate overall penetration in the market to be relatively low at c 5% when looking at overall use of single pills and loose combinations. Over the medium term, management believes there is headroom for c €20m additional sales from the current portfolio, which we estimate would increase market penetration to c 12% and seems reasonable in our opinion. With higher margins, an increasing mix of these single pills would benefit current operating leverage and provide the foundation for an enticing margin story.

From an R&D perspective, development of these single pills requires some formulation work and bioequivalence studies, typically taking around 3.5–5 years and costing €1.0–2.5m. Management estimates its investment is paid back in under two years and capitalises these costs. Despite these being typically comprised of generics drugs (off-patent), once approved by regulators this new single pill can for all intents and purposes be considered a branded drug, which under EU law is granted 10-year data and marketing exclusivity (eight years plus two years).

While this exclusivity will prevent entry of a generic from directly referencing the single pill for the period, we note that there is not anything directly prohibiting another company repeating the same development process and launching a similar single pill (aside from substantial capital spending and the lack of an extensive existing network with GPs). As such the biggest risk to developing these single pill products is not typical binary drug development risk, but competitor and pricing risk.

It is worth noting that c €20m of the net proceeds from the IPO has been earmarked for development of pipeline candidates in Exhibit 3. Management has highlighted clear plans for four single pill products that it believes can be launched in by 2025, which could provide an additional c €20m in annualised sales. Likewise, it has identified other prospective candidates that could be launched in the medium term and provide an additional c €60m annualised sales. So, looking at management’s plans in totality, for the current and developmental single pills, guidance is for the portfolio to grow sales by c €100m. If we assume these are fully realised by end-2030 this would imply a c 20% CAGR. Management has guided for 2021 single pills sales of c €27.5m (+47.5%).

We believe the biggest tailwind for these single pills results from the growing recognition of their benefits by both prescribers and payors, which in part has been driven by findings from Apontis’s START study. This 60,000-patient study was conducted in collaboration with AOK PLUS (a public insurer) and Ingress Health (a health economics consultancy) and was a retrospective study between 2012 and 2018 of patients’ outcomes when prescribed single pills compared to their respective loose combinations. Key findings from the study are shown Exhibit 4, but in summary highlight that taking a single pill rather than several improves adherence, and consistently taking your medicine results in better treatment outcomes.

In essence, these findings are intuitive, however, the key purpose of this study was to quantify the outcomes. Instead of alluding to expected qualitative benefits of a single pill, Apontis can now reference the study with exact quantitative data. This is now an essential tool that Apontis can use for marketing and in pricing and regulatory discussions. Apontis presented these data at several scientific conferences throughout 2019–20 and has submitted manuscripts to a leading peer-reviewed journal.

Another tailwind has been recently updated (August 2018) prescription guidelines from the European Society of Cardiology, recommending physicians start most patients with arterial hypertension on two/three antihypertensive drugs as a single pill. The previous recommendation was for stepwise treatment, starting with one drug then adding a second and third if needed. This is a significant shift and will invariably take time until it is fully adopted, but having data from the START study at hand could be a clear advantage for the growth outlook for Apontis Pharma’s portfolio.

Cardiovascular diseases remain the leading cause of death in Germany, with the EU estimating c 37% are due to ischaemic heart disease or stroke. With an ageing population and growing incidence of obesity, this is unlikely to abate. Management currently estimates that c 35 million Germans suffer from hypertension, of which c 22 million are accurately diagnosed and c nine million are adequately treated with antihypertensives. Apontis believes it currently holds the highest share of voice with physicians regarding single pills (c 74% based on IPSOS data), so is clearly well positioned to benefit from these tailwinds with its current sales footprint. Apontis’s main competitors for single pills in Germany include Aristo Pharma, Ratiopharm (Teva) and TAD Pharma, but also Servier and Hexal (Sandoz/Novartis), which are behemoths in the European generics market.

Co-marketing agreements with large-cap pharma companies for branded drugs form a significant portion of Apontis’s current base business. These are primally for respiratory disease and diabetes, so fit well into the company’s marketing focus with targeting GPs. Revenues from these co-marketing agreements totalled €16.6m in 2020 (c 42%) and alongside revenues from legacy products of €3.6m in 2020 contributed €10.7m to gross profits (c 43%) implying gross margins of c 50%, whereas its single pills were c 75% in 2020. It is therefore clear to see why Apontis is prioritising the single pill portfolio over co-marketing, but the latter will stay a key component of the overall strategy.

Management has set a mid-term target for co-marketing to contribute c €20m in annual revenues, estimating gross margins of c 45–50%, but for its higher-margin single pills to be the largest contributor at c 85–90% of the overall revenue mix. One aspect worth flagging is that despite having a lower margin, having these branded drugs on the books clearly offers synergies for marketing its single pills as they provide sales reps with a more well-rounded offering.

In March 2021, Apontis transferred its co-marketing agreement with Novartis, which covers the rights to market its inhaled bronchodilator Ulunar, a doublet of indacaterol (LABA) plus glycopyrronium (LAMA) prescribed for chronic obstructive pulmonary disease (COPD), into a distribution agreement with an expected term until end-2024. This was the largest single contributor to revenue in 2020 at €9.5m (c 24%), but was facing near-term pricing pressure. In July 2019, a new framework agreement between pharmacies (DAV) and public payors (GKV) substituted Ulunar for a less expensive parallel import of Ultibro.

Apontis aims to circumvent any potential shortfall in revenues through a new agreement with AstraZeneca. In April 2021 sales reps began co-promoting AstraZeneca’s recently approved COPD inhaler Trixeo, which could replace Ulunar. Trixeo was approved in December 2020 for treatment of mod-severe COPD, this is a triplet of formoterol (LABA) + glycopyrronium (LAMA) plus budesonide (ICS). Approval was based on the positive Phase III ETHOS and KRONOS data.

With management guiding for slight growth in the co-marketing business during 2021 (€18.2m, +12%), it is clear that it does not believe that this switch in COPD drugs will present a drag on sales of this division. This agreement with AstraZeneca has a term until end-2022, after which the relationship could be renewed, expanded or scrapped.

Apontis has a separate co-marketing agreement with Novartis for two its diabetes drugs, Jalra (vildagliptin) and Icandra (vildagliptin/metformin), which again form a sizeable portion of current revenues. These were relaunched in the German market in October 2018 and combined revenues in 2020 were €7.0m (c 18%). The agreement will likely end on patent expiry, expected in September 2022 for Jalra and in November 2022 for Icandra . We note that failure to replace these sales either through new agreements or growth could present a short-fall and would materially affect the mid-term outlook.

Consistent with the board organisation of German companies, Apontis has a two-tier board in which executive directors are in the executive board and non-executive directors are in a separate supervisory board. The composition of Apontis’s management board is as follows:

Schwarz Pharma AG was founded in 1947 and was a mid-sized, family-owned European pharma that built a high degree of recognition through its distribution of pharmaceuticals within Germany, but also through operation in the broader European market as well as North America and Asia. In 2006, Schwarz was acquired by UCB for c $5.6bn and during the integration, UCB established the business unit ‘UCB Innere Medizin’ to focus on general medicine in the German market. With UCB’s increasing strategic focus on neurology and immunology, this increasingly developed into an independent business unit. In 2016, UCB established this as a separate group, UCB Innere Medizin GmbH & Co. KG, which was acquired in October 2018 by private equity company Paragon Partners. This was renamed in 2019 to Apontis GmbH & Co. KG.

In total 5,290,000 shares were placed at a price of €19.0/share versus the offered price range of €18.5–24.5, representing gross proceeds of c €101m, and gross primary proceeds to the company of €38m (c €35m net), assuming the upsize and greenshoe options are exercised. With 8.5m shares in issue post IPO, Apontis’s initial market cap was c €162m and assuming all options are taken the free float is 62%, with Paragon holding 31% and management 7% of the remaining outstanding shares, both of which will be subject to a lock-up period of 12 months; shares held by management will not form part of the free float.

Apontis Pharma’s shares were placed at €19.0/share, raising net proceeds to the company of c €35m translating to an enterprise value (EV) of c €145m. Consensus forecasts are not yet available for Apontis Pharma, but based on management’s FY21 guidance, the shares were listed at c 3.0x EV/sales. This is within the range for established peers, but at a c 8% discount to the average for the group, which we have selected based on similarity of operations but we note disparities in geographical exposure and size. Broader recognition of Apontis Pharma’s double-digit growth potential, coupled with the foundations for a strong margin story, could enable additional value crystallisation in our view.

Apontis reported group revenues of €39.2m in 2020 and €40.0m in 2019, a relative plateau as a result of the significant shift to the overall mix. Primarily this related to the winding up of a co-marketing agreement with Novartis for Dafiro, which resulted in a shortfall of €9.5m that was largely offset by growth in single pills sales (2020: €19.0m, +65%) and co-marketing revenues for Jalra and Icandra (2020: €7.0m, +125%). Management anticipates group revenues to grow by c 24% to €48.5m in 2021, primarily from the growth in single pills as discussed above.

Cost of goods increased to €14.2m in 2020 from €11.1m in 2019; primarily this was as a result of this shift in the revenue mix, with Jalra and Icandra offering lower gross margins than Dafiro. Personnel expenses decreased €16.5m in 2020 from €18.6m in 2019 as a result of the short-time work implemented due to the COVID-19 pandemic. Likewise, other operating expenses decreased to €10.1m in 2020 from €13.3m in 2019 again due COVID-19 cost savings. The net result from this was a positive EBITDA in 2020, which management anticipates will grow substantially to €5.5m in 2021. But it is worth noting that through capitalising its R&D expenditure, the EBITDA line does not incorporate the expenses that will be associated with its growing pipeline of single pills, for which management has earmarked c €20m of the net IPO proceeds.

As of 28 February 2021, Apontis had cash of €7.7m, €8.8m in short-term debt and €17.2m in long-term debt which includes a shareholder loan from the Paragon fund of €12.3m (+ c €2m accrued interest) so pre-IPO net debt was €18.3m. Assuming c €35m in net IPO proceeds to the company, we approximate pro forma net cash of c €18m at 11 May 2021.

Apontis is subject to various sensitivities common to speciality pharmaceutical companies, but we believe these primarily relate to commercialisation: