CASI Pharmaceuticals — Aiming to be China’s hematology company

CASI is a pharmaceutical company focused on acquiring assets for commercialization in China. It has taken multiple approaches including acquiring the rights to drugs already approved outside of China (such as Evomela, which was approved in China in August 2019) as well as the licensing and acquisition of development stage candidates (such as CID-103, its anti-CD38 antibody, and CNCT19, its anti-CD19 CAR-T therapy). The company has a particular focus on building a portfolio of drugs for hematological disorders, but also has a portfolio of generics it intends to manufacture in China.

We have lowered our valuation to $333.6m or $3.37 per basic share, from $720m or $7.47 per basic share. This downward revision is driven by two primary factors. First, we have included a risk adjustment (20% reduction) to all of the company’s programs to encompass the non-specific risks associated with COVID-19. This is meant to encompass disruptions to clinical trial timelines, labor disruptions and other factors. Additionally, we have reduced the value of the ANDA portfolio to $151m from $495m. We believe that this portfolio has been significantly deprioritized compared to the hematology assets, and there has been a lack of progress on breaking ground for the Wuxi production facility.

The company reported Evomela sales of $4.1m for 2019 since its launch in August. However, we forecast lower sales in 2020 on an annualized basis ($7.8m) due to the disruption caused by COVID-19. The company ended the year with $54.2m in cash and marketable securities, the majority of which we expect to be deployed on the buildout of the Wuxi facility. The company has committed to deploying $50m in cash before December 2021 on the project, of which approximately $7m has been spent. We have increased our financing requirement for the company to $120m ($50m in 2020, $70m in 2022, recorded as illustrative debt) from $50m to cover operational shortfalls we expect before profitability in 2026.

Although CASI faces many of the same risks as other pharmaceutical companies, it has taken strategic measures to limit these risks. Many of the products it has acquired the rights to are already approved medications, some within China and some in other geographies. This dramatically simplifies the approval process for these molecules in China. However, the Chinese regulatory system has historically been associated with delays, so although the company has to date navigated the process adeptly, there can be no guarantees for future applications. Additionally, for its early stage assets, the company has specifically chosen programs with limited clinical risk. For instance, there are already a number of approved CD19 CAR-T therapies similar to CNCT19, so there is little risk associated with the target choice. However, this does not completely reduce the clinical risk because it still remains to be seen if CNCT19 is a well-designed and active CAR-T therapy. The same analysis applies to CID-108, which has the same target as the approved Darzalex. However, in addition to these normal business risks, CASI, along with many other companies across the world, faces certain special risks due to the ongoing COVID-19 pandemic, which we predict may have negative near-term impacts on sales for Evomela as well as potentially delay the company’s clinical studies and capital development plans.

CASI was formed in its current manifestation in 2014, when it changed its name from EntreMed and shifted its focus towards its current China-focused strategy. The company’s products are a mixture of early stage assets with no prior approvals and products that have been approved outside of China. The overarching strategy of the company is to acquire assets that it believes address a high unmet need in China and are likely to gain approval. The assets that have been previously approved overseas allow a quicker pathway to the market through new pathways that have been established by the Chinese National Medical Products Administration (NMPA). The company then expects to further build out these markets with its early stage assets. And its earlier stage assets have specifically been chosen to limit clinical risk by using well vetted targets.

The company is prioritizing its portfolio of products for hematologic cancers. The company’s hematology portfolio was founded around three assets it licensed from Spectrum (which were subsequently sold to Acrotech Biopharma) including Evomela (melphalan), which was launched in China in August 2019 as the company’s first commercial product. The company also licensed Zevalin (ibritumomab tiuxetan) and Marqibo (vincristine sulphate liposome) from Spectrum, and has built out the hematology portfolio with the addition of the early stage assets CID-103 (an anti-CD38 mAb) and CNCT19 (an anti-CD19 CAR-T), both of which it acquired in 2019. Finally, the company has announced that it has acquired the Chinese rights to a novel formulation of thiotepa, a treatment for multiple myeloma (conditioning agent) similar to Evomela, but few details of the agreement or the development plan have been announced.

The company also has a package of ANDAs (25 approved and four pending, although seven subsequently delisted) that it acquired from Sandoz in 2018. The company intends to build out a GMP production facility in Wuxi (to break ground before August 2020, unless delayed by the parties involved), originally to support these ANDAs but now also as part of a broader goal to become more vertically integrated across its portfolio of products. Finally, in November 2019, the company announced that it has acquired the Chinese rights to a long-acting injectable (LAI) formulation of Octreotide (Octreotide LAI), for which it will need to perform confirmatory registrational trials, planned to start in 2020.

China is the largest pharmaceutical market in the world by volume with a population of 1.4 billion, but attempts to penetrate its pharmaceutical market from western companies have historically been limited. In 2015 the total US drug exports to China were only $2bn.1 However, the situation is rapidly changing with the adoption of new policies across all healthcare market segments to promote improved care, greater innovation and international collaboration. These include initiatives to improve the quality of pharmaceutical products and reduce regulatory bottlenecks.

China’s reimbursement system is almost entirely public, with 97% of individuals covered. Chinese citizens are covered under one of three schemes: Urban Employee Basic Medical Insurance (UEBMI), Urban Resident Basic Medical Insurance (URBMI), or New Rural Cooperative Medical Scheme (NRCMS). To complicate matters further, each of these schemes varies based on local government, with wide variations in benefits. UEBMI is by far the best-funded program and the predominant payer in terms of volume, despite only covering 19% of the population. Reimbursement is 75% for inpatient procedures and drugs, and outpatient costs are typically handled via a medical savings account (MSA), which is mandatory for payees and is financed primarily by payroll taxes.

Despite the high number of insured individuals, there are still significant hurdles to receiving care in China. Generally, patients pay for medical procedures upfront then apply for reimbursement, which puts patients with low amounts of disposable income at a significant disadvantage. Additionally, although the NRCMS has had significant success in extending coverage to vulnerable people in China’s countryside, this population continues to have issues with access to quality care.

Historically, deficiencies in the public health insurance infrastructure have been met through out-of-pocket spending. The total out-of-pocket contribution for healthcare costs was 33% in 2011 and the government previously stated the goal of reducing this to 30% by 2018.2 These expenses have been implicated as contributing to the exceptionally high rate of household saving in China at 38% in 2014, the highest in the world.4 This savings rate has consistently increased since the early 2000s with the ageing population of China. In a given year, approximately 13% of Chinese households experience a catastrophic medical expense, defined as spending of more than 40% of their disposable income,5 so the need to address significant out-of-pocket medical costs is a common occurrence.

There are several national regulatory schemes in China that determine drug pricing and reimbursement, although they only cover a portion of the drugs that are commercially available in China. The Essential Drug List (EDL) names widely used, low-cost generics that are intended as drugs required for basic care. The National Reimbursement Drug List (NRDL) is a separately administered list of drugs, divided into two parts: Class A for essential generics, which heavily overlaps with the EDL, and Class B, which includes more expensive and non-generic drugs. In theory, drugs on the EDL and NRDL Class A are fully reimbursed, although in practice this is limited by the resources of the individual insurance schemes and local jurisdiction. The NRDL Class B list is reimbursed on a provincial level with copays of between 10% and 90%. The prices of the drugs included on all these lists also have a high degree of variability compared to their western counterparts, ranging from 30% or less of the US list price for innovative cancer drugs to par for low-cost generics and subsidized programs. A limitation of the NRDL historically has been the frequency at which it was updated: the list received its first revision in eight years in early 2017. The government is also developing the so-called major disease schemes system, which provides reimbursement at a minimum of 50% for patients with certain high-cost conditions such as cancer or autoimmune disorders. These programs are still in the pilot stages.

One of the biggest focuses of regulatory reform in the Chinese healthcare system has been improving the availability of innovative medicines. A major limiting factor in the approval of new drugs in China has been the regulatory backlog. Historically, a new drug application was filed each time a manufacturer launched a competing generic and there was no apparatus to effectively identify which applications should receive priority review. As of 2014 there were approximately 19,000 open drug applications, and fewer than 100 employees involved in their review at the Chinese FDA (the agency that historically precedes the NMPA). In efforts to reduce the backlog, the agency increased the number of reviewers to 600 by the end of 2017 and reduced the number of outstanding applications to approximately 4,000.6

The agency has also instituted a series of pathways to market to expedite the approval of innovative drugs. In particular, these new policies open up the process to drugs that have been approved by foreign regulatory agencies. In June 2017, the CFDA joined the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use, the organization tasked with standardizing drug approval standards across regulatory agencies. To facilitate the approval of foreign medicines and align its process with foreign agencies, the CFDA created a series of new drug classifications, which take into consideration the approval status of a drug overseas and reduce the clinical requirements for drugs that have been approved elsewhere (Exhibit 4). Further, in October 2018, the State Council announced a draft proposal that would further reduce the clinical burden for imported drugs by allowing the CFDA to accept overseas clinical trial data as part of Chinese application packages. The proposal included the requirement that application include clinical data on ‘the existence of ethnic differences,’ presumably to ensure similar activity in Chinese populations. This requirement is in accordance with the historical motivation for requiring additional Chinese clinical trials. We should note that this requirement was not a barrier for the approval of Evomela in 2018.

The agency has set up a series of criteria for priority review to shorten the time to approval for new drugs. Priority review is awarded to:

China is also reforming its approach to intellectual property with regard to pharmaceuticals. It is moving to a patent-linkage system similar to that present in the US, where a generic applicant must reference the originator patent and inform the holder, thus initiating an appeals process. The CFDA also proposed a series of data exclusivity periods for different classes of drug: six years for an innovative small molecule and 12 for a biologic. We expect this data exclusivity to be the primary method by which CASI protects the drugs in the Spectrum portfolio.

In September 2014, CASI was granted the Chinese rights (including Taiwan, Hong Kong and Macau) to three drugs, Zevalin, Marqibo and Evomela, from Spectrum Pharmaceuticals in exchange for approximately 17% of CASI stock and a $1.5m promissory note. The agreement does not include any milestones or royalties to Spectrum, but CASI is obligated to pay the China portion of royalties and milestones owed to Spectrum’s upstream licensors. Spectrum subsequently sold these products to Acrotech Biopharma, which now holds the supply agreement. In general, these products are modified versions of other approved medications: novel formulations in the case of Evomela and Marqibo, and a radio-labelled derivative in the case of Zevalin. The patent terms for these products are limited (estimated at 2029, 2020 and expired for the three products, respectively), but additional protection may be provided in China via data exclusivity. In accordance with the most recent guidance, Evomela and Marqibo should be eligible for data protection of six years as innovative drugs, whereas Zevalin should be eligible for 12 years as a biologic.

CASI’s first commercial product is Evomela, a proprietary formulation of melphalan, a nitrogen mustard chemotherapy agent. Melphalan has a low solubility in water and the generic drug is commonly prepared with propylene glycol as an excipient to improve solubility, although this is associated with certain toxicities such as lactic acidosis, renal dysfunction and hemolysis. Evomela instead uses the proprietary cyclodextrin Captisol (developed by Ligand Pharmaceuticals) as a solubilization agent to avoid these effects and provides the additional benefit of increased stability after preparation. A 20% royalty on sales is owed to Ligand for the product.

Evomela is approved in the US for use as a conditioning agent before undergoing hematopoietic stem cell transplantation in patients with multiple myeloma. The drug is essentially used to kill the body’s malignant bone marrow before it is replaced in the transplant. In the 61-person, open-label, single-arm pivotal trial, the drug combined with stem cell transplant improved response rates (partial response or better) from 79% to 95% following transplant. The safety profile was consistent with high-dose melphalan, without any toxicities typically associated with propylene glycol. The drug is also approved for the minor indication of patients with multiple myeloma who cannot take oral medications. The drug was launched in 2016 and Spectrum reported sales of $35.2m in 2017. We estimate pricing of around $14,000 for a conditioning regimen in the US.

As with other hematologic malignancies, multiple myeloma is significantly rarer in China than in the west. The age-adjusted incidence rate is 0.8 per 100,000 person years,8 compared to 3.3 in the US.9 Prior to its approval, there were no other forms of melphalan available in China, and the drug was granted a priority review process to speed its entry to the market. The drug was approved in December 2018 and launched August 2019, and had $4.1m in sales through the end of the year.

Zevalin is an antibody targeting CD20 with an yttrium-90 radio-label. CD20 is the same protein on B-cells that is target by the blockbuster Rituxan (rituximab). Zevalin is used in combination therapy with Rituxan for the treatment of follicular non-Hodgkin lymphoma (NHL) in the second and higher lines and for consolidation in the first line. The therapy is designed to improve standard anti-CD20 therapy by providing a dose of radiation to accumulations of B-cells in the lymph nodes. The drug was shown to improve progression-free survival compared to Rituxan alone, albeit at the risk of inducing radiation-associated malignancies such as myelodysplastic syndrome. In the pivotal study (open-label, randomized), the Zevalin arm had a complete response rate of 38% vs 18% for Rituxan alone. The drug has been on the market since 2002 and Spectrum reported sales of $11.8m of it in 2017. We estimate that Zevalin costs approximately $66,000 per treatment.

Based on the underlying rate of 6.4 per 100,000 cases of non-Hodgkin’s lymphoma in China,10 we estimate a rate of follicular lymphoma of approximately 1.3.10 The CTA for the drug was approved in February 2019, and the company is planning to initiate pivotal studies in China in early 2021.

Marqibo is a liposomal formulation of vincristine, a chemotherapy used in the treatment of hematologic and solid tumors. The goal of the development of the liposomal formulation was to improve the pharmacokinetic profile of the drug by increasing circulation time and reducing off-target tissue exposure. The drug is approved in the US for Philadelphia chromosome negative (Ph-) acute lymphoblastic leukemia (ALL) in the third line. The drug was approved with an open-label, single-arm registration trial of 65 relapsed and refractory patients. Three patients had a complete response (CR, 4.6%) and an additional seven patients had a complete response with incomplete blood cell recovery (CRi, 10.8%). Marqibo was launched in 2013 and generated $6.6m in sales (US only) in 2017, with an estimated list price of $112,000 per course.

The estimated incidence of all forms of leukemia in China is approximately 5.5 per 100,000 person years.11 Based on statistics from western countries, we estimate the rate of adult ALL in China at 1.0 per 100,000, 80% of which are expected to be Ph-.12 The CTA for the product was approved in March 2019, but the company has indicated that it is evaluating its options for the drug.

CASI announced on 17 June 2019 that it had signed an agreement with Chinese company Juventas Cell Therapy to license the worldwide rights to the latter’s anti-CD19 CAR-T therapy, CNCT19. The therapy was developed at the Institute of Hematology and Blood Diseases Hospital in Tianjin, one of the premier hematological cancer centers in the country.

A joint venture was established (80% owned by CASI) that will invest ¥80m (US$11.6m) in Juventas as well as provide for undisclosed future development milestones and royalties. The new CEO of CASI, Weiwu He (appointed in April 2019), is also the chairman and a founder of Juventas (although he recused himself from the deal process).

The announcement stated that Juventas would be responsible for the future development of the treatment (although CASI would be on a steering committee). Juventas submitted two IND applications with the NMPA for the treatment of non-Hodgkin lymphoma and acute lymphoblastic leukemia, which have been approved. Juventas previously announced in December 2018 that it received ¥163m in a series A to support CAR-T development.

We have made several assumptions regarding the program. First, we expect initial indications for these programs to be diffuse large B-cell lymphoma and adult ALL, respectively, as these are the target indications that already have approved CD19 CAR-T therapies. Additionally, although CASI has stated that it intends to market the therapy worldwide, we expect the initial market to be China. Autologous cell therapies require a substantial manufacturing footprint to process patients’ cells and establishing this manufacturing and the associated supply chains are a greater barrier to market entry than traditional intellectual property protections. Moreover, it is currently illegal for cell therapies (or other products containing genetic material) manufactured in China to leave the country. Juventas has a 1,400 square foot lab in Tianjin and has announced that it is building a 7,000 square foot production facility in Tianjin and plans to build a facility in Wuxi. We therefore expect the company to establish initial operations in China, but may amend this assumption in the future.

CD19 is the most prominent target for CAR-T therapy in the oncology industry. The protein is a marker for immature B-cells (those that are not terminally differentiated into plasma cells), and is present on the abnormal cells of B-cell cancers. There has been significant interest in developing CD19 CAR-T therapies both in China and worldwide. The two CAR-T therapies currently approved in the US Kymriah (tisagenlecleucel, Novartis) and Yescarta (Axicabtagene ciloleucel, Kite/Gilead), as well as prominent development-stage candidates JCAR017 and JCAR014 from Juno/Celgene/Bristol Meyers all also target CD19. All of these programs have footprints in China (albeit structured differently) with the goal of entering this market.

We expect these companies to seek approval in China, where applicable, through the priority review pathway for foreign approved drugs, which allows for speedy approval using foreign clinical trial data for drugs already approved overseas. A potential limitation of this strategy is that these companies must replicate an identical product in China. Because of restrictions on the export of human tissue in China, these companies cannot use overseas manufacturing to support Chinese sales, and therefore must reconstitute their manufacturing and controls domestically, which may be expensive. Moreover, trade disputes may affect the ability of these companies to import components of their CAR-T products, such as viruses.

We expect that a fully domestic CD19 CAR-T like that being developed by CASI will be able to better realize efficiencies in China and provide a lower-cost product, which may provide a competitive edge with patients and payers. There are a large number of such domestic CD19 CART development programs in China, with ongoing clinical studies. According to clinicaltrials.gov, there are current 49 ongoing industry sponsored CD19 CAR-T clinical studies in China, although the status of many of these studies is largely unconfirmed.

We expect the first domestic CD19 CAR-T that is included on state insurance formularies to command significant market share. In the case of CASI, we have previously been impressed at the company’s ability to quickly navigate the new regulatory framework in China in order to get Evomela approved quickly, but there can be no concrete assurances that it will be able to bring CNCT19 to market first.

The NMPA has approved CTAs to start clinical studies for both B-cell non-Hodgkin lymphoma (B-NHL), which initiated Phase I studies and enrolled its first patients in Q120, and B-cell adult lymphocytic leukemia (B-ALL), which is expected to initiate in H120.

Diffuse large B-cell lymphoma (DLBCL) is the primary B-NHL indication currently being treated with CAR-T. DLBCL is the most common variety of non-Hodgkin lymphoma, making up approximately 30% of all new cases of the disease. We expect this to be the primary market for CNCT19, like other CD19 CAR-Ts. Like other B-cell lymphomas, it is characterized by the proliferation of abnormal B-cells that accumulate in the lymph nodes and destroy their underlying structure. The genetic causes of the disease are diverse and truly it represents an underlying cluster of diseases based on the precise defect and histology. Because of this, the disease can be complex to treat, with widely varying prognoses depending on subtype. For instance, the five-year survival is only 10% when the disease affects bone marrow, compared to over 60% in the disease as a whole.13 DLBCL is one of the most common hematologic cancers in the western world, with approximately seven cases per 100,000 in the US. By comparison, the rate in China is much lower: the underlying rate of lymphoma in China is 6.4 people per 100,000 (including all NHL subtypes, Hodgkin’s lymphoma, and others),14 so we estimate a rate of DLBCL of approximately 1.3 per 100,000.

Acute lymphocytic leukemia (ALL) is similar to DLBCL in that it is caused by the over proliferation of lymphocytes, although unlike DLBCL, these dysfunctional cells accumulate primarily in the bone marrow. In the majority of ALL cases, B-cells or B-cell progenitors over proliferate (B-ALL, approximately 75% of cases), although T-cells can be affected in a minority,15 and therapies such as CD19 CAR-Ts would not be appropriate for these patients. Unlike the vast majority of cancers, ALL afflicts children as well as adults and 30% of ALL cases occur before the age of 15. It is the most common childhood cancer and leading cause of cancer deaths among children despite the fact that the five-year survival rate among children is high at 90%. By comparison the survival for adult patients is significantly lower at 40% for those aged 25 to 64 and 15% for those 65 and older. The disease is most common in Caucasian populations, but tends to be more aggressive in non-Caucasians. We estimate the incidence of ALL in China at 1.4 per 100,00016 compared to 1.7 per 100,000 in the US.17

CASI announced that it had in-licensed the rights to anti-CD38 antibody CID-103 (formerly TSK011010) from Black Belt Therapeutics. Black Belt was recently spun off from Tusk Therapeutics when the latter merged with Roche in September 2018 (for €70m upfront and €585m in milestones) to acquire an unrelated asset (an anti-CD25 antibody). Tusk/Black Belt previously completed preclinical studies of the drug and CASI plans to submit CTA and Investigational Medicinal Product Dossier (IMPD) applications in H120 and for clinical trials to start in late 2020 or H121 (following delays due to COVID-19). CASI will assume all development responsibility for the asset.

CD38 is a cell-surface protein expressed on a range of white blood cells, including the malignant B-cells present in multiple myeloma. The strategy of targeting CD38 has already been vetted clinically. The drug Darzalex (daratumumab, Janssen) is an anti-CD38 antibody that was approved in 2015 in the US for the treatment of multiple myeloma and had sales of $2.0bn in 2018. Inclusion of the drug in a regimen of lenalidomide and dexamethasone significantly improved progression-free survival (HR=0.37, p<0.0001, median not reached at 21 months). However, despite its success Darzalex has been limited in part by its tolerability profile. The drug is associated with high rates of infusion reactions (48% as a monotherapy), fatigue (39%), back pain (23%), nausea (27%), vomiting (17%) and infections (20% upper respiratory, 15% nasopharyngitis, 11% pneumonia). There is ample room to improve on these results, particularly in the area of safety and tolerability.

There are a small number of other CD38 antibodies in clinical development (Exhibit 5), the most advanced of which is isatuximab (Sanofi), which reported positive results for its pivotal Phase III study in February 2019 (although the company has not reported detailed data).

In addition to the obvious indication of multiple myeloma, CID-103 has been investigated in preclinical studies for activity in solid tumors. CD38 is expressed in certain solid tumor cells and is believed to play a role in avoiding an anti-tumor immune response. Janssen also explored this possibility in the clinic combining the PD-L1 inhibitor Tecentriq (atezolizumab) with Darzalex for the treatment of non-small cell lung cancer (NSCLC). However, the study was terminated in May 2018 after finding higher mortality in the treatment arm, but there are other combination studies in solid tumors that remain ongoing.

The acquisition of this drug is different from the company’s previous strategy to acquire or in-license mature drugs and seek approval in China via new regulatory regimes in that country. However, it is consistent with the company’s previous acquisition of hematology drugs from Spectrum. The development and approval of CID-103 will follow a more traditional route and will require Phase I through III trials. While we expect the company to seek approval for the drug in China, the major markets will be the US and Europe. However, the company will be able to add the drug to its portfolio of other hematologic malignancy assets for marketing in China.

CASI also recently announced that it has licensed the Chinese rights to a novel formulation of thiotepa. Very little has been said about the deal, including no details on the partner or any payments, but we do know that it will be manufactured by Riemser Pharma. The company has stated that it expects the product to enter registrational trials in early 2021. The drug is an alkylating chemotherapeutic agent, similar to melphalan, and also used as part of a conditioning regimen for hematopoietic stem cell transplant. However, it is generally considered a more aggressive conditioning regimen. It is also used as an intravesical chemotherapy for bladder cancer. Also similar to Evomela, there currently is no commercially available form of thiotepa in China. We expect the company to add it to its hematology portfolio to provide a more complete catalogue of conditioning treatments.

CASI announced on 7 November 2019 that it entered into an agreement with Pharmathen to develop and distribute octreotide LAI in China. The agreement included a €1m upfront payment and €2m in future milestone payments. CASI will be responsible for securing approval for the drug in China and intends to file for a CTA and initial clinical studies in 2020.

Octreotide is a synthetic form of the hormone somatostatin. Somatostatin’s role in the body is to inhibit the effect of growth hormone and it is used medically to counteract the effect of high levels of growth hormone in patients with acromegaly (also known as gigantism). Acromegaly is generally caused by the presence of a growth hormone-secreting tumor present on the pituitary. Patients must maintain a constant level of somatostatin for it to be effective, which has led to the development of LAI forms of the drug. The first long-acting formulation developed was Sandostatin LAR (long acting release) from Novartis, which had sales of $1.6bn in 2018. The expiration of the patent for Sandostatin LAR in 2017 has opened up the field to competitors, such as the formulation available from Pharmathen, which is approved in Germany and the Czech Republic and is under review in the UK and France.

In addition to acromegaly, octreotide has been approved in the US to treat carcinoid syndrome. Carcinoid syndrome is a set of symptoms such as diarrhea and flushing secondary to carcinoid tumors caused by the overproduction of a range of hormones. Carcinoids are only diagnosed at 3.8 per 100,000, and carcinoid syndrome only occurs in approximately 10% of these cases.18 We do not expect carcinoids to be the primary value driver for the product.

We expect acromegaly to be the primary market for the drug. The prevalence of acromegaly in China has not been studied to our knowledge, but it has an estimated prevalence of between 2.8 and 13.7 per 100,000 depending on geography.19 In South Korea, the prevalence was estimated at 3.9 per 100,000.20

Sandostatin is already approved in China in both LAR and standard formulations and was recently the target of recent pricing negotiations between the Chinese government and drug makers. In October 2018, it was announced that the government had negotiated price reductions for Sandostatin and 16 other drugs for inclusion on in the National Reimbursement Drug List. The agreed price for the product was ¥5,800 for a 20mg vial, which corresponds to ¥75,400 per year for an acromegaly patient.

CASI has a portfolio of generic drugs it intends to commercialize in China. The majority of drugs in this portfolio were acquired in January 2018 when the company announced it had acquired 25 approved and four pending ANDAs from Sandoz for $18m CASI added the ANDAs for tenofovir disoproxil fumarate (TDF) in October 2018 from Laurus Labs ($700,000 upfront and $2.3m in milestones), and subsequently delisted seven ANDA for non-core products. Most of these drugs are already included on the NRDL in one form or another, and CASI intends to select certain products from the list that it believes have significant market potential in the US and China.

The company is planning to establish a GMP manufacturing facility for these products in China. In late 2018 it established a joint venture (CASI Wuxi) with Wuxi Jintou Huicun Investment Enterprise, a Wuxi based development corporation to build a production facility in the Wuxi Huishan Economic Development Zone in Jiangsu Province. CASI owns 80% of CASI Wuxi following a $21m initial investment, the transfer of select ANDAs valued at $30m and a commitment to invest an additional $29m by the three-year anniversary of the agreement (December 2021). To our knowledge, CASI Wuxi has not broken ground on the new facility yet, but has committed to making ‘specified fixed asset investments on the land with initial construction to begin before 26 August 2020,’ unless it is extended by the parties involved.

If the country were to manufacture ANDA products locally in China, it would receive priority review for its ANDA applications to the CFDA. CASI will then perform the bioequivalence studies needed for approval, allowing these products to rapidly enter the market. This is an avenue that was previously unavailable to non-Chinese generics companies such as Sandoz and has the potential to dramatically increase the market for these products and the value of this portfolio. Moreover, in the future the company may file ANDA amendments (CBE-30 or PAS) to allow manufacturing in China for the US market.

Despite the recent regulatory shift toward more branded and innovative pharmaceuticals, the drug market in China has been, and still is, dominated by generics. The market is highly competitive and fragmented with as many as 5,000 generics companies, with the top 100 companies only comprising a third of total sales.1 The situation is further complicated by a highly complex, multi-level distribution network of over 13,500 companies.

The Chinese government recently initiated a pilot drug purchasing program aimed at reducing the price of generic drugs. The program consists of a pact between major cities (including Beijing, Shanghai and Guangzhou) to purchase certain generic drugs in bulk, forcing companies to compete for contracts, but also making the winning companies the sole distributors to hospitals in these regions. This resulted in an average price reduction of 52%. Importantly for CASI, the program cut the price of entecavir by 90% when the contract was won by Chia-tai Tianqing Pharma. Historically entecavir has received high reimbursement rates through programs to address the hepatitis B virus (HBV) epidemic in China. Additionally, the company’s other HBV treatment TDF was also included in the scheme.

The global COVID-19 pandemic will undoubtedly affect the operations of CASI. It is difficult to fully estimate the impact of the disease at this time, but we believe it is safe to assume that even if the impact on human health is contained, there will be widespread and long-lasting economic consequences. These risks are not specific to China, but as the country already has a major caseload, we do not expect it to be able to avoid future disruption.

Firstly, we expect COVID-19 to negatively impact sales of Evomela. We expect a large fraction of healthcare infrastructure will be redirected toward treating the virus and that many stem cell transplant procedures will be delayed until after the threat from the virus has diminished. We model the drug taking a 20% haircut from the run rate established in the first five months of sales (from August to December 2019), which corresponds to sales of $7.8m in 2020.

Additionally, COVID-19 may negatively impact the ability of the company to enroll clinical studies. It has studies planned in 2020 for CID-103, CNCT19 and Octreotide LAI, and trials for thiotepa and Zevalin in 2021. The company has some flexibility over these studies and we expect few resources have been allocated to them yet, but prolonged delays could negatively impact the ability of the company to get these products approved in a timely manner and delay the profitability of the company. It is encouraging that the company was able to enroll some patients in the CNCT19 NHL study in Q120, and the company stated that it believes it can meet its timeline for the program at this time. However, it guided to delays in the initiation of the CID-103 study in the UK, and has guided that it will enter Phase I in late 2020 or H121.

Finally, COVID-19 may negatively impact the ability of the company to deliver its capital development plans. It is committed to building two facilities: the Wuxi manufacturing facility (to support the generics portfolio) and the Tianjin cell therapy production facility (for CNCT19, in collaboration with Juventas). Completion of these facilities may be delayed due to labor disruptions and a shift in priorities among local authorities. Again, relatively little cash has been deployed on these projects, so the company may have some latitude although it has a deadline of August 2020 to break ground on the Wuxi facility.

We have lowered our valuation to $333.6m or $3.37 per basic share from $720m or $7.47 per basic share. This is due to multiple adjustments on our part. First, we have added a 20% discount across the board discount based on the risks associated with the COVID-19 pandemic. The goal is for this to encompass all the non-specific risks to development and commercialization for these projects from the pandemic. We expect to update this value with further information on the pandemic, but our current outlook is for there to be widespread disruption throughout 2020, especially in China, which may impact the ability of the company to perform normal business. We have also directly lowered our revenue estimates for Evomela for 2020 to $7.8m from $13.2m as a result of the impact of COVID-19. We believe the risk of performing a stem cell transplant with active COVID-19 will temper use during the outbreak.

We have also significantly lowered our valuation for the ANDA generics to $151m from $495m. This is to align the value of the project with the company’s current priorities. We believe this portfolio has been significantly deprioritized in favor of the hematology portfolio. The company originally planned on bringing these products to market quickly, using contract manufacturing if needed, but this shifted to internal manufacturing at the Wuxi facility, which has not broken ground yet. Moreover, the company has indicated that this facility will not exclusively be used for generics production. The lower valuation is driven by delaying initial commercialization of these products to 2023 (from 2020), the removal of the seven delisted drugs and the aforementioned COVID-19 risk. We have also increased our discount rate to 12.5% from 10%. We use typically use 10% for approved products but given the delays and uncertainties over the company getting these drugs to market, we have reflected this in our discount.

We have increased the probability of success for CNCT19 to 10% from 5% as the product has begun clinical trials. This has increased its value to $30.7m from $23.2m.

We have delayed the clinical program for CID-103 to align with company guidance that it will enter Phase I in late 2020 or H121. We previously forecasted the majority of patient enrolment in 2020.

We have also added Thiotepa to the hematology portfolio. We use the same market estimates as for Evomela (given it is used for the same indication of stem cell transplant for multiple myeloma), but expect lower penetration (10%) given it is generally reserved for more severe cases. We do not know the terms of the license (or the other participant yet) but include a 15% royalty payable in lieu of more detail. Our initial valuation is $4.1m.

Finally, we have removed the legacy asset ENMD-2076 from our model, as we do not expect it to be developed further.

The company reported revenue of $4.1m from Evomela in 2019. The majority of these sales were in Q319 ($2.7m) following the August launch, presumably because of warehoused patients. As described above, we forecast $7.8m in sales for 2020, which is lower on a full-year basis, due to the impact of COVID-19.

Spending for 2019 was dominated by SG&A expenses of $30.4m, which we expect to remain relatively stable in 2020, but increase thereafter as Evomela sales ramp up and costs associated with the generics business increase ($40.8m in 2021).

The company ended the year with $54.2m in cash. A large portion of this is earmarked for the buildout of the facility in Wuxi. The company has earmarked $50m in cash for the project: $21m payment to CASI Wuxi (although this has not left the CASI balance sheet as CASI Wuxi is consolidated in CASI financials) and an additional $29m to be deployed before December 2021. Of the $21m, approximately $7m has been spent on land use rights. We forecast $15m in capex in 2020 and $29m in 2021. We have increased our expected financing hurdle for the company to $120m ($50m in 2020, $70m in 2022, recorded as illustrative debt) from $50m. This increase is driven primarily by the delay in the expected commercialization timeline for the ANDAs. We forecast profitability in 2026.