Basilea Pharmaceutica — A strong start to FY23 across the board

Heading Basilea’s portfolio of products is Cresemba (Exhibit 1), an intravenous and oral antifungal therapy for the treatment of life-threatening, invasive mould infections. Cresemba has been approved in 73 countries, is marketed in 67 countries and has orphan drug designation in the US, Europe and Australia. Sustained market appetite is driving continued sales momentum. H123 saw the successful launch of Cresemba in Japan, which we expect will contribute to a material sales push in H223. Additionally, we note that the company is planning to submit paediatric study data to EU regulatory authorities, which could extend Cresemba’s market exclusivity by two years to October 2027 in this region; the submission is planned for H223. A paediatric label extension is also planned for the US, with the potential to extend market exclusivity in the US by six months to September 2027.

As recorded in Basilea’s FY22 results, sales of Cresemba meant the company achieved profitability sooner than expected, and this positive newsflow has continued throughout H123. In the first half of the year, Basilea reported a CHF20m milestone payment from partner Astellas for strong sales in the US (accounted in FY22 as milestone payment was based on FY22 sales), three further milestone payments totalling US$27.5m from Pfizer triggered by sales across Asia-Pacific, China and Europe, along with an additional CHF5m from Asahi Kasei Pharma for the launch of Cresemba in Japan. We note that the company expects about CHF33-34m in milestone payments in FY23, out of which CHF30.6m has already been recognised in H123. It is our opinion that, collectively, these milestone payments covering various regions highlight the commercial success of the antifungal therapy worldwide. Furthermore, Basilea also received CHF36.7m in Cresemba-associated sales royalties, marking a 27% year-on-year increase. In our view, this reflects impressive progress and demonstrates that Cresemba is playing an effective role in addressing an important medical need.

In terms of value, Cresemba has become the market leader in the US (Exhibit 2). We note that it has a market share of 36% (according to IQVIA data, March 2023, as cited by Basilea) compared to competitor best-in-class antifungal therapies posaconazole, voriconazole, AmBisome, anidulafungin, caspofungin and micafungin. This has increased from 31% at end FY22, representing encouraging growth, in our view, as the US remains a key market. In terms of global sales, Cresemba has captured 14% of this wider market (according to IQVIA, March 2023, as cited by Basilea), up from 12% at end FY22 (Exhibit 3). We anticipate that this trend will continue through H223, as the company sees increasing contributions from China and Japan, for which Cresemba gained regulatory approvals in FY22. Management believes that these regions represent c 25% of the global market opportunity for Cresemba.

Zevtera (ceftobiprole) is an intravenous antibiotic medication that has demonstrated rapid bactericidal activity against various Gram-positive bacteria such as Staphylococcus aureus (including methicillin-resistant strains, MRSA) and Gram-negative bacteria. While Zevtera is already marketed in selected countries in Europe, Latin America, the Middle East and North Africa, and Canada, the approval of Zevtera in the US is a key strategic priority for Basilea. This could represent a potentially lucrative commercial opportunity, as the global MRSA treatment market is predicted to be worth c $5.5bn by 2030 and with the US accounting for the majority of global anti-MRSA antibiotics by revenue (c 85%, according to IQVIA, March 2023).

Post-period, in August 2023, Basilea announced that it had submitted an NDA for Zevtera to the US FDA. This came after a minor delay with one of the company’s contract manufacturing organisations requiring additional time to adapt its quality control systems prior to FDA inspection, a prerequisite for NDA review. We note that the FDA previously granted qualified infectious disease product (QIDP) designation to Zevtera, and hence the NDA is eligible for priority review (ie within eight months of submission). Therefore, Basilea expects a decision from the FDA in Q224, on track for a potential launch date for Zevtera in H224. We also note that Basilea plans to commercialise Zevtera in the US with a licensing partner, which management hopes to have signed before the regulatory decision. Furthermore, if approved by the FDA, the QIDP designation enables up to 10 years of market exclusivity in the US, representing a potentially lucrative opportunity, in our view.

For Zevtera, Basilea is seeking FDA approval for three indications: Staphylococcus aureus bacteraemia (SAB), acute bacterial skin and skin structure infections (ABSSSI) and community-acquired bacterial pneumonia (CABP). Hence, the IND submission is supported by positive results from three Phase III clinical trials: the ERADICATE study for SAB, the TARGET study for ABSSSI, and a Phase III study in CABP. In our view, these trial outcomes contribute to a strong data package for Zevtera in these indications, and we believe that the outcome of the regulatory decision could represent a significant catalyst for the company.

Our valuation for Basilea increases to CHF797.8m or CHF66.6 per share, from CHF785.0m or CHF65.7 per share previously, mainly due to the combined effects of reduced net debt to CHF38.1m at end June 2023 (CHF46.7m at end-FY22), foreign exchange changes and rolling forward our estimates. Our long-term assumptions for Basilea are unchanged.

In H123, Basilea reported revenue growth of 47.3% y-o-y to CHF84.9m, mainly driven by higher revenue related to Cresemba and Zevtera sales. Total Cresemba- and Zevtera-related revenue stood at CHF80.5m in H123, 57.2% y-o-y growth, and was primarily associated with CHF36.7m in royalty income from Cresemba (27.0% y-o-y growth) and CHF30.6m from milestone payments (versus CHF2.2m in H222). Other revenue (including R&D reimbursements from BARDA) declined to CHF4.4m in H123 from CHF6.5m in H222, as the Zevtera Phase III study concludes, indicated by the recent NDA submission.

While cost of goods sold was down 33.0% y-o-y in H123, operating expenses excluding COGS decreased by 28.0% y-o-y in H123 to CHF38.0m. The decline in operating expenses was mainly driven by reduced R&D expenses, down by 42.2% y-o-y, reflecting decreased clinical activities related to the Zevtera Phase III programme and discontinuation of the oncology clinical programmes in FY22. SG&A expenses recorded a moderate increase of 5.9% to CHF16.5m in H123 (versus CHF15.6m in H122). All these developments resulted in Basilea reporting an operating profit of CHF36.9m in H123, compared to an operating loss of CHF10.0m in H122. Cash flow from operations for the period was CHF21.9m, contributing to cash and cash equivalents and restricted cash of CHF112.9m at end H123. At 30 June 2023, Basilea’s debt position stood at CHF151.1m including 2027 convertible senior unsecured bonds and a senior secured loan.

Along with the H123 results, Basilea has provided revised guidance for FY23. It now expects revenue to grow by 20–23% to CHF147–150m in FY23 (versus CHF145–148m previously). Operating profit and net profit guidance for FY23 is CHF50–55m (CHF45–50m previously) and CHF41–46m (CHF36–41m previously), respectively. Based on the new guidance, we have made minor adjustments to our estimates. We have slightly increased our revenue estimates for FY23 to CHF158.2m from CHF156.7m previously. Additionally, we have slightly adjusted our R&D estimate to CHF50.4m from CHF51.7m previously, resulting in operating expenses (ex-COGS) of CHF79.6m, in line with management guidance of c CHF80m. These changes translate into an operating profit of CHF51.7m in FY23 and net profit of CHF43.3m in FY23, again in line with company guidance. Similar to FY23, we have slightly revised down our FY24 R&D estimate to CHF47.9m from CHF49.1m previously, which is reflected in improved operating profit and net profit estimates of CHF67.2m and CHF63.0m from CHF66.0m and CHF61.8m previously.