CASI Pharmaceuticals — CASI restructures CAR-T deal

CASI Pharmaceuticals (US: CASI)

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Research: Healthcare

CASI Pharmaceuticals — CASI restructures CAR-T deal

CASI announced on 29 September 2020 that it had adjusted its licence and marketing agreement with Juventas, the developer of the CAR-T therapy CNCT19. Under the new agreement, the two companies will co-market the product and have a profit-sharing agreement, as opposed to the previous model in which CASI would have owed milestones and royalties (all undisclosed). The new agreement should make Juventas more viable as a standalone entity, capable of raising independent capital to support its internal development.

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Written by

Healthcare

CASI Pharmaceuticals

CASI restructures CAR-T deal

Business update

Pharma & biotech

1 October 2020

Price

US$1.53

Market cap

US$190m

¥6.94/US$

Net cash ($m) at 30 June 2020 + subsequent transactions

82.4

Shares in issue

123.9m

Free float

63%

Code

CASI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.5)

(38.8)

(54.2)

Rel (local)

(6.9)

(43.6)

(59.5)

52-week high/low

US$3.6

US$1.4

Business description

CASI Pharmaceuticals is building a portfolio of drugs it intends to produce for Chinese and worldwide markets including Evomela launched in China, an anti-CD19 CAR-T therapy CNCT19, and the anti-CD38 drug CID-103, among others. The goal is to seek approval through new pathways that have opened in the quickly changing Chinese regulatory environment.

Next events

CID-103 trial start

Late 2020/H121

CNCT19 Phase I trials complete

End 2020

Analyst

Nathaniel Calloway

+1 646 653 7036

CASI Pharmaceuticals is a research client of Edison Investment Research Limited

CASI announced on 29 September 2020 that it had adjusted its licence and marketing agreement with Juventas, the developer of the CAR-T therapy CNCT19. Under the new agreement, the two companies will co-market the product and have a profit-sharing agreement, as opposed to the previous model in which CASI would have owed milestones and royalties (all undisclosed). The new agreement should make Juventas more viable as a standalone entity, capable of raising independent capital to support its internal development.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/18

0.0

(20.0)

(0.24)

0.00

N/A

N/A

12/19

4.1

(36.5)

(0.39)

0.00

N/A

N/A

12/20e

11.5

(28.0)

(0.25)

0.00

N/A

N/A

12/21e

20.2

(27.0)

(0.21)

0.00

N/A

N/A

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

Milestone replaced with equity investment

Like the old agreement, under the new agreement Juventas will be carrying out all development activity for CNCT19, the anti-CD19 CAR-T therapy under development for non-Hodgkin lymphoma and acute lymphoblastic leukemia. However, Juventas will no longer be entitled to milestone payments from CASI associated with CNCT19, including a planned ¥70m milestone associated with the program entering registrational trials (planned for Q121). CASI instead opted to invest the ¥70m, bringing its ownership of Juventas to 20% (net 16% after the minority stake in the holding subsidiary). The current CEO of CASI, Wei-Wu He, is a founder and the current chairman of Juventas.

Juventas in a better position to raise cash

The restructuring of the deal was at the behest of an undisclosed investor participating in the ongoing Series B financing for Juventas, and we believe it will make Juventas a more robust standalone entity capable of raising capital to support development of CNCT19. CASI has given two loans to the company for a total of ¥70m since June 2020 to support its operations. Although the resulting back end of the deal will result in lower profitability for CASI, the restructuring has significantly reduced its financial obligations for the project.

Valuation: Reduced to $377.1m due to restructuring

We have lowered our valuation to $377.1m or $3.04 per share from $399.4m or $3.22 per share. This is driven by adjustments to our models for the new commercialization agreement for CNCT19. This has reduced the valuation of the product to $22.67m from $38.96m. Additionally, our pro forma net cash has been adjusted for the recent Juventas transactions (estimated $82.4m net cash). We have reduced our expected financing requirement for CASI to $50m (recorded as illustrative debt in 2022) from $70m.

Making Juventas more viable as a standalone entity

CASI entered into the new agreement with Juventas at the behest of a new shareholder participating in the latter’s Series B financing round as a criterion for participation. The goal of this new agreement appears to be to make Juventas a more viable independent entity for future investment. In August 2020, CASI announced that it had extended a bridge loan to Juventas for the amount of ¥40m (with a term of 365 days and 20% interest), which is in addition to the previously announced ¥30m loan to Juventas in June 2020 (on the same terms). Through the restructured agreement, Juventas has assumed a larger proportion of the financial risk in exchange for an increase in its potential share of profits. The changes to the agreement are summarized in Exhibit 1. As a reminder, the current CEO of CASI, Wei-Wu He, is a founder and the current chairman of Juventas.

Exhibit 1: Licensing agreement for CNCT19

Obligation

Old agreement

New agreement

Juventas financing

New investment and development milestones

All new investment

Development costs

Juventas

Juventas

Manufacturing

Juventas, designated sole supplier

Juventas, can charge mark-up

Marketing costs

CASI

Shared, CASI to set up sales team and reimburse some of Juventas’s sales costs

Profit model

Undisclosed royalty payable to Juventas

Profit share, tiered up to 50% payable to CASI, additional single-digit royalty payable to Juventas

Source: CASI

The new agreement shifts much of the financial responsibility of supporting Juventas away from CASI and onto Juventas’s shareholders. Juventas is responsible for the development costs associated with CNCT19, as this has not changed, but under the new agreement CASI will no longer be obligated to pay development milestones associated with the program. Instead, Juventas’s development program will be supported internally by its fund-raising activities. These milestones were previously undisclosed, but the company noted in the announcement of the deal that it would have owed a ¥70m milestone payment associated with the initiation of registration trials, planned for Q121. Instead, CASI’s subsidiary, CASI Wuxi, has opted to invest this ¥70m in Juventas, which has increased CASI Wuxi’s stake in the company to 20% (determined post Series B). CASI Wuxi is 80% held by CASI. Hence, the parent company, CASI, now has a net 16% stake in Juventas.

Juventas will remain responsible for manufacturing CNCT19. The announcement also mentioned that Juventas will be able to charge CASI a mark-up on its manufacturing costs.

The new agreement also changes the revenue model from one that was entirely royalty based (previously undisclosed), to a predominantly profit-sharing agreement. Under the new structure, the two companies will co-market the product and CASI will be entitled to a share of profits: a tiered percentage increasing to 50%. The agreement also has provisions to ensure a minimum target net profit payment to Juventas on an annual basis (details undisclosed). In addition, Juventas will receive a small single-digit royalty on net sales.

Finally, the agreement hints at a potential future expansion of this relationship. The new agreement grants CASI similar co-commercialization rights on a new undisclosed product if it makes a future milestone payment. We expect Juventas will be able to expand its pipeline more easily under this new agreement, as it opens up pathways to financing its operations that were previously unavailable.

Valuation

We have lowered our valuation to $377.1m or $3.04 per share from $399.4m or $3.22 per share. This reduction in valuation is wholly associated with the change in terms of the CNCT19 agreement.

We have made a number of changes to our assumptions regarding CNCT19 to align them with the new agreement. We previously included $23m in payments to Juventas, which have been removed, and a 5% royalty on sales, which has been reduced to 1%. We have also reduced our expected marketing costs to 5% of net sales from 10%, to account for the co-marketing part of the agreement (we also include $2m in annual marketing overhead, which remains unchanged). We assume that profit sharing begins at 30% payable to CASI and increases to 50%. Finally, our valuation accounts for the 20% stake in Juventas held by CASI Wuxi and the 80% ownership of CASI Wuxi by the parent. Collectively, these changes have reduced our valuation for CNCT19 to $22.67m from $38.96m.

Our pro forma net cash in our valuation ($82.4m) includes net cash at the end of Q220 ($45.8m) adjusted for the subsequent July offering ($41.3m), $1.25m from the sale of ANDAs (as we previously reported), and the ¥70m investment in Juventas ($10.3m). However, we are not including the cost of the bridge loans to Juventas ($4.2m in Q220, $5.7m in Q320) as we expect them to be paid with the completion of the fund raise. Otherwise our valuation remains unchanged.

Exhibit 2: Valuation of CASI

Portfolio

Asset

Region

Peak sales ($m)

Margins

Clinical risk adjustment

Covid-19 risk

Value ($m)

Hematology

Evomela

China

35.4

49%

100%

90%

66.77

Marqibo

China

9.2

56%

90%

90%

6.90

Zevalin

China

25.5

64%

90%

90%

38.40

Thiotepa

China

8.8

39%

90%

90%

4.07

CID-103

China & US & Europe

766.6

59%

5%

90%

12.66

CNCT19

China

306.2

up to 50% profit share

10%

90%

22.67

Other products

ANDA portfolio

China & US

142.0

47%

100%

90%

153.49

Octreotide LAI

China

15.7

41%

80%

90%

10.81

Total

315.78

Net cash and equivalents (Q220 + subsequent transactions) ($m)

82.37

Non-controlling interest

(21.07)

Total firm value ($m)

377.07

Total shares (m)

123.94

Value per basic share ($)

3.04

Dilutive warrants and options

15.91

Value per diluted share ($)

3.01

Source: CASI reports, Edison Investment Research.

Financials

Although CASI has relinquished a degree of downstream profit potential for CNCT19, the new agreement also reduces the financial obligations of CASI associated with the program. This has reduced our expected financing overhead by approximately $10m.

The company announced in late August 2020 that it was breaking ground on the planned production facility in Wuxi. CASI Wuxi entered into a construction contract for Phase I of the plan at a cost of ¥74.6m ($10.9m from previous estimates of around $15m), which will pay for ‘construction and installation of a combined factory building, warehouse, guard house and public works’. The estimated completion date for the project is October 2023. The company has earmarked $50m in cash for the project: a previous $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. We previously included this $29m being deployed as capex that year but, based on the announced construction plan, we have pushed this back to equal amounts in 2022 and 2023.

Based on the adjustments outlined above, we have reduced our forecasted capital needs for CASI to $50m from $70m (which we include as illustrative debt in 2022).

Exhibit 3: Financial summary

$'000s

2018e

2019e

2020e

2021e

31-December

US GAAP

US GAAP

US GAAP

US GAAP

INCOME STATEMENT

Revenue

 

 

0.0

4,131.0

11,487.0

20,153.5

Cost of Sales

0.0

(3,935.0)

(7,209.4)

(5,021.4)

Gross Profit

0.0

196.0

4,277.6

15,132.1

EBITDA

 

 

(19,402.4)

(37,495.0)

(27,525.3)

(26,311.9)

Normalised operating profit

 

 

(19,767.9)

(38,098.0)

(28,061.3)

(27,095.6)

Amortisation of acquired intangibles

(1,305.4)

(1,550.0)

(3,054.0)

(1,508.0)

Exceptionals

0.0

0.0

(1,087.0)

0.0

Share-based payments

(6,118.1)

(7,310.0)

(7,310.0)

(7,310.0)

Reported operating profit

(27,191.4)

(46,958.0)

(39,512.3)

(35,913.6)

Net Interest

(280.1)

1,062.0

48.6

48.6

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

534.0

0.0

0.0

Profit Before Tax (norm)

 

 

(20,048.1)

(36,502.0)

(28,012.8)

(27,047.0)

Profit Before Tax (reported)

 

 

(27,471.6)

(45,362.0)

(39,463.8)

(35,865.0)

Reported tax

0.0

0.0

0.0

7,173.0

Profit After Tax (norm)

(20,048.1)

(36,502.0)

(28,012.8)

(27,047.0)

Profit After Tax (reported)

(27,471.6)

(45,362.0)

(39,463.8)

(28,692.0)

Minority interests

0.0

(670.0)

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

(20,048.1)

(37,172.0)

(28,012.8)

(27,047.0)

Net income (reported)

(27,471.6)

(46,032.0)

(39,463.8)

(28,692.0)

Basic average number of shares outstanding (m)

85

96

112

130

EPS - basic normalised (c)

 

 

(23.65)

(38.74)

(25.03)

(20.77)

EPS - diluted normalised (c)

 

 

(23.65)

(38.74)

(25.03)

(20.77)

EPS - basic reported (c)

 

 

(32.41)

(47.98)

(35.26)

(22.04)

Dividend (c)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

20,845.4

41,130.0

58,491.8

56,583.9

Intangible Assets

18,784.7

16,895.0

13,222.0

11,714.0

Tangible Assets

1,750.6

985.0

11,755.8

11,355.9

Investments & other

310.0

23,250.0

33,513.9

33,513.9

Current Assets

 

 

92,564.6

61,501.0

58,836.0

40,587.1

Stocks

0.0

4,542.0

2,370.2

1,650.9

Debtors

0.0

1,293.0

1,888.3

3,312.9

Cash & cash equivalents

85,117.0

54,246.0

41,863.5

32,966.3

Other

7,447.6

1,420.0

12,714.0

2,657.0

Current Liabilities

 

 

(3,873.9)

(7,947.0)

(9,247.0)

(10,472.1)

Creditors

(968.0)

(5,113.0)

(6,413.0)

(7,638.1)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings

(1,499.5)

0.0

0.0

0.0

Other

(1,406.4)

(2,834.0)

(2,834.0)

(2,834.0)

Long Term Liabilities

 

 

(73.6)

(1,019.0)

(781.0)

(781.0)

Long term borrowings

0.0

0.0

0.0

0.0

Other long-term liabilities

(73.6)

(1,019.0)

(781.0)

(781.0)

Net Assets

 

 

109,462.5

93,665.0

107,299.8

85,917.8

Minority interests

0.0

20,670.0

20,670.0

20,670.0

Shareholders' equity

 

 

109,462.5

72,995.0

86,629.8

65,247.8

CASH FLOW

Op Cash Flow before WC and tax

(19,402.4)

(37,495.0)

(27,525.3)

(26,311.9)

Working capital

(9,780.4)

4,452.0

(626.5)

519.9

Exceptional & other

598.9

9,800.0

(1,310.0)

7,173.0

Tax

0.0

0.0

0.0

0.0

Net operating cash flow

 

 

(28,583.9)

(23,243.0)

(29,461.8)

(18,619.0)

Capex

(1,131.1)

(7,053.0)

(11,306.8)

(383.8)

Acquisitions/disposals

(20,642.4)

(21,005.0)

(9,644.9)

0.0

Net interest

0.0

0.0

(275.4)

48.6

Equity financing

92,269.8

3,545.0

46,277.7

0.0

Dividends

912.0

0.0

0.0

0.0

Other

0.0

20,000.0

(7,791.0)

10,057.0

Net Cash Flow

42,824.4

(27,756.0)

(12,202.3)

(8,897.3)

Opening net debt/(cash)

 

 

(41,991.7)

(83,617.5)

(54,245.5)

(41,863.3)

FX

(1,197.5)

(1,328.0)

(489.0)

0.0

Other non-cash movements

(1.0)

(288.0)

309.0

0.0

Closing net debt/(cash)

 

 

(83,617.5)

(54,245.5)

(41,863.3)

(32,966.0)

Source: CASI reports, Edison Investment Research.


General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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While COVID-19 has had some impact on Renewi’s markets, the extent is less than anticipated by management earlier in the year. Consequently, we are able to nudge up current year estimates (PBT up by €4m in a low base year) ahead of the H121 results. The latest strategic phase is in its early stages of implementation and management is clearly focused on delivering a significant uplift in profitability under this three-year programme.

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