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Research: Healthcare
With its Q118 results, RedHill reported GI product revenues growing by 22% q-o-q to $2.4m in Q118. It also provided updates on its Phase III programmes. The last patient has been assessed against the primary endpoint in the RHB-104 first Phase III trial in Crohn’s disease (CD), and top-line data are expected by August (including) this year. Additionally, more than 70% of patients have been enrolled for the TALICIA confirmatory Phase III trial in H. pylori infection. Management now expects top-line data from this trial in Q418. We value the company at $404.5m (NIS1.5bn) or $19.0/ADS (NIS6.8/share).
Written by
RedHill BioPharma |
Continued GI product growth, CD PhIII data in 3M |
Q118 update |
Pharma & biotech |
24 May 2018 |
Share price performance
Business description
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With its Q118 results, RedHill reported GI product revenues growing by 22% q-o-q to $2.4m in Q118. It also provided updates on its Phase III programmes. The last patient has been assessed against the primary endpoint in the RHB-104 first Phase III trial in Crohn’s disease (CD), and top-line data are expected by August (including) this year. Additionally, more than 70% of patients have been enrolled for the TALICIA confirmatory Phase III trial in H. pylori infection. Management now expects top-line data from this trial in Q418. We value the company at $404.5m (NIS1.5bn) or $19.0/ADS (NIS6.8/share).
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
0.1 |
(29.4) |
(0.23) |
0.0 |
N/A |
N/A |
12/17 |
4.0 |
(45.5) |
(0.26) |
0.0 |
N/A |
N/A |
12/18e |
16.6 |
(39.3) |
(0.18) |
0.0 |
N/A |
N/A |
12/19e |
30.2 |
(35.8) |
(0.17) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Continued GI product growth is encouraging
GI revenues grew 22% to $2.4m in Q118 compared with $2.0m in Q417. This was only the second complete quarter in which all three GI products were marketed by RedHill (Donnatal, EnteraGam and Esomeprazole Strontium DR Capsules 49.3mg). No product breakdown was provided but, according to management, growth came from all three products, where Donnatal contributed the most. The gross profit margin was 62% compared with 54% in Q417, surpassing our expectations. Sales visibility is still limited so we maintain our forecasts. Currently, 100% revenues are from the three GI products, but management is in discussions to in-license additional products (likely to be already approved products).
Cost-reduction programme underway, R&D update
In line with the company’s ongoing cost-reduction programme, operating loss in Q118 was $10.0m compared with $14.4m in Q417. Net cash used in operating activities was $9.5m compared to $14.2m in Q417. This is moving towards management’s target of $8.5m average cash burn per quarter for 2018. The pivotal Phase III study for RHB-204 in non-tuberculous mycobacteria (NTM) infections should start in H218, depending on non-clinical supportive studies and additional input from the FDA. RedHill is in discussions with the FDA regarding the design of the upcoming BEKINDA trials: gastroenteritis (confirmatory Phase III) and IBS-D (likely 2x Phase III trials).
Valuation: Revised to $404.5m or $19.0/ADS
Our valuation has slightly decreased to $404.5m or $19.0/ADS from $410m or $19.2/ADS previously. This is due to a lower net cash position, which was partially offset by rolling the model forward. The cash position at 31 March 2018 was $36.4m, which according to our model will reach to the end of 2018. Key near-term catalysts are top-line results from the Phase III trial with RHB-104 in CD, top-line results from confirmatory Phase III trial with TALICIA for H. pylori and continued sales growth.
Next catalyst: RHB-104 CD Phase III results
According to recent news, the last patient has been assessed against the primary endpoint in the RHB-104 first Phase III trial in Crohn’s disease (CD). The primary efficacy endpoint is remission at week 26. Top-line data are expected by August (including) this year. As RedHill pointed out, a review of the blinded blended efficacy data suggests that the total number of treatment successes is consistent with the predefined expected treatment outcome (effect of at least 15% defined in the protocol). However, the data are currently unblinded. After that, as communicated previously, RedHill will likely need to carry out a second Phase III trial before regulatory submission.
As a reminder, the ongoing Phase III trial was initiated in 331 moderate to severe CD patients. To gather as many insights as possible, the company is also running an open-label extension study to assess the safety and efficacy in those patients who remained with active CD after the treatment in the original trial. RHB-104 is a patented combination of three antibiotics (clarithromycin, rifabutin and clofazimine) in an oral capsule for the treatment of CD. The product is in Phase III development for CD, an area where current therapies have limited efficacy and pronounced side effects, and are often very costly. An increasing amount of data supports the link between MAP infection in CD patients and RedHill believes it could induce and prolong remission time by treating the infection. This idea has an interesting background and has previously been explored in several clinical trials by other parties, such as a large Phase III trial funded by Pharmacia/Pfizer. In our initiation report, we reviewed the MAP hypothesis in CD, existing clinical data and RHB-104’s fit in the current landscape.
Financials: GI products deliver 22% growth q-o-q
RedHill reported revenues of $2.4m in Q118 (all US), which represented 22% growth from Q417 (see Exhibit 1), which is largely in line with our expectations. This was the second full quarter with all three products so this growth rate is now more informative (Donnatal launched Q217, EnteraGam Q317 and Esomeprazole Strontium DR 49.4mg Q417). According to management, all three products have grown in sales. However, it is still too early to judge uptake. Management did not release information about product split, and there was also no guidance released yet. The gross profit margin in Q118 was 62% compared with 54% in Q417 and better than we expected. The increase was mainly related to Donnatal. Although this is improved and management commented that it could be even higher for the GI speciality products, due to the early stage of commercialisation we maintain a 50% gross profit margin in our GI product forecast. We also maintain our previous estimates for 2018 and 2019, which are $16.6m and $30.2m respectively, until we have greater visibility on sales.
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Exhibit 1: RedHill’s sales and gross profit |
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Source: RedHill, Edison Investment Research |
RedHill employs a sales force of approximately 40 people based in North Carolina, which according to management is targeting thousands of US gastroenterologists as well as some primary care physicians and internists. The company believes that building relationships with physicians now will make it easier to introduce new products into the US market in the future, including its proprietary GI products, if approved: BEKINDA for gastroenteritis and IBS-D, RHB-105 for H.pylori infection and RHB-104 for CD.
Management is in ongoing discussions to in-license new GI products, which could be introduced in 2019 before the potential launch of TALICIA and may contribute to top-line growth. We assume they are approved or marketed products, and could provide upside to our sales forecasts. In addition, due to economies of scale RedHill’s margins would likely grow, as growing the GI portfolio would bring in more sales, while keeping the infrastructure close to the size it is currently.
Operating loss in Q118 was reported as $9.9m, which is a decrease from Q417 ($14.4m) but more in line with Q317 ($9.0m), which did not include the Q4 costs of establishing the US sales force. We maintain our estimates for R&D, S&M and G&A for 2018 at $26.6m, $14.0 and $7.0m, respectively. Net cash used in operating activities was $9.5m compared to $14.2m in Q417, and $10.2m in Q317. This Q118 cash burn is closer to management’s target of $8.5m average cash burn per quarter for 2018. Management expects a further decrease of expenses as a result of its previously announced cost reduction plan, which is still being implemented. This measure will help to reduce cash burn along with the increased top-line revenue growth.
Although RedHill does not provide guidance on cash reach, our model suggests cash will last until end-2018, past two key R&D catalysts and more sales data points. RedHill’s cash position at 31 March 2018 was $36.4m (including bank deposits and short term financial assets), compared with $46.2m at 31 December 2017. For 2019 we calculate an additional cash need of $33.8m, which we show in our model as illustrative long-term debt.
Valuation
Our valuation has decreased slightly to $404.5m or $19.0/ADS from $410m or $19.2/ADS previously. This is due to a lower net cash position, which was partially offset by rolling the model forward. All our assumptions remain unchanged until we have further visibility on GI product sales and the upcoming clinical data readouts, which are due by August (including) 2018 (RHB-104 first Phase III trial for CD) and Q418 (TALICIA confirmatory Phase III trial in H. pylori).
Exhibit 2: Sum-of-the parts RedHill valuation
Product |
Launch |
Peak sales ($m) |
NPV ($m) |
NPV/share ($) |
Probability |
rNPV ($m) |
rNPV/share ($) |
TALICIA, - H. pylori infection |
2021* |
86 |
103.9 |
4.9 |
70% |
70.4 |
3.3 |
RHB-104, - Crohn’s disease |
2023 |
145 |
67.7 |
3.2 |
40% |
20.7 |
1.0 |
- NTM infections |
2022 |
50 |
55.6 |
2.6 |
30% |
14.0 |
0.7 |
BEKINDA, - Gastroenteritis |
2022 |
21 |
28.2 |
1.3 |
85% |
23.5 |
1.1 |
- IBS-D |
2023 |
201 |
137.3 |
6.4 |
60% |
100.4 |
4.7 |
YELIVA, - Cholangiocarcinoma |
2024 |
115 |
159.2 |
7.5 |
10% |
10.5 |
0.5 |
- r/r MM |
2025 |
565 |
243.5 |
11.4 |
10% |
60.6 |
2.8 |
- Advanced HCC |
2025 |
649 |
145.8 |
6.8 |
10% |
44.5 |
2.1 |
GI specialty products: Donnatal, EnteraGam & Esomeprazole |
Market |
48 |
24.4 |
1.1 |
100% |
24.4 |
1.1 |
Net cash (end-Q118) |
35.4 |
100% |
35.4 |
1.7 |
|||
Valuation |
1,001 |
45.2 |
404.5 |
19.0 |
|||
Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D: irritable bowel syndrome; r/r MM: refractory/relapse multiple myeloma; Advanced HCC: hepatocellular carcinoma; *TALICIA could potentially reach the market before 2021 given its fast-track status and depending on the timelines for the upcoming confirmatory Phase III trial.
Exhibit 3: Financial summary
$'000s |
2016 |
2017 |
2018e |
2019e |
||
December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
101 |
4,007 |
16,584 |
30,157 |
Cost of Sales |
0 |
(2,126) |
(8,292) |
(15,079) |
||
Gross Profit |
101 |
1,881 |
8,292 |
15,079 |
||
Research and development |
(25,241) |
(32,969) |
(26,584) |
(29,084) |
||
EBITDA |
|
|
(30,499) |
(51,891) |
(39,210) |
(35,670) |
Operating Profit (before amort. and except.) |
(30,543) |
(51,972) |
(39,317) |
(35,801) |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Operating Profit |
(30,543) |
(51,972) |
(39,317) |
(35,801) |
||
Net Interest |
1,173 |
6,428 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(29,370) |
(45,544) |
(39,317) |
(35,801) |
Profit Before Tax (reported) |
|
|
(29,370) |
(45,544) |
(39,317) |
(35,801) |
Tax |
0 |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(29,370) |
(45,544) |
(39,317) |
(35,801) |
||
Profit After Tax (reported) |
(29,370) |
(45,544) |
(39,317) |
(35,801) |
||
Average Number of Shares Outstanding (m) |
128.5 |
175.3 |
213.6 |
213.8 |
||
EPS - normalised (c) |
|
|
(22.85) |
(25.99) |
(18.41) |
(16.74) |
EPS - normalised |
|
|
(0.24) |
(0.26) |
(0.18) |
(0.17) |
EPS - (reported) ($) |
|
|
(0.23) |
(0.26) |
(0.18) |
(0.17) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
100.0 |
46.9 |
50.0 |
50.0 |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
N/A |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
6,397 |
5,667 |
6,211 |
6,995 |
Intangible Assets |
6,095 |
5,285 |
5,820 |
6,605 |
||
Tangible Assets |
165 |
230 |
239 |
238 |
||
Investments |
137 |
152 |
152 |
152 |
||
Current Assets |
|
|
67,815 |
51,676 |
6,497 |
5,471 |
Stocks |
0 |
653 |
653 |
653 |
||
Debtors |
1,661 |
4,818 |
4,818 |
4,818 |
||
Cash |
53,786 |
16,455 |
1,026 |
0 |
||
Other* |
12,368 |
29,750 |
0 |
0 |
||
Current Liabilities |
|
|
(5,356) |
(11,830) |
(4,276) |
(3,849) |
Creditors |
(5,356) |
(11,830) |
(4,276) |
(3,849) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(6,155) |
(448) |
(448) |
(34,200) |
Long term borrowings |
0 |
0 |
0 |
(33,752) |
||
Other long term liabilities |
(6,155) |
(448) |
(448) |
(448) |
||
Net Assets |
|
|
62,701 |
45,065 |
7,983 |
(25,583) |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(28,258) |
(44,769) |
(44,528) |
(33,862) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(85) |
(146) |
(116) |
(131) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
36,017 |
25,653 |
0 |
0 |
||
Other** |
24,596 |
(18,069) |
29,215 |
(785) |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
32,270 |
(37,331) |
(15,429) |
(34,778) |
||
Opening net debt/(cash) |
|
|
(21,516) |
(53,786) |
(16,455) |
(1,026) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(53,786) |
(16,455) |
(1,026) |
33,752 |
Source: Edison Investment Research, RedHill accounts. Note: *Bank deposits and financial assets at fair value. **Includes bank deposits converted to cash and cash equivalents.
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Research: TMT
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