Basilea Pharmaceutica — Cresemba driving top-line growth

Basilea reported strong growth in total revenues in FY18, driven largely by strong sales performance of antifungal drug, Cresemba. Total revenues were reported at CHF132.6m for FY18 (+31%) versus revised guidance (given at the interim results in August 2018) for total revenues of CHF120–130m (initial 2018 guidance at the FY17 results was CHF105–115m). Total reported revenues include CHF82.0m (+56%) contributions from Cresemba and Zevtera, which represent a mix of royalties on sales, contract revenues and milestones. Given that Zevtera still accounts for a minority of these combined revenues (we assume ≤9%, CHF7.0m), the product sales performance reflects stronger than anticipated Cresemba revenues (we assume ≥91%, CHF75.0m). Global sales of Cresemba reported by international partners in 2018 exceeded $150m. Exhibit 1 highlights the breakdown of revenues as reported.

Basilea reported contract revenue (including revenue recognition from upfront and milestone payments that were recorded as deferred revenues) of CHF79.7m (CHF74.0m in FY17), of which CHF23.9m (CHF37.7m in 2017) relates to deferred revenue recognition for the Toctino upfront payment of £145.6m (CHF224.1m) received in 2012, which will reduce to zero in 2019. We expect contributions from Cresemba revenue growth to more than make up the shortfall here.

Contract revenues include royalties of CHF26.5m (CHF15m in FY17) from licence partners, primarily from sales of Cresemba in the US and Europe. Basilea received CHF15.4m in milestone payments in 2018, including: a CHF10m sales milestone from Astellas on US Cresemba sales, a $3m (CHF2.9m) upfront payment from Pfizer for the licence extension of Cresemba into the China and Asia Pacific regions) and a CHF2.0m regulatory milestone from Grupo Biotoscana for regulatory approval in Peru.

Total revenues also include CHF25.9m of Biomedical Advanced Research and Development Authority (BARDA) reimbursements relating to ongoing US Phase III clinical studies for ceftobiprole. This reimbursement payment partly compensates for the increase in R&D spend on ceftobiprole, with Basilea funding approximately 30% of the anticipated costs for the Phase III programme.

Basilea reported an operating loss in FY18 of CHF24.1m (vs CHF17.1m in 2017), with the increased loss mainly due to the significant uplift in total revenues and higher operating expenses (higher R&D costs offset reductions in SG&A). Net R&D expenses increased to CHF104.9m in 2018 from CHF55.1m in 2017. The higher 2018 R&D figure includes costs associated with the expansion of its oncology portfolio by in-licensing the worldwide (ex-Greater China) rights from ArQule ($10m upfront payment) for derazantinib, an oral tyrosine kinase inhibitor (panFGFR), plus the in-licensing of preclinical kinase inhibitors (undisclosed target). Importantly, we highlight that the reported R&D number does not include the reimbursement payment from BARDA, which contributes to funding the FDA-required, cross-supportive clinical trials for ceftobiprole, as the BARDA payment is booked as other revenue received.

Basilea has provided financial guidance for FY19 (Exhibit 2) for total revenues of CHF128–138m, with royalty and milestone contributions from Cresemba and Zevtera expected at CHF100–110m. Basilea expects operating loss in the region of approximately CHF20–30m in 2019. Guidance does not include the potential impact of any in-licensing deals.

We have tweaked our forecasts for 2019 following guidance issued with the FY18 results. We forecast total revenues of CHF134.4m in 2019 and CHF149.5m in 2020. Our 2019 top-line forecasts include CHF15m in sales milestones and CHF29.4m in royalties from Astellas, for 2019 sales of Cresemba in the US of $156.8m. We forecast royalties from Pfizer of $13.0m, based on sales in Europe of $92.2m. In February 2019, the first $5m sales milestone was received from Pfizer based on cumulative sales. The impact from receiving milestones based on cumulative sales should lead to smaller but more frequent royalty payments, versus our previous assumption of larger (but more irregular) payments. We now forecast that sales milestones from Pfizer will total $9m in 2019, based on cumulative sales.

We forecast a stable operating cost base in 2019 and 2020, anticipate breakeven to be achievable in 2020 and sustainable profitability from 2021 – the major swing factors to this being timing (and amount) of milestones received, actual R&D expenses for the year and any potential in-licensing deals.

Basilea reported cash and financial instruments of CHF223m at year-end December 2018 (CHF311m at year-end December 2017). The company has a convertible bond in issue, which is not due for conversion until 2022. We calculate net cash at end 2018 of CHF26.1m based on CHF37.4m in cash, CHF185.6m in short-term deposits and CHF197.0m of unsecured convertible bonds. Our financial model suggests that current cash and financial instruments (CHF223m) will be sufficient to fund operations beyond 2020, even in the absence of any milestone payments.

Basilea has multiple licensing deals in place for its commercially available hospital anti-infective products, Cresemba and Zevtera. More than 100 countries are covered by strong regional and global partnerships. So far, Basilea has received $255m in total upfront and milestone payments. Under the terms of existing agreements, it could receive an additional $1.1bn in regulatory and sales milestones if the assets reach predetermined targets. Exhibit 3 highlights the existing partnerships for both Cresemba and Zevtera, and outlines the associated deal economics. We note that in many instances, partners have chosen to in-license both products given the significant overlap in the physician-prescribing base.

Cresemba (isavuconazole) is a broad-spectrum antifungal for the treatment of severe, life-threatening fungal infections. Basilea reported that global in-market sales for Cresemba were in excess of $150m in 2018. Exhibit 4 highlights the steady growth in US sales and the increasing contribution from the key European markets of Germany, the UK and France and new markets such as Italy and Spain.

In the US, partner Astellas has reported sales of $113m for CY18 (+47%), which triggered a sales milestone payment of $10m to Basilea in 2018. Basilea is entitled to a tiered royalty on Cresemba sales, starting in the mid-teens and ramping up to the mid-20s, with up to CHF275m of sales milestones (CHF5m of which were received in FY17). While the exact structure of the milestone deal with Astellas has not been disclosed, we model that further sales milestones payments will be triggered when Cresemba sales in the US hit $150m, which we forecast to be in 2019. We also anticipate a slight ramp-up in the royalty rate from 2018. We forecast peak sales of Cresemba in the US to reach $250m in 2023 but, if the current growth rate is sustained, this looks conservative.

Basilea anticipates growth in existing markets and further launches worldwide to drive top-line growth. Pfizer will roll out the drug in stages across Europe (timing is dependent on individual country pricing and reimbursement discussions as Cresemba received approval through a centralised process in Europe). Launches in 2018 included Switzerland, Greece, Ireland, Portugal and the Netherlands, with further launches in Europe anticipated in 2019/20. Outside Europe and the US, partners are filing or have filed for marketing authorisation, so approvals in additional territories can be expected in the next couple of years. Basilea anticipates that by end-2021, Cresemba will be available in 60 countries worldwide (Exhibit 5). In July 2018, Latin American distribution partner Grupo Biotoscana received the first Cresemba approval in Peru, triggering a CHF2m milestone payment to Basilea.

Zevtera/Mabelio (ceftobiprole) is a broad-spectrum antibiotic for the treatment of Gram-positive infections, including methicillin-resistant Staphylococcus aureus (MRSA), which are resistant to a number of existing antibiotics, and Gram-negative bacterial infections, including Pseudomonas. The product is available in major European countries and some international markets through multiple partners (Exhibit 3), and further roll-outs are expected (ex US) in 2019 and 2020. Correvio acquired the commercial rights to Zevtera in September 2017 across core European countries and sales have been modest (9M18: $4.2m), as sales of antibiotics take time to build after launch due to the requirement for regional reimbursement across Europe, the need to be added to individual hospital stewardship programmes formularies and microbial, and a tendency to keep new antibiotics in reserve use. We believe the major commercial opportunity for Zevtera resides in the US market.

In terms of value, in 2017 the US accounted for 50% of anti-MRSA antibiotics and 70–90% of the branded hospital antibiotic market. During 2018, Basilea initiated two Phase III cross-supportive ceftobiprole registration trials needed for US marketing approval in accordance with the Special Protocol Assessments agreed with FDA. The TARGET study in acute bacterial skin and skin structure infections (ABSSSI) started enrolment in February 2018 and the ERADICATE study in Staphylococcus aureus bacteraemia (SAB) bloodstream infections was initiated in August 2018. The studies are cross-supportive, with both needed to support a US NDA submission. We expect that ABSSSI top-line data to be available in late 2019. SAB is an indication where few antibiotics are approved and that the FDA considers an area of unmet need. Therefore, the SAB study could further differentiate Zevtera from available cephalosporins and potentially be used as a first-line treatment (given the mortality rates). Basilea anticipates that the ERADICATE study will take three years, with top-line data available in H221.

A US launch date of 2022/23 for ceftobiprole could be feasible, with a focus on SAB and ABSSSI. Data from the TARGET study could be used to support a post-marketing label extension outside the US. Critically, the funding for these trials plus the potential trial in community-acquired pneumonia is in place, with up to $128m from BARDA and Basilea funding approximately 30% of the anticipated costs for the Phase III programme. BARDA is a division of the US Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response. Importantly, the BARDA contract provides a path to create further value by enabling non-dilutive funding for the programme before seeking a commercialisation partner for the US market.

The year 2018 was pivotal for Basilea, broadening its oncology portfolio focus, with a biomarker-driven approach. In April 2018, Basilea in-licensed the Phase II asset derazantinib (panFGFR kinase inhibitor) from ArQule. An ongoing Phase II registration study for derazantinib in intrahepatic cholangiocarcinoma (iCCA) reported promising interim data in January 2019; full data are expected in mid-2020. In the near term, Basilea will seek to add maximal value to derazantinib through investigating its utility in other FGFR-driven solid tumours.

We anticipate near-term inflection points from its internally developed asset BAL101553; top-line data can be expected in H219 from an ongoing Phase IIa study (IV dose, glioblastoma and ovarian cancer). In 2018, Basilea in-licensed a set of preclinical kinase inhibitors (deal terms and target not disclosed) adding further depth to its oncology portfolio. We anticipate Basilea could progress one of its preclinical oncology assets into candidate nomination (internally developed or in-licensed) in the mid-term. Basilea has highlighted one of its key goals for 2019 is to broaden its oncology portfolio further by in-licensing another asset (clinical or preclinical). We note that with cash and financial instruments of CHF223m at 31 December 2018, Basilea has the firepower to expand its R&D offering through in-licensing.

Basilea has announced plans to start a Phase I/II study in mid-2019 for derazantinib in a second indication, urothelial carcinoma (UC), using both a monotherapy and a combination approach with Roche's PD-L1 targeting antibody atezolizumab (Tecentriq). Fibroblast growth factor receptors (FGFR) are transmembrane receptor tyrosine kinases that mediate cell differentiation, migration and survival; genetic aberrations to FGFRs can lead to a gain-in-function and have been implicated in the progression of a range of cancers, including iCCA. The rationale to utilise an FGFR inhibitor (such as derazantinib) in the treatment of UC stems from the observation that activating FGFR aberrations have been found frequently (32%) in UC, primarily from genetic mutations, rearrangements and amplifications that lead to over-activation of FGFR1/3.

Basilea’s decision to pursue UC and adopt an immunoncology combination approach is supported by Bayer taking a similar approach last year. In May 2018, Bayer initiated a biomarker-driven Phase II/III study (FORT-1) investigating its panFGFR inhibitor rogaratinib (BAY1163877) as a monotherapy in the treatment of advanced or metastatic UC, specifically in patients where FGFR1/3 aberrations (biomarkers) have been identified. The onus in oncology is constantly shifting towards immunotherapy, not least in UC where several immune checkpoint inhibitors (ICIs) have been approved since 2016, namely PD-1/PD-L1 targeting antibodies (Tecentriq, Keytruda, Opdivo, Imfinzi and Bavencio). With combination approaches the central focus for improving response rates in cancer patients, in parallel with its monotherapy FORT-1 study, Bayer is also investigating the utility of Tecentriq with rogaratinib, in a similar biomarker-driven Phase I/II study (FORT-2).

Full details of Basilea’s study design are yet to be announced, but we anticipate a similar focus as the biomarker-driven studies FORT-1 and FORT-2, targeting UC patients with FGFR1/3 aberrations. Beyond its ability to inhibit FGFRs, derazantinib’s ability to inhibit colony-stimulatory factor receptor 1 (CSF1R), which could provide additional synergies in combination with a PD-(L)1 antibody compared to other FGFR inhibitors in the clinic. CSF1R has emerged as an attractive target in immunoncology as it mediates the differentiation of macrophages into a tumour promoting phenotype (M2), as opposed to a tumouricidal phenotype (M1); inhibition of CSF1R is thought to improve immune responses to tumours. We note at least eight trials investigating combinations that target PD-(L)1 and CSF1R are ongoing.

We ascribe value to derazantinib solely for its potential approval in iCCA (2023 launch), as the more details of the UC trial emerge, we will look to incorporate this into our valuation.

BAL101553 is an internally developed microtubule-targeting tumour checkpoint modulator that is currently in three clinical studies, with a primary focus for treating patients with glioblastoma multiforme (GBM). Top-line data can be expected in H219 from a Phase IIa expansion study (IV dose) in patients with recurrent GBM and platinum-resistant ovarian cancer. Additionally, a Phase I dose-escalation study (oral dose) in recurrent GBM patients is expected to complete enrolment in H119. Finally, an investigator sponsored Phase I study is being conducted in the US, investigating BAL101553 in combination with radiotherapy in patients with newly diagnosed GBM, who have a reduced sensitivity the standard-of-care chemotherapy drug temozolomide (Temodal).

In late 2018, Basilea’s in-licensed panRAF/SRC inhibitor BAL3833 completed a Phase I dose escalation study in patients with advanced solid tumours; a maximum tolerated dose (MTD) could not be determined with the current formulation, and as such a recommended Phase II dose (RP2D) could not be established. With BAL3833 now requiring reformulation work, moving back to preclinical stage of development, we now ascribe value to Basilea two clinical-stage oncology assets derazantinib and BAL101533. For more details on Basilea’s oncology portfolio, please see our note The future looks bright.

Our updated Basilea valuation is CHF1,082m (from CHF1,239m previously). The major impact on valuation is a revision of the timing and amounts of milestones received from partners for sales of Cresemba. With two sales-related milestones from Astellas now reported and further disclosure that Pfizer sales milestones are based on cumulative sales, we have revised our milestone assumptions downwards. This has been offset slightly by tweaking our sales trajectory for Cresemba. We forecast peak sales of $853.5m for Cresemba, which is an amalgamation of peak sales in the US and Europe being reached in 2023, and Japan and RoW in 2027. We have removed BAL3833 from our valuation, but would look to add this asset back in once the reformulation work has been completed and we gain better visibility on clinical development timelines. Additionally, we roll forward our DCF and adjust for a higher net cash position at end-December 2018 (CHF26.1m vs CHF51.3m at end-June 2018). Our valuation is based on an NPV analysis, which includes the main portfolio of products and net cash. The breakdown of our valuation is shown in Exhibit 6.