CASI Pharmaceuticals — Evomela shows a strong launch

We find the initial launch sales in the first few weeks for Evomela to be highly encouraging. The $2.7m reported for Q319 represents only approximately six weeks of sales. We expect a fraction of these patients to have been warehoused in anticipation of the approval, but do not expect them to have been warehoused for long given the treatment demands of the disease.

We have previously questioned the size of the market for hematology products in China, Hematologic cancers such as multiple myeloma have significantly lower incidence rates in China and other East Asian countries, according to most epidemiological data. Globocan estimates the age-adjusted incidence of multiple myeloma in China at 0.9 per 100,000, compared to 4.1 in the US. It is worth noting that the epidemiological data available on China is generally of low quality and focused on major metropolises. Despite the lower incidence, given the higher population China still represents the second largest multiple myeloma population (20,000 per year) after the US (25,000). The question then becomes what fraction of this population has access to care. These early sales have exceeded our estimates on these fronts and suggest that a larger population of patients has access to therapy than we previously appreciated.

Evomela is a proprietary formulation of the chemotherapy agent melphalan that is typically used as a conditioning agent prior to hematopoietic stem cell transplant (HSCT) in patients with multiple myeloma. This formulation of melphalan was developed to improve on the infusion properties of the product by pairing the drug with the Captisol solubilization agent developed by Ligand Pharmaceuticals. Ligand is entitled to a 20% royalty on sales from this contribution.

CASI obtained a license for the Chinese rights to Evomela from Spectrum Pharmaceuticals in 2014, along with similar rights to Spectrum’s other drugs Marqibo and Zevalin. To get the product approved, CASI took advantage of the newly designed regulatory framework in the country designed to speed the approval process for foreign approved drugs. Because Evomela would be the first approved version of melphalan in China, this entitled the drug to priority review and allowed the company to forego any additional clinical studies.

A conditioning regimen is the process a patient goes through to prepare his or her body for an HSCT. In the case of multiple myeloma, melphalan is used to kill as much of the malignant bone marrow as possible, before the patient receives the transplant. The drug is also approved in the US for the minor indication of patients with multiple myeloma who cannot take oral medications. Melphalan is used commonly for conditioning in the US and Europe. However, sales of Evomela reported by Spectrum have been slow: $35.2m in 2017, and $28.3m in 2018, all US sales. This is presumably due to competition from inexpensive generic melphalan. We assume these difficulties are what motivated Spectrum in March 2019 to sell Evomela (and its other hematology products) to Acrotech Biopharma.

CASI announced on 7 November 2019 that it entered into an agreement with Pharmathen to develop and distribute octreotide LAI (long acting injectable) 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 it stated that it intends to file for a clinical trial authorization (CTA) from the NMPA in 2019.

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 long acting injectable forms of the drug. The first long acting formulation developed was Sandostatin LAR 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 currently 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.1 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.2 In South Korea, the prevalence was estimated at 3.9 per 100,000.3

Sandostatin is already approved in China in both LAR and standard formulations, and it was recent the target of recent pricing negotiations the Chinese government had with drug makers. In October 2018, it was announced that the government has negotiated for 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.

We have increased our valuation to $720m or $7.47 per basic share, from $688m or $7.19. This increase is driven by an increase in our valuation of Evomela (to $75.2m from $29.0m) and the inclusion of octreotide LAI ($12.2m). We have increased our peak sales estimates for Evomela to $35.4m from $15.5m based on the sales seen in the launch. The demand for the product appears to be significantly higher than our initial estimates. Our valuation for octreotide LAI assumes that the company will be able to capture 10% of the acromegaly market in China. We expect the company to compete on price with Novartis and other generics, and assume the product will launch in 2023 with a price of approximately $6,000 per patient-year, or roughly 60% of the current Sandostatin price in China. We assume that Pharmathen will charge an ex-manufacturer price of 30% the list price. The company will need to perform a clinical study to support approval, which we estimate will cost $2m, using rough estimates of 100 patients at a cost of $20,000 each. Additionally, our valuation is lifted by rolling forward our NPVs.

These factors are offset by adjustments made to our estimates of the generic ANDA portfolio, which have reduced its valuation to $497m from $512m. The progress in getting marketing approval for the company’s ANDA portfolio has been slower than expected, and we expect the first small sales from generics in late 2020. We suspect that delays in advancing this portfolio are in part because of prioritizing its resources for the Evomela launch and the vigorous pace to business development, and we may further update this timeline in the future based on company feedback.

Although we were impressed with the initial sales of Evomela, Q319 was characterized by a series of costs associated with the launch. COGS were exceptionally high at $2.6m due to a ‘transitional supply agreement’ that was signed and other non-recurring charges. The company stated that it expects this to normalize in future periods. The company also reported G&A expenses of $8.0m, up from $7.0m sequentially, due to costs associated with the launch. We have carried forward some of these G&A costs, as we see an increasing demand for this overhead as the company continues its business development. The increased operational demands and the delay in revenue from the generics portfolio has resulted in a delay in profitability from 2021 to 2023. We now expect the company to require $50m in additional capital, which we include in 2020 as illustrative debt.