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Research: Healthcare
CASI continues to execute on its strategy to commercialize a portfolio of US-approved drugs in China. It recently received clinical trial authorization (CTA) from the National Medical Products Administration (NMPA) for Marqibo and Zevalin, and established a distribution partnership for Evomela, which it expects to launch mid-2019. However, estimates for entecavir and TDF have been tempered due to a new procurement scheme in China, which is driving down the prices of certain drugs.
Written by
CASI Pharmaceuticals |
Executing on China rollout |
Earnings update |
Pharma & biotech |
3 April 2019 |
Share price performance
Business description
Next events
Analyst
CASI Pharmaceuticals is a research client of Edison Investment Research Limited |
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CASI continues to execute on its strategy to commercialize a portfolio of US-approved drugs in China. It recently received clinical trial authorization (CTA) from the National Medical Products Administration (NMPA) for Marqibo and Zevalin, and established a distribution partnership for Evomela, which it expects to launch mid-2019. However, estimates for entecavir and TDF have been tempered due to a new procurement scheme in China, which is driving down the prices of certain drugs.
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
0.0 |
(10.1) |
(0.16) |
0.0 |
N/A |
N/A |
12/18 |
0.0 |
(20.0) |
(0.24) |
0.0 |
N/A |
N/A |
12/19e |
9.0 |
(16.8) |
(0.17) |
0.0 |
N/A |
N/A |
12/20e |
33.5 |
(1.4) |
(0.01) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
CTA approval for Marqibo and Zevalin
CASI recently received approval of its CTA applications for both Marqibo and Zevalin from the NMPA in China. Because the drugs are approved in the US, the company will only need a single Chinse pivotal study to support approval. Importantly, the timely approval of these CTA applications is encouraging for both CASI’s ability to navigate these new Chinse regulatory pathways and the NMPA’s capacity and willingness to progress these products.
Distribution partner selected for Evomela
CASI also announced that it reached an agreement with China Resources Guokang Pharmaceuticals (CRGK) for the distribution of Evomela in China. Evomela received marketing approval by the NMPA in December 2018 through the agency’s priority review process as the only formulation of melphalan available in the country. Distribution relationships are very important for the commercial success of drugs in China given the highly fragmented distribution landscape. CRGK is a subsidiary of China Resources Pharmaceuticals (2018 revenue: HK$189bn).
Generic prices driven down by new pricing scheme
China has initiated a new pilot drug purchasing scheme in which the major municipalities will purchase drugs in bulk from a single supplier for all the hospitals in these regions. The tender process resulted in price cuts on average of 52% for the 31 drugs included, including a 90% price cut for entecavir. CASI’s other hepatitis B virus drug TDF was also included in the scheme, and we expect substantial pricing pressure on these products in the future.
Valuation: Lowered to $675m or $7.06 per basic share
We have lowered our valuation to $675m ($7.06 per basic share), from $759m ($8.11 per basic share), due to adjustments to estimates for entecavir (China revenue down 75%) and TDF (down 50%), offset by rolling forward our NPVs.
Marqibo and Zevalin to enter pivotal trials shortly
CASI Pharmaceuticals recently announced that CTAs for Marqibo and Zevalin had been approved. The products are regulated in China as innovative import drugs, which require pharmacokinetic studies and Phase III clinical trials for approval. The CTA is an important regulatory step in China that allows the company to initiate these studies. The innovative import drug approval pathway is a relatively new designation designed to facilitate the approval of drugs that are already approved in other territories. Also, historically there have been significant delays in the approval of CTAs through regulatory agencies. Therefore it is encouraging that these CTA applications were processed in such a timely manner. This will enable the company to proceed with clinical trials on schedule, although at the current time CASI has not announced any of the details of how these studies may be designed.
Evomela to be distributed by major partner in China
CASI’s distribution agreement with CRGK is an important milestone for the commercialization of Evomela. Although there are significant efforts from the government to consolidate the industry, it remains highly fragmented, with over 13,500 distribution companies. Historically, distribution networks have been highly complex with multiple layers of distributors and middlemen, and these distribution relationships typically control access to the market. However, we find the partnership with CRGK highly encouraging in this case because it is a subsidiary of the major distributer China Resources Pharmaceuticals (CRP, 3320.HK). CRP reported revenue of HK$189bn and a profit of HK$4.04bn in 2018. CRP is a major distributor of western medicines, with a network in 31 provinces and 90,000 downstream customers. The company has multiple other partnerships with major pharmaceutical companies including Sanofi, Reckitt Benckiser and others. In particular CRGK also has a distribution agreement with BeiGene (BEIG), which recently received approval for zanubrutinib in China for the treatment of blood cancers and will be targeting a similar set of customers to Evomela. We believe this distribution agreement is highly encouraging and a major step in Evomela’s commercialization. The company has guided to a commercial launch in mid-2019
Pilot purchasing program in China likely to affect entecavir and TDF pricing
The Chinese government recently initiated a pilot drug purchasing program aimed at reducing the price of generic drugs. The program consists of a pact between major cities (including Beijing, Shanghai and Guangzhou) to purchase certain generic drugs in bulk, forcing companies to compete for contracts, but also making the wining companies the sole distributor to hospitals in these regions. This resulted in an average price reduction of 52%. Importantly for CASI, the program cut the price of entecavir by 90% when the contract was won by Chia-tai Tianqing Pharma. Historically entecavir has received high reimbursement rates through programs to address the hepatitis B virus (HBV) epidemic in China. Additionally, the company’s other HBV treatment tenofovir disoproxil fumarate (TDF) was also included in the scheme. We expect this to significantly affect CASI as these drugs were key drivers of its generics sales, and we have adjusted our sales estimates to reflect this: we expect combined peak sales in China of $20m (21% of all generics sales in China), down from previous estimates of $57m (48%).
The NMPA has been engaged in a multi-year program to improve generic drug safety following several prominent case of adulterated drugs. Part of this program was to move away from the previous system, which had 5,000 generic drug manufacturers competing for individual hospital contracts, as pricing pressure and poor oversight was cited as a causative factor of counterfeit drugs.
The program instituted a series of controls termed the generic quality consistency evaluation (GQCE). Hospital purchases were to be limited to companies that had passed the GQCE. However, the recent procurement scheme has been criticized both inside and outside China as potentially exacerbating some of the issues the generic drug reforms were attempting to address, such as quality and supply.
Although the new purchasing scheme will likely close most hospital supply chains, CASI will be able to market entecavir and TDF as premium branded generic drugs. Because of the aforementioned quality control issues, patients often pay cash for premium drug products in China, and we do not expect this trend to end, although we do believe that there will still be significant pricing pressure on these premium generic drugs. However, it is difficult to predict the precise implications of the new procurement scheme at this time.
Valuation
We have lowered our valuation to $675m ($7.06 per basic share), from $759m ($8.11 per basic share), due to adjustments to our pricing assumptions for entecavir and TDF. We have reduced our peak sales estimates in China for entecavir by 75% ($9m peak sales) as we expect significant price competition, but we believe that it will be able to maintain some premium pricing (as opposed to a 90% price reduction). We currently do not have pricing data on TDF but have similarly reduced peak sales estimates for TDF by 50% (to $11m) on par with the average price cuts in the program. Although we expect the company to market these drugs as premium products, we also account for increased pricing pressure and competition in these markets due to the new procurement scheme. Combined, these reduce our peak sales estimates for the generics portfolio by 11% (to $212m from $250m). This effect is offset by rolling forward our NPVs to the most recent period. We may make further adjustments to our market assumptions for generics in the future if other drugs from the company’s portfolio are including in the procurement scheme. For illustrative purposes, a 10% reduction in Chinese sales (from the current base) would translate to a $23m reduction in our NPVs.
Exhibit 1: Valuation of CASI Pharmaceuticals
Portfolio |
Asset |
Region |
Peak sales |
Margin |
Clinical risk adjustment |
Value |
Spectrum |
Evomela |
China |
15.5 |
46% |
100% |
27.69 |
Marqibo |
China |
8.3 |
58% |
90% |
8.65 |
|
Zevalin |
China |
23.9 |
64% |
90% |
48.61 |
|
Generics |
China and US |
212.0 |
49% |
100% |
504.93 |
|
Internal |
ENMD-2076 |
China and US |
25.2 |
51% |
20% |
1.90 |
Total |
591.78 |
|||||
Net cash and equivalents (YE18) ($m) |
83.62 |
|||||
Total firm value ($m) |
675.40 |
|||||
Total shares (m) |
95.72 |
|||||
Value per basic share ($) |
7.06 |
|||||
Dilutive warrants and options (est.) (m) |
30.21 |
|||||
Value per diluted share ($) |
6.09 |
|||||
Source: CASI reports, Edison Investment Research
Financials
CASI reported an operational loss of $27.2m for 2018, driven primarily by SG&A expenses of $18.0m as it builds out its manufacturing and commercial apparatus in China, although $6.1m of this was share-based payments. R&D spending for the period (including acquired in process development) was $8.5m ($9.2m including acquired in process development), which was higher than our estimates ($7.1m), primarily associated with higher than expected preclinical development activities. We have increased our future R&D expectations. We expect initial revenue in 2019 of $9.0m, although this assumes initial sales from the generics pipeline during this period. The company previously secured a manufacturing partner for entecavir and is undergoing a factory buildout in Wuxi, and our estimates may be affected by the timing of these programs. This revenue is slightly tempered from our previous report ($10.9m revenue previously forecast in 2019) due to the impact of entecavir and TDF sales reductions.
The company ended the year with $85.1m in cash and liquid investments (and $1.5m in debt), which we expect will be sufficient to bring the company to profitability in 2021. However, the company may raise additional capital in the future to finance further acquisitions, and it has indicated that this is its intent. Moreover, the company has committed $50m in cash to the launch of its Wuxi production facility, with $21m due in the first quarter of 2019 (note: this payment was previously expected to occur in Q418), and $29m due in three years.
Exhibit 2: Financial summary
$000s |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
US GAAP |
US GAAP |
US GAAP |
US GAAP |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
0.0 |
0.0 |
8,964.9 |
33,546.7 |
Cost of Sales |
0.0 |
0.0 |
(2,479.5) |
(8,127.2) |
||
Gross Profit |
0.0 |
0.0 |
6,485.4 |
25,419.5 |
||
EBITDA |
|
|
(9,983.1) |
(19,402.4) |
(16,440.4) |
3,124.0 |
Normalised operating profit |
|
|
(10,100.9) |
(19,767.9) |
(16,790.5) |
(1,432.8) |
Amortisation of acquired intangibles |
0.0 |
(1,305.4) |
(1,388.8) |
(1,388.8) |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Share-based payments |
(650.4) |
(6,118.1) |
(6,118.1) |
(6,118.1) |
||
Reported operating profit |
(10,751.3) |
(27,191.4) |
(24,297.5) |
(8,939.8) |
||
Net Interest |
1.0 |
(280.1) |
0.0 |
0.0 |
||
Joint ventures & associates (post tax) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(19.9) |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
(10,119.8) |
(20,048.1) |
(16,790.5) |
(1,432.8) |
Profit Before Tax (reported) |
|
|
(10,770.2) |
(27,471.6) |
(24,297.5) |
(8,939.8) |
Reported tax |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit After Tax (norm) |
(10,119.8) |
(20,048.1) |
(16,790.5) |
(1,432.8) |
||
Profit After Tax (reported) |
(10,770.2) |
(27,471.6) |
(24,297.5) |
(8,939.8) |
||
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Discontinued operations |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
(10,119.8) |
(20,048.1) |
(16,790.5) |
(1,432.8) |
||
Net income (reported) |
(10,770.2) |
(27,471.6) |
(24,297.5) |
(8,939.8) |
||
Basic average number of shares outstanding (m) |
62 |
85 |
98 |
103 |
||
EPS - basic normalised (c) |
|
|
(16.45) |
(23.65) |
(17.20) |
(1.40) |
EPS - diluted normalised (c) |
|
|
(16.45) |
(23.65) |
(17.20) |
(1.40) |
EPS - basic reported (c) |
|
|
(17.51) |
(32.41) |
(24.89) |
(8.72) |
Dividend (c) |
0.00 |
0.00 |
0.00 |
0.00 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
1,288.5 |
20,845.4 |
40,490.2 |
63,928.4 |
Intangible Assets |
0.0 |
18,784.7 |
17,395.9 |
16,007.0 |
||
Tangible Assets |
1,046.5 |
1,750.6 |
22,784.3 |
47,611.3 |
||
Investments & other |
242.0 |
310.0 |
310.0 |
310.0 |
||
Current Assets |
|
|
43,812.4 |
92,564.6 |
56,449.1 |
31,014.1 |
Stocks |
0.0 |
0.0 |
611.4 |
2,004.0 |
||
Debtors |
0.0 |
0.0 |
1,473.7 |
5,514.5 |
||
Cash & cash equivalents |
43,489.9 |
85,117.0 |
46,916.4 |
16,048.0 |
||
Other |
322.5 |
7,447.6 |
7,447.6 |
7,447.6 |
||
Current Liabilities |
|
|
(5,062.1) |
(3,873.9) |
(5,582.6) |
(6,407.4) |
Creditors |
(4,316.1) |
(968.0) |
(4,176.2) |
(5,001.0) |
||
Tax and social security |
0.0 |
0.0 |
0.0 |
0.0 |
||
Short term borrowings |
0.0 |
(1,499.5) |
0.0 |
0.0 |
||
Other |
(746.0) |
(1,406.4) |
(1,406.4) |
(1,406.4) |
||
Long Term Liabilities |
|
|
(1,498.8) |
(73.6) |
(73.6) |
(73.6) |
Long term borrowings |
(1,498.8) |
0.0 |
0.0 |
0.0 |
||
Other long term liabilities |
0.0 |
(73.6) |
(73.6) |
(73.6) |
||
Net Assets |
|
|
38,540.1 |
109,462.5 |
91,283.1 |
88,461.4 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
38,540.1 |
109,462.5 |
91,283.1 |
88,461.4 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
(9,983.1) |
(19,402.4) |
(16,440.4) |
3,124.0 |
||
Working capital |
3,572.4 |
(9,780.4) |
1,123.1 |
(4,608.7) |
||
Exceptional & other |
8.5 |
598.9 |
0.0 |
0.0 |
||
Tax |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net operating cash flow |
|
|
(6,402.2) |
(28,583.9) |
(15,317.3) |
(1,484.6) |
Capex |
(934.7) |
(1,131.1) |
(21,383.8) |
(29,383.8) |
||
Acquisitions/disposals |
0.0 |
(20,642.4) |
0.0 |
0.0 |
||
Net interest |
0.0 |
0.0 |
0.0 |
0.0 |
||
Equity financing |
23,733.9 |
92,269.8 |
0.0 |
0.0 |
||
Dividends |
0.0 |
912.0 |
0.0 |
0.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
16,397.0 |
42,824.4 |
(36,701.1) |
(30,868.5) |
||
Opening net debt/(cash) |
|
|
(25,601.7) |
(41,991.7) |
(83,617.5) |
(46,916.4) |
FX |
0.0 |
(1,197.5) |
0.0 |
0.0 |
||
Other non-cash movements |
(7.0) |
(1.0) |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
(41,991.7) |
(83,617.5) |
(46,916.4) |
(16,048.0) |
Source: CASI reports, Edison Investment Research
|
|
Research: Financials
Nürnberger Beteiligungs’ (NBG’s) FY18 results reflect an overall stable business at the top line, as gross premiums booked were up by 2.2% versus FY17 and new business was ahead of management expectations. However, the bottom line continues to be affected by the low interest rates translating into weaker net investment income (although a high base from one-off effects in FY17 played a role as well). This should also reduce earnings in FY19, with the current guidance implying a 10% y-o-y decline. On the other hand, the recent introduction of the ‘corridor method’ in case of the Zinszusatzreserve (ZZR) provided some tailwinds in FY18.