Redhill Biopharma — First quarter with significant sales; Cosmo deal

RedHill Biopharma (US: RDHL)

Last close As at 12/07/2024

9.14

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Research: Healthcare

Redhill Biopharma — First quarter with significant sales; Cosmo deal

RedHill booked $20.9m in Q220 sales (vs $1.6m a year ago) with Movantik accounting for $20.0m. Q220 was the first full quarter of RedHill promoting Movantik for opioid-induced constipation (acquired from AstraZeneca on 1 April 2020). AstraZeneca reported sales of $96m in FY19. It is worth noting that Q220 saw the peak of COVID-19 lockdowns in the US, so promotional activities were limited. With lifting of restrictions, RedHill is also ramping up the promotion of its recently launched Talicia. The COVID-19 programme is progressing well with two clinical trials up and running. The new deal with Cosmo expands the collaboration with this partner and involves co-development of two assets. Our valuation of RedHill remains slightly changed at $601m or $16.2 per ADS.

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Healthcare

RedHill Biopharma

First quarter with significant sales; Cosmo deal

Q220 results update

Pharma & biotech

26 August 2020

Price

US$7.25

Market cap

US$268m

Net debt ($m) at end-Q220, plus $5.1m raised since the close of Q220

21.0

Shares in issue

37.0m

Free float

90%

Code

RDHL

Primary exchange

Nasdaq

Share price performance

%

1m

3m

12m

Abs

6.3

(1.5)

(0.1)

Rel (local)

(0.7)

(15.5)

(17.4)

52-week high/low

US$9.77

US$3.51

Business description

Speciality pharma company RedHill Biopharma focuses on GI diseases and promotes several products in the US. The commercial portfolio includes Movantik (opioid-induced constipation), Talicia (H. pylori eradication) and Aemcolo (travellers’ diarrhoea). The most advanced R&D assets are RHB-204 for NTM, RHB-104 for Crohn’s disease and Bekinda for gastroenteritis and IBS-D. RedHill also has a rapidly progressing COVID-19 R&D programme.

Next events

Initiation of pivotal Phase III study with RHB-204 for NTM infections

Q320

Updates from the Phase IIa study with COVID-19 patients in the US and from the global Phase II/III COVID-19 study

H220

Updates on promotion of commercial portfolio drugs

2020

Analyst

Jonas Peciulis

+44 (0)20 3077 5728

RedHill Biopharma is a research client of Edison Investment Research Limited

RedHill booked $20.9m in Q220 sales (vs $1.6m a year ago) with Movantik accounting for $20.0m. Q220 was the first full quarter of RedHill promoting Movantik for opioid-induced constipation (acquired from AstraZeneca on 1 April 2020). AstraZeneca reported sales of $96m in FY19. It is worth noting that Q220 saw the peak of COVID-19 lockdowns in the US, so promotional activities were limited. With lifting of restrictions, RedHill is also ramping up the promotion of its recently launched Talicia. The COVID-19 programme is progressing well with two clinical trials up and running. The new deal with Cosmo expands the collaboration with this partner and involves co-development of two assets. Our valuation of RedHill remains slightly changed at $601m or $16.2 per ADS.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/18

8.4

(38.8)

(0.17)

0.0

N/A

N/A

12/19

6.3

(42.1)

(0.14)

0.0

N/A

N/A

12/20e

105.0

2.3

0.00

0.0

N/A

N/A

12/21e

137.0

3.2

0.01

0.0

N/A

N/A

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

COVID-19 programme: Both trials up and running

The Phase II study in the US should complete patient (up to 40) recruitment in August 2020. An international Phase II/III study is also running in several countries and aims to enrol 270 patients. If results are promising, RedHill plans to apply for emergency use authorisation in Q420. The trials are testing opaganib, a sphingosine kinase-2 inhibitor (reviewed in our last report in July 2020). Clinical data from the compassionate use programme were particularly intriguing, as one-third of patients in the control arm received corticosteroids vs none in the opaganib arm (data were collected before the landmark study in the UK showed that corticosteroids significantly improve outcomes). Patients in the opaganib arm showed numerically better outcomes, but these could have been even better considering corticosteroid use in the control arm.

Closer collaboration with Cosmo

In August 2020, RedHill announced that it had signed an exclusive licensing and manufacturing agreement with Cosmo. This is an expansion of the partnership with Cosmo announced in October 2019, when RedHill in-licensed Aemcolo, one of the three main assets in its commercial portfolio. The new expanded deal involved co-development of a novel H. pylori therapy, co-development of RedHill’s RHB-204 for NTM infections and Cosmo becoming the exclusive manufacturer of these drugs.

Valuation: $601m or $16.2 per ADS

Our RedHill valuation is slightly changed at $601m or $16.2 per ADS, versus $593m or $16.5 per ADS previously. We do not yet include RedHill’s COVID-19 programme in our valuation, but there is potential to expand our R&D model depending on its further progress. The successful resumption of full-scale promotion activities, new products (Talicia and Aemcolo) gaining traction and updates from the COVID-19 R&D programme are the key catalysts in the near term.

Expansion of collaboration with Cosmo in multiple avenues

In August 2020, RedHill announced that it had signed an exclusive licensing and manufacturing agreement with Cosmo. The partners agreed to co-develop a novel therapy for the eradication of H. pylori. Both companies will be involved in running the clinical trials and will seek regulatory approvals in the US and Europe. The costs will be split 70%/30% (RedHill/Cosmo). Cosmo will receive exclusive European rights and will be the exclusive manufacturer of the new therapy. RedHill will receive $7m upfront, an additional $2m on approval in Europe and 30% royalties.

As part of this deal, Cosmo will take over the manufacturing of Movantik from AstraZeneca and will also manufacture RedHill’s drug candidate RHB-204 for NTM infections if the pivotal trial is successful. Cosmo will be paid €5.5m for tech transfer formulation and development work. Furthermore, Cosmo will finance the planned pivotal trial with RedHill’s RHB-204 for NTM infections, with $5m upfront and an additional $7m in two milestone payments (the timing has not been specified, but we expect it will be after successful completion of a late-stage/pivotal trial and after regulatory approval). Cosmo will be entitled to 15% in royalty payments.

In the beginning of August 2020, RedHill announced that it had replaced Movantik’s co-commercialisation agreement with Daiichi, which was inherited together with the acquisition of the asset from AstraZeneca. The co-commercialisation agreement has been replaced with royalty-bearing agreement, where Daiichi will receive mid-teen royalties and three lump sums over 2021-2023 ($5m each). Daiichi also received 283k of RedHill’s ADSs. This new agreement with Daiichi and Cosmo, a close partner, taking over the manufacturing, mean that RedHill will ensure a stable supply chain and will have full control of the brand and responsibilities for the commercialisation of Movantik in the US.

Our view

The new arrangement with Cosmo is a rather close collaboration on multiple ventures, but not that surprising since RedHill and Cosmo had already been working since late 2019 (RedHill in-licensed Aemcolo from Cosmo). In addition, Cosmo is also the largest shareholder of RedHill.

According to new, expanded collaboration details, RedHill will spend more on development of the new H. pylori therapy, but will retain rights to the US, which is a lucrative market. At the same time, RedHill seems to be willing to give away some of RHB-204’s potential to Cosmo for the price of financing the pivotal trial. This is not surprising, as it is in line with RedHill’s primary focus on the GI space. No specifics were provided about the potential new product for H. pylori treatment; as a result, full assessment of the deal is not possible at the moment and we do not make any changes to our R&D model, but will revisit it once we have more detail. However, the new expanded arrangement with Cosmo includes very specific financials, so we believe this indicates that the R&D programmes with the new H. pylori asset and RedHill’s RHB-204 should proceed at a steady pace. This ensures interesting R&D newsflow in the future.

COVID-19 programmes: Two clinical trials initiated

RedHill’s programme with opaganib against COVID-19 is progressing rapidly. An ongoing Phase II study in the US should complete patient (up to 40) recruitment in August 2020. In July 2020, RedHill initiated an international Phase II/III study in several countries and aims to enrol 270 patients. If results from these studies are promising, RedHill plans to apply for emergency use authorisation in Q420.

In our last published report, we reviewed opaganib’s potential in treating SARS-CoV-2 infection, including the available rationale for mechanism of action and the first clinical insights from the compassionate use programme in Israel (preprint article published in June 2020).

The clinical data were particularly intriguing. Treatment of five severe COVID-19 patients with opaganib led to better clinical outcomes compared to matched case controls at the same hospital. All patients received standard of care, while the active arm also received opaganib. The key difference between the active and control arms, however, was the fact that a third of control patients received methylprednisolone versus none in the opaganib arm. Compassionate use data for this analysis were collected in April to May 2020, so before the publication of preliminary results in mid-June from a large study conducted in the UK (the RECOVERY study; RedHill was not involved). The key finding was that for patients on ventilators, corticosteroid treatment was shown to reduce mortality by about one-third, and for patients requiring oxygen therapy mortality was cut by about one-fifth. The authors of RedHill’s opaganib article were not aware of the benefit of corticosteroids, as the article was submitted for publication before the release of the UK study results. We believe it is possible that the use of methylprednisolone in the control arm in compassionate use data increased the hurdle for opaganib. If corticosteroids had not been administered to patients in the control arm, the benefit of opaganib might have been even more pronounced.

Financials

Revenues in Q220 were $20.9m (Movantik sales $20.0m). RedHill acquired the rights to Movantik on 1 April 2020, so the results reflect the full quarter. Movantik’s FY19 sales under AstraZeneca (co-commercialised with Daiichi) were $96m. It is worth noting that Q220 saw the peak of the COVID-19 lockdown, so marketing and promotional activities were restricted.

Both Talicia and Aemcolo were newly launched in mid-March 2020 and December 2019, respectively. Both these drugs were affected by the COVID-19 pandemic. Aemcolo’s indication is traveller’s diarrhoea and international travel restrictions in place during most of H120 meant that the launch phase of this drug was protracted. Talicia is indicated for H. pylori eradication and patient visits to GPs and gastroenterologists were reduced during lockdowns in the US states. With its Q220 results, RedHill indicated that patient visits are now increasing and H. pylori testing is resuming, so it expects Talicia prescription volumes to grow.

Q220 operating expenses were $19.2m vs $13.5m in Q219, reflecting a y-o-y increase due to a higher level of commercial activities. We had already assumed an increase in costs associated with the US organisation and commercialisation of the GI drugs. This is somewhat counterbalanced by lower R&D spending.

We include the expected upfront payments from Cosmo of $12m in 2020 as licensing income. This pushed our 2020 operating profit into positive territory. Adjusted for that, our underlying estimates remain unchanged: sales expectations of $93m and $137m and operating profit of -$9.7m and $3.2m in 2020 and 2021 respectively. The key driver of near-term sales is successful resumption of active promotion activities in H220 (the so-called second wave of the COVID-19 pandemic is a risk for the whole industry).

Reported cash and cash equivalents were $53.1m. $52.5m was paid in Q220 upfront to AstraZeneca for Movantik. Net cash used in operating activities was $15m, partly offset by $6.4m raised via the ATM offering in Q220. RedHill raised another $5.1m via the ATM offering from the end of Q220 to the results announcement day (12 August). RedHill also expects to receive $12m in upfront payments from Cosmo, while another $9m is possible in milestone payments. We include the $12m upfront in our 2020 financial estimates.

Valuation

Our valuation of RedHill is slightly changed at $601m or $16.2 per ADS, versus $593m or $16.5 per ADS previously. We have modified our rNPV project model for RHB-204 for the treatment of NTM infections by including the 15% royalty rate to Cosmo, which was balanced by the inclusion of the $5m upfront payment as cash and $7m as risk-adjusted milestone payments. We include the small amounts raised via the ATM offerings, a total of $11.5m from the beginning of Q220 to 12 August, hence this has a modest technical dilutive effect on our valuation. The successful resumption of full-scale promotional activities, new products (Talicia and Aemcolo) gaining traction and updates from the COVID-19 R&D programme are the key catalysts in the near term.

Exhibit 1: RedHill sum-of-the-parts valuation

Product

Launch

Peak sales ($m)

NPV ($m)

NPV/share ($)

Probability

rNPV ($m)

rNPV/share ($)

GI specialty products (including Talicia, Aemcolo and Movantik)

Marketed

426.6

11.5

100%

426.6

11.52

RHB-104 - Crohn’s disease

2023

145

98.7

2.7

50%

49.4

1.33

RHB -204 - NTM infections

2024

50

49.7

1.3

30%

14.4

0.39

Bekinda - Gastroenteritis

2022

21

40.3

1.1

85%

34.0

0.92

- IBS-D

2023

201

122.9

3.3

60%

80.5

2.17

Yeliva - Cholangiocarcinoma

2024

115

212.4

5.7

10%

17.3

0.47

Net debt* (end-Q220, plus $5.1m raised since the close of Q220)

(21.0)

100%

(21.0)

(0.57)

Valuation

929.6

25.67

601.2

16.24

Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D = irritable bowel syndrome; NTM = nontuberculous mycobacteria. *Net debt includes bank deposits and financial assets at fair value booked separately on the balance sheet. Net debt also includes the expected $12m upfront payment from Cosmo.

Exhibit 2: Financial summary

$'000s

 

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Commercial product sales

8,360

6,291

93,006

136,969

Licensing income

0

0

12,000

0

Revenue

 

 

8,360

6,291

105,006

136,969

Cost of Sales

(2,837)

(2,259)

(33,652)

(49,013)

Gross Profit

5,523

4,032

71,354

87,956

Research and development

(24,862)

(17,419)

(11,200)

(11,200)

EBITDA

 

 

(39,241)

(41,988)

2,487

3,377

Operating Profit (before amort. and except.)

 

 

(39,331)

(42,985)

2,349

3,208

Intangible Amortisation

0

(216)

0

0

Exceptionals

0

0

0

0

Other

0

0

0

0

Operating Profit

(39,331)

(43,201)

2,349

3,208

Net Interest

511

897

0

0

Profit Before Tax (norm)

 

 

(38,820)

(42,088)

2,349

3,208

Profit Before Tax (reported)

 

 

(38,820)

(42,304)

2,349

3,208

Tax

0

0

(587)

(802)

Profit After Tax (norm)

(38,820)

(42,088)

1,761

2,406

Profit After Tax (reported)

(38,820)

(42,304)

1,761

2,406

Average Number of Shares Outstanding (m)

231.2

296.9

361.6

370.6

EPS - normalised ($)

 

 

(0.17)

(0.14)

0.00

0.01

EPS - normalised fully diluted ($)

 

 

(0.17)

(0.14)

0.00

0.01

EPS - (reported) ($)

 

 

(0.17)

(0.14)

0.00

0.01

Dividend per share ($)

0.0

0.0

0.0

0.0

Gross Margin (%)

66.1

64.1

68.0

64.2

EBITDA Margin (%)

N/A

N/A

2.4

2.5

Operating Margin (before GW and except.) (%)

N/A

N/A

2.2

2.3

BALANCE SHEET

Fixed Assets

 

 

5,623

20,885

107,128

122,162

Intangible Assets

5,320

16,927

81,642

96,677

Tangible Assets

163

228

258

257

Other, incl. Right-of-use assets

140

3,730

5,228

5,228

Restricted cash*

0

0

20,000

20,000

Current Assets

 

 

56,788

53,214

76,813

67,212

Stocks

769

1,882

4,750

4,750

Debtors

2,834

3,460

23,440

23,440

Cash

29,005

29,023

37,959

28,358

Other**

24,180

18,849

10,664

10,664

Current Liabilities

 

 

(10,381)

(10,616)

(11,740)

(11,740)

Creditors

(10,381)

(10,616)

(11,740)

(11,740)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(844)

(3,481)

(95,910)

(95,910)

Long term borrowings

0

0

(79,189)

(79,189)

Payable in respect of intangible assets purchase

0

0

(12,180)

(12,180)

Other long-term liabilities

(844)

(3,481)

(4,541)

(4,541)

Net Assets

 

 

51,186

60,002

76,290

81,724

CASH FLOW

Operating Cash Flow

 

 

(34,462)

(40,749)

(16,648)

6,404

Net Interest

0

0

0

0

Tax

0

0

(587)

(802)

Capex

(23)

(168)

(168)

(168)

Acquisitions/disposals

0

0

0

0

Financing

42,263

36,305

11,500

0

Other***

4,772

4,630

(64,350)

(15,035)

Dividends

0

0

0

0

Net Cash Flow

12,550

18

(70,253)

(9,601)

Opening net debt/(cash)

 

 

(16,455)

(29,005)

(29,023)

41,230

HP finance leases initiated

0

0

0

0

Other

0

0

0

0

Closing net debt/(cash)*****

 

 

(29,005)

(29,023)

41,230

50,831

Source: RedHill Biopharma accounts, Edison Investment Research. Note: *A covenant requirement in the credit agreement with HealthCare Royalty Partners. **Bank deposits and financial assets at fair value. ***Includes Movantik acquisition payments to AstraZeneca ($52.5m) and $20m outflow to create a long-term asset, restricted cash. ****Net cash does not include bank deposits and financial assets.


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

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

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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.

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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

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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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John Laing Group — Reset and refocus

COVID-19 and a further cut to power price assumptions saw NAV per share fall to 309p in H120 (FY19: 337p). However, PPP performed well, bidding momentum has picked up recently and John Laing Group (JLG) expects ‘modest’ NAV growth in H2. New CEO Ben Loomes highlighted digital connectivity and energy transitions as potential future investment themes, and will set out further details in November. We cut our FY20 NAV per share forecast by 14% to 308p. The share price stands at an 8% discount to FY20e NAV per share.

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