Redhill Biopharma — First quarter with significant sales; Cosmo deal

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.

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.

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.

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.

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.