Basilea Pharmaceutica — Need for innovation against severe infections

The Basilea CMD highlighted the company’s focus on developing treatments for invasive/serious fungal and bacterial infections, its differentiated product portfolio (Exhibit 1) and business strategy aimed at risk mitigation and maximisation of commercial potential. The past couple of years have seen the company right size itself (fully divesting its oncology portfolio), with a renewed focus on anti-infectives supported by the acquisition of three clinical-stage assets in 2023 and one preclinical programme in early 2024. Basilea turned cash flow positive in FY22, with the liquidity position improving in FY23, despite a total of c US$40m upfront spend on the three acquisitions/in-licensing deals in 2023 and early repayment of the senior secured loan (last pending payment made in Q124).

Despite the large incidence and concerning mortality rates (as noted above), microbial infections have fallen under the radar, with limited therapeutic options and no real innovation in the past decade or two. At Basilea’s CMD, the invited key opinion leaders, Professor Oliver A Cornely, professor of translational research, faculty of medicine, University of Cologne, and Professor Thomas L Holland, associate professor, division of infectious diseases, Duke University, highlighted the rising threat of invasive fungal infections and SAB, the most prevalent and deadly bacterial infection.

While these invasive fungal infections are typically assumed to affect mostly immunocompromised patients, Professor Cornely also discussed the role of climate change, natural disasters and environmental factors in the rising number of invasive fungal infections. Examples quoted include the increasing number of pulmonary aspergillosis cases, a mould infection that afflicts up to 25% of severe influenza and COVID-19 cases. He also highlighted the rise in treatment-resistant strains such as Candida auris, a type of yeast infection, termed an urgent threat in the CDC antimicrobial threats report, citing the Spanish Candida auris outbreak, which had a mortality rate of 41% and was treatment resistant to commonly used azoles. The growing incidence of treatment-resistant Candida (primarily affecting the blood, abdominal abscesses and bones) and Aspergillus (primarily affecting the lungs) related cases (among others) resulted in a 37% mortality rate at day 30 in 79 candidemia patients in Europe. According to the professor, the utility of current antifungal drug classes is limited by dose-limiting toxicities, drug-drug interactions, slow onset of action and long treatment durations, indicative of the need to develop more effective, novel drug classes. Basilea’s Cresemba is a market leader in the treatment of invasive mould infections (such as aspergillosis and mucormycosis). Fosmanogepix, its Phase-III ready asset, is a broad-spectrum antifungal treatment with activity against both yeast and mould infections (discussed in more detail later).

Professor Thomas L Holland focused specifically on SAB, a common and serious bloodstream infection, associated with significant morbidity and mortality, particularly in hospitalised patients. SAB is believed to have an incidence rate of 20–50 cases per 100,000 population, with a mortality rate between 10% and 30%. These figures are likely to be significantly higher in hospitalised patients and the professor noted that SAB infection rates in patients with prosthetics or implants can be as high as 30–70%. Results for a 21-year, prospective longitudinal study (n=2348) noted that SAB has been getting more complicated over time, with risk factors including patients with prosthetics, co-morbid conditions and metastatic complications. The study also highlighted the rising cases of community acquired infection. The professor noted that while the mortality rates have come down modestly, there is further scope for improvement.

Methicillin-resistant Staphylococcus aureus (MRSA), which accounts for c 50% of all SAB infections, was noted to have caused over 50% of multidrug-resistant bacterial infections in hospitalised patients in the US, highting the scale of the issue. Infective endocarditis (inflammation of the inner lining of the heart and valves), a major complication related to SAB, was observed in 12% of over 4,800 prospectively enrolled patients with SAB. Despite this concerning statistic, optimal treatment options have been limited due to inherent or acquired resistance (antibiotics such as gentamicin, rifampin and antistaphylococcal penicillin have proven to be ineffective). The current treatments of choice are the glycopeptides vancomycin and daptomycin, which are intravenously administered, followed by an oral step-down treatment. However, there have been concerns around the bacteria developing resistance to these treatments. Professor Holland noted the potential of new antibiotic classes such as ceftobiprole (Zevtera) and lysins (tonabacase) in the treatment of SAB. Zevtera demonstrated non-inferiority to the standard of care daptomycin in a large clinical trial and is the first new class of antibiotics to be approved for the treatment of SAB in the past 15 years in the US (discussed in more detail later).

As part of the CMD, Basilea’s management reconfirmed its focus on treating aggressive and serious infections by developing its novel class of assets, spanning both antifungal and antibacterial treatments. We present a brief portfolio overview below.

Basilea’s antifungal portfolio includes its lead commercial asset Cresemba and clinical-stage assets fosmanogepix and BAL2062:

Two Phase III trials are planned for 2024, for the treatment of candidemia and invasive candidiasis (expected to commence by mid-2024) and for the treatment of mould infections (to commence by end 2024). The drug holds the Fast Track and Orphan Drug designations from the FDA, as well as a QIDP tag, which should provide more than 12 years of market exclusivity post launch. Note that Pfizer continues to hold the right of first negotiation for commercial rights to fosmanogepix, which we believe it will exercise, if clinical data are favourable. For more details on the drug, please refer to our update notes (Refilling the pipeline for growth, From strength to strength).

Basilea’s antibacterial portfolio includes its commercial-stage asset Zevtera, clinical-stage asset tonabacase and the preclinical programme of LptA inhibitors:

The CMD also saw the company explain its operational strategy and business model, which focuses on identifying and acquiring novel and promising early-stage assets (late preclinical to Phase II clinical stage), taking them through to the end of Phase III trials (creating value by adding clinical differentiation) and then out-licensing the assets to larger commercial-stage players (global or local), for upfront, milestone and royalty payments. Management asserted that this allows it to de-risk its exposure and supports faster market entry and scale-up, translating to a larger income stream for Basilea. This also works to the mutual benefit of big pharma, which has traditionally shunned investing R&D dollars in anti-infectives, instead focusing on in-licensing commercial-stage assets. As per data shared by management, this strategy results in the company recognising 30–40% of the in-market sales of the product as income (including product sales and upfront, milestones and royalty payments) over the lifetime of the drug. This translates to a 20–30% operating margin on a product basis for a comparable self-commercialisation model, a healthy return in our opinion, particular given the lower risk profile (these returns can be generated with a lean, lower-risk business model with minimal fixed costs and launch investments). Management also shared the difference in gross margin across the different asset profiles, with internal programmes generating gross margins of 75–85% versus 55–75% for acquired assets, based on the stage of development.

This strategy, along with the decision to offload its oncology assets in 2022, has allowed the company to turn operating cash flow positive in 2022 and further consolidate its balance sheet strength in 2023 (Exhibit 3). Moreover, the improved cash balance was achieved without external funding, even after absorbing c US$40m in upfront payments for acquisitions made in 2023. The company also used the improved free cash flows and cash at hand to significantly reduce its indebtedness (CHF59m in debt repayment out of the total CHF75m outstanding) (Exhibit 4). This reflects Basilea’s confidence in its future operational and financial prospects, in our opinion.

Based on the current operating performance and our near-term estimates, we expect the company to be sufficiently capitalised to fund ongoing development work from internally generated funds. Note that this does not discount the potential of receiving further government or non-profit R&D funding to advance its clinical programmes. As a reminder, the US Phase III clinical trials were 75% funded (equivalent of US$112m) by the Biomedical Advanced Research and Development Authority (BARDA) and the preclinical LptA inhibitor programme recently received US$0.9m in funding from CARB-X.