Kazia Therapeutics — Paxalisib Chinese rights licensed

Kazia Therapeutics (NASDAQ: KZIA)

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Research: Healthcare

Kazia Therapeutics — Paxalisib Chinese rights licensed

Kazia has announced it has signed an agreement for the Greater China rights to paxalisib with Simcere Pharmaceuticals. The deal includes an US$11m upfront (US$7m in cash, and US$4m in an equity investment), up to US$281m in milestone payments and royalties in the mid-teens. This is a key development for Kazia because not only does this payment help alleviate the near-term financing needs of the company, but the deal illustrates the potential value of this asset to partners.

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Written by

Healthcare

Kazia Therapeutics

Paxalisib Chinese rights licensed

Business update

Pharma & biotech

30 March 2021

ADR research

`

Price

$12.86

Market cap

$162m

ADR/Ord conversion ratio 1:10

Net cash ($m) at 31 December 2020

13.9

ADRs in issue

12.6m

ADR code

KZIA

ADR exchange

NASDAQ

Underlying exchange

ASX

Depository

BNY

ADR share price performance

52-week high/low

$13.47

$2.56

Business description

Kazia Therapeutics is a pharmaceutical company with lead asset paxalisib, a PI3K inhibitor licensed from Genentech that can cross the blood-brain barrier, which is entering a pivotal study for GBM. It is also being investigated for other brain cancers such as breast cancer brain metastases.

Next events

Dana-Farber BCBM Phase II

CY21

Sloan-Kettering BM Phase II

CY21

NIH BM Phase II

CY21

Analyst

Nathaniel Calloway

+1 646 653 7036

Kazia Therapeutics is a research client of Edison Investment Research Limited

Kazia has announced it has signed an agreement for the Greater China rights to paxalisib with Simcere Pharmaceuticals. The deal includes an US$11m upfront (US$7m in cash, and US$4m in an equity investment), up to US$281m in milestone payments and royalties in the mid-teens. This is a key development for Kazia because not only does this payment help alleviate the near-term financing needs of the company, but the deal illustrates the potential value of this asset to partners.

Year end

Revenue ($m)

PBT
($m)

EPADR
($)

DPADR
($)

P/E
(x)

Gross yield
(%)

06/19

1.1

(5.3)

(0.91)

0.00

N/A

N/A

06/20

0.8

(7.7)

(1.01)

0.00

N/A

N/A

06/21e

12.0

2.8

0.23

0.00

55.9

N/A

06/22e

0.9

(8.8)

(0.62)

0.00

N/A

N/A

Note: Converted at A$1.40/US$. Dividend yield excludes withholding tax. Investors should consult their tax advisor regarding the application of any domestic and foreign tax laws.

An established partner

Kazia’s partner for the transaction is Simcere Pharmaceuticals, a publicly traded company (HKSE: 2096) with a significant presence in the Chinese pharmaceutical market. The company had sales of ¥5.0bn in 2019 and reported earnings of ¥1.0bn in 2019 from its portfolio of over 40 products, primarily branded generics. It also has existing distribution relationships with over 2,000 hospitals in China.

Simcere is part of a shift in the Chinese market

There has been significant regulatory reform in China to encourage the approval and marketing of proprietary drugs (developed domestically or licensed internationally). However, significant preference is still given to domestic drug developers and manufacturers. Simcere is well positioned to take advantage of these reforms with its existing manufacturing and distribution capacity and has been in licensing a large number of assets from both domestic sources and overseas.

GBM a major issue in China as in West

Many oncology indications have different incidence rates in China compared to other countries such as those in the West, but glioblastoma multiforme (GBM) is a major unmet medical need globally. The estimated rates in China (1–4 per 100,000 persons) is similar or slightly lower than the US (3.5 per 100,000).

Valuation: Increased on deal to US$215m or US$16.60

We have increased our valuation US$215m or US$16.60 per basic ADR, from US$190 or US$15.02 per basic ADR. This increase is from the Simcere licensing deal (US$11m from upfront payments and US$14.1m from cash flows). This has reduced our expected future financing requirement to US$7m from US$14m previously.

Simcere licenses paxalisib rights in Greater China

Kazia announced in March 2021 that it has signed an agreement with Simcere Pharmaceuticals (HKSE: 2096), an established, China-based drug manufacturer, for the rights to paxalisib in Greater China. The deal terms included: a US$11m upfront as US$7m in cash and a US$4m equity investment in Kazia (shares undisclosed, priced at 20% premium “to recent trading”), up to US$281m in milestone payments and royalties in the mid-teens. Simcere will be responsible for developing and marketing paxalisib in Greater China (PRC, Hong Kong, Macau, Taiwan). The above milestones and royalties are for the first indication of GBM and additional undisclosed milestones are available for other indications. Kazia will remain responsible for the global development of the drug and for its role in the pivotal GBM AGILE study, but Simcere will perform any clinical development activities necessary for approval in China. The upfront payment for this deal is a similar size to other recent China regional GBM deals from Novocure (US$15m, with Zai Lab) and Mimivax (US$10m, with Fosun). The milestone payments for the Kazia deal are larger than most comparables (eg US$138m for Mimivax), but it is difficult to make conclusions given their undisclosed nature.

The Chinese pharmaceutical industry has been undergoing rapid change with the advent of new regulatory reforms aimed at both encouraging the approval of innovative, proprietary medications as well as improving access to generic medications. It has reformed its regulatory apparatus to conform with international standards and to allow for the relatively speedy approval of drugs that have been approved in other geographies. At the same time, it has instituted plans to control pricing on generic medications, such as the so-called 4+7 Volume Based Procurement Plan. Under this plan the government negotiates for lots of generic medications at steeply discounted prices. These combined developments have reshaped the landscape of the Chinese drug industry substantially in favour of developing new medicines instead of generics. This being said, the regulatory structure in China still strongly favours domestic companies and products manufactured domestically, so it is commonplace for foreign drug developers to partner their products with Chinese companies for distribution there.

Kazia’s partner Simcere reflects the above shift toward proprietary development internally as it transitions from primarily a manufacturer of branded generics to a full-fledged drug developer. It is achieving this through a combination of in licensing and internal development, and it has an extensive pipeline of early stage assets. Paxalisib, by virtue of being in the Phase II/III GBM AGILE study, will be the most advanced development asset the company has in licensed, as its other clinical programs are in Phase I or earlier. Simcere had revenue of ¥5.0bn in 2019 and reported earnings of ¥1.0bn during the period.

The reported rate of GBM in China is approximately similar to the US and Europe, if slightly lower. The yearly incidence in the US is approximately 3.5/100,000,1 whereas estimates for China are in the range of 1–4/100,000.2

  Faleh A and Juweid M (2017) Chapter 8: Epidemiology and Outcome of Glioblastoma. In: De Vleeschouwer S, editor. Glioblastoma [Internet]. Codon Publications

  Chang L, et al. (2014) Treating malignant glioma in Chinese patients: update on temozolomide. Onco Targets Ther 7, 235-244.

Valuation

We have increased our valuation to US$215m or US$16.60 per basic ADR, from US$190 or US$15.02 per basic ADR. This increase is from the inclusion of the Simcere licensing deal and future cash flows into our model. US$11m is from upfront payments (included in our net cash line), and US$14.1m is from our NPV based model. This is offset slightly by the increase in shares from the equity part of the deal which we estimate at 0.32m ADRs (based on a 20% premium to the 5 day VWAP A$1.4685/share). Our valuation of paxalisib for the Chinese market is based on the following assumptions:

We assume a 15% royalty payable to Kazia, and that approximately half (US$130m) of the US$281m in milestones (US$30m in clinical regulatory milestones and US$100m in sales-based milestones) will be paid over the lifetime of the drug. Our first upcoming hypothetical milestone in our model is US$5m on completion of the Phase II portion of GBM AGILE in 2023.

We model approval for the drug slightly later in China (2026) compared to the US and Europe (2025) to allow for the completion of a Chinese bridging study (done at Simcere’s cost) to support approval there.

Our China pricing is lower than the US at US$29,000 at launch in 2026 (compared to US$169,000 at launch in the US). There is significant pricing pressure in China both from regulators and the market as it is still in large part a cash-pay system, or at least a cash up front, reimbursement later system.

We only consider patients covered under the government’s urban health plans (UEBMI and URBMI programs) as a viable market, reflecting approximately 35% of the population. We may change this as access to healthcare among China’s rural population improves.

Our peak penetration is 25%, the same as the US and Europe.

We are only modelling the Chinese market for GBM at this time, although we may add other indications like breast cancer brain metastases (BCBMs) in the future. Otherwise our models remain unchanged.

Exhibit 1: Valuation of Kazia

Development Program

Indication

Clinical stage

Prob. of success

Launch year

Patent/Exclusivity Protection

Launch Pricing ($/course)

Peak sales (US$m)

rNPV (US$m)

Paxalisib

GBM

Phase II

35%

2025

2037

169,000

450

173.66

BCBMs

Phase II

5%

2029

2037

183,000

249

6.15

Cantrixil

OC

Phase I complete

15%

2027

2040

124,000

174

6.05

Total

185.86

Net cash and equivalents (FQ221 + Oasmia and Simcere upfronts) (US$m)

28.83

Total firm value (US$m)

214.69

Total basic ADRs (m)

12.9

Value per basic ADR (US$)

16.60

Dilutive options (as ADRs, m)

0.45

Total diluted ADRs

13.4

Value per diluted ADR

16.24

Source: Kazia Therapeutics reports, Edison Investment Research

Financials

The only change to our near-term forecasts has been the inclusion of the cash (US$7m) and stock (US$4m) components of the Simcere upfront payment in our models for the 2021 fiscal year (as revenue and equity offerings respectively). This has reduced our expected financing requirement for the company to US$7m from US$14m (which we include as illustrative debt in 2024, compared to 2023 previously).

Exhibit 2: Financial summary

$'k

2019

2020

2021e

2022e

30-June

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

1,117.9

757.8

12,003.4

865.0

Cost of Sales

0.0

0.0

0.0

0.0

Gross Profit

1,117.9

757.8

12,003.4

865.0

R&D

4,625.4

6,781.7

5,846.4

4,746.4

SG&A

2,704.0

2,635.6

4,285.6

5,871.3

EBITDA

 

 

(5,260.9)

(7,697.7)

2,833.1

(8,791.0)

Normalized operating profit

 

 

(5,261.0)

(7,697.7)

2,833.1

(8,791.0)

Amortization of acquired intangibles

(774.5)

(774.5)

(774.5)

(774.5)

Exceptionals

(1,337.4)

(458.8)

0.0

0.0

Share-based payments

(176.0)

(187.2)

(187.2)

(187.2)

Reported operating profit

(7,548.9)

(9,118.3)

1,871.4

(9,752.7)

Net Interest

0.0

0.0

0.0

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(5,261.0)

(7,697.7)

2,833.1

(8,791.0)

Profit Before Tax (reported)

 

 

(7,548.9)

(9,118.3)

1,871.4

(9,752.7)

Reported tax

213.0

213.0

(71.4)

372.2

Profit After Tax (norm)

(5,261.0)

(7,404.0)

2,725.0

(8,455.5)

Profit After Tax (reported)

(7,335.9)

(8,905.3)

1,799.9

(9,380.5)

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalized)

(5,261.0)

(7,404.0)

2,725.0

(8,455.5)

Net income (reported)

(7,335.9)

(8,905.3)

1,799.9

(9,380.5)

Basic average number of ADRs outstanding (m)

5.8

7.3

11.9

13.6

EPADR - basic normalized ($)

 

 

(0.91)

(1.01)

0.23

(0.62)

EPADR - diluted normalized ($)

 

 

(0.91)

(1.01)

0.23

(0.62)

EPADR - basic reported ($)

 

 

(1.28)

(1.22)

0.15

(0.69)

Dividend (A$)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

9,758.8

8,864.4

12,497.4

10,294.3

Intangible Assets

9,638.9

8,864.4

8,089.9

7,315.3

Tangible Assets

0.0

0.0

0.0

0.0

Investments & other

119.9

0.0

4,407.5

2,979.0

Current Assets

 

 

5,367.3

7,609.7

26,844.3

19,601.7

Stocks

0.0

0.0

0.0

0.0

Debtors

1,221.9

965.9

1,093.9

568.8

Cash & cash equivalents

3,881.3

6,260.0

25,366.6

18,649.1

Other

264.0

383.8

383.8

383.8

Current Liabilities

 

 

(1,357.4)

(3,619.6)

(2,495.8)

(2,615.6)

Creditors

(1,260.0)

(2,492.1)

(2,261.2)

(2,380.9)

Tax and social security

0.0

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

0.0

Other

(97.4)

(1,127.5)

(234.7)

(234.7)

Long Term Liabilities

 

 

(3,629.6)

(2,764.8)

(3,905.2)

(3,533.0)

Long term borrowings

0.0

0.0

0.0

0.0

Other long term liabilities

(3,629.6)

(2,764.8)

(3,905.2)

(3,533.0)

Net Assets

 

 

10,139.1

10,089.7

32,940.7

23,747.4

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

10,139.1

10,089.7

32,940.7

23,747.4

CASH FLOW

Op Cash Flow before WC and tax

(5,260.9)

(7,697.7)

2,833.1

(8,791.0)

Working capital

252.1

1,192.2

(4,518.9)

1,701.2

Exceptional & other

213.0

213.0

(71.4)

372.2

Tax

0.0

0.0

0.0

0.0

Net operating cash flow

 

 

(4,795.9)

(6,292.5)

(1,757.2)

(6,717.5)

Capex

0.0

0.0

0.0

0.0

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

0.0

0.0

0.0

0.0

Equity financing

2,725.5

8,671.2

20,863.8

0.0

Dividends

0.0

0.0

0.0

0.0

Other

1,685.1

0.0

0.0

0.0

Net Cash Flow

(385.3)

2,378.7

19,106.6

(6,717.5)

Opening net debt/(cash)

 

 

(4,254.4)

(3,881.3)

(6,260.0)

(25,366.6)

FX

12.2

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

(3,881.3)

(6,260.0)

(25,366.6)

(18,649.1)

Source: Company data, Edison Investment Research

General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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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

3rd Floor, New York, NY 10036

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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Tyman — Strong end to FY20, positive start to FY21

Tyman successfully navigated a major trading shock from COVID-19 across multiple geographies in FY20, ultimately delivering only a modest earnings reduction. A stronger balance sheet and good trading momentum in the early part of FY21 are positives for investors and our estimates are modestly increased after allowing for FX headwinds. Tyman entered FY21 in a position of strength and, as market pandemic effects recede, strategy and underlying business performance should come more to the fore.

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