PharmaMar — Update 5 May 2016

PharmaMar announced positive top-line results from the 255-patient ADMYRE Phase III trial of Aplidin (plitidepsin) in relapsed/refractory multiple myeloma last month. The trial met its primary endpoint, showing a statistically significant 35% reduction in the risk of disease progression or death. With these positive trial results in hand, PharmaMar plans to file for approval in Europe in Q416. The full ADMYRE results will be presented at a future medical conference, possibly ASH in December. Aplidin has orphan drug designation in Europe and the US.

Separately, in the US the company plans to seek initial approval for Aplidin for the ultra-orphan indication angioimmunoblastic T-cell lymphoma, which accounts for 2% of non-Hodgkin’s lymphomas. A pivotal Phase II trial in this indication is expected to commence recruitment in the current quarter.

Multiple myeloma accounts for 10% of all haematological malignancies. It is caused by malignant plasma cells that multiply very rapidly. In 2015, 26,850 new cases were diagnosed in the US, and about 11,200 people died of this disease. In Europe, the incidence is 4.5-6.0 out of every 100,000 people each year.

On the back of the successful Phase III trial, we increase our likelihood of approval in Europe to 90% (previously 65%). We expect PharmaMar to file for regulatory approval in Europe in Q416, which could potentially lead to approval in late 2017 and market launch in 2018. However, we have pushed our forecast US launch back by Three years to 2020, given that development timelines are yet to be determined. We expect Aplidin to reach global peak sales of US$300m.

PharmaMar has an Aplidin co-promotion agreement with Chugai Pharma Europe covering certain European countries (France, Germany, the UK, Benelux, Ireland and Austria). It has also licensed marketing rights to Specialised Therapeutics Australia covering Australia, New Zealand and certain Asian countries, and to TTY Biopharm in Taiwan. PharmaMar retains commercialisation rights in several key European territories, including Spain, Italy and Northern Europe, where we assume it will market Aplidin using its existing salesforce. PharmaMar also retains production rights and will supply Aplidin to its partners for sale in the licensed regions. There is potential for further licensing newsflow with Aplidin as the regulatory dossier for European approval will also be valid for more than 40 additional ex-EU countries.

PharmaMar plans to initiate a pivotal Phase III study in SCLC on the back of impressive efficacy in an expansion cohort in a Phase Ib study. The proposed Phase III is expected to be a head-to-head study comparing the combination of PM1183 and doxorubicin against either topotecan or a combination of cyclophosphamide, adriamycin and vincristine in 600 relapsed (second-line) SCLC patients following platinum-containing therapy. Preliminary results from the Phase Ib study showed that 67% of SCLC patients responded to PM1183 plus doxorubicin, compared to response rates of 20-25% typically seen with standard-of-care drug topotecan. In patients who initially responded to first-line chemotherapy before relapse, the response rate was 100% (Exhibits 1 and 2).

PM1183 is a synthetic alkaloid that is structurally related to PharmaMar’s marketed drug Yondelis, with activity in similar (ovarian cancer) and new indications (SCLC, NSCLC, breast cancer). The compound has been optimised to improve the pharmacokinetic profile, such that PM1183 can be given at 4x the tolerated dose level of Yondelis and offers administration advantages. PM1183 can be administered in a one-hour infusion using a peripheral intravenous catheter, compared to a 24-hour infusion with Yondelis via a central catheter.

In June 2015 PharmaMar initiated a Phase III trial of PM1183 as a monotherapy in platinum-resistant ovarian cancer (CORAIL), compared to a control arm with topotecan or liposomal doxorubicin. The randomised open-label trial will enrol 420 women with unresectable platinum-resistant ovarian cancer and will assess whether PM1183 can improve progression-free survival (PFS) as the primary endpoint. The drug cleared an interim safety analysis on the first 80 patients in February, and an interim futility analysis after 210 patients is expected to report in June or July. Recruitment is expected to complete around the end of 2016 with results likely in 2017. This pivotal study follows encouraging PFS and OS rates in a Phase IIb trial (Exhibit 3).

Data also are expected before the end of the year from a Phase II trial of PM1183 in metastatic breast cancer, which commenced in 2012. The primary endpoint of the 117-patient trial is overall response rate.

We have increased the likelihood of Aplidin approval in Europe from 65% to 90% following the positive Phase III results, but have delayed our forecast market launch date for Aplidin in the US by three years to 2021. These changes broadly net out; however, as Yondelis sales in US and Japan are becoming established, we have also updated our WACC to 10% (our standard for commercial-stage programmes) from 12.5%. The result is an increase to our valuation which now stands at €1.09bn or €4.91/share (vs €1.07bn or €4.82/share previously). Our valuation is based on a sum-of-the-parts DCF model (project-based rNPV for the biopharma business; FCF for the chemicals division to 2025), as shown in Exhibit 4.

With regard to PM1183 and Aplidin, we note that we have maintained our previous assumptions that these products will be out-licensed at some stage. However, we acknowledge that with the new corporate structure, PM1183 (and possibly also Aplidin) could be retained by PharmaMar for self-commercialisation or co-promotion. This would typically provide greater economic returns on these products (even after the extra investment required), so confirmation of a co-promotion strategy in the US (and across Europe) would add upside.

For example, if PharmaMar negotiated a 35% profit share arrangement for PM1183 in the US post approval, our valuation would increase to €1,170m (€5.27 per share). Alternatively, if it self-commercialised PM1183 in the US at an operating margin of 45% (subject to obtaining funding to set up a salesforce) our valuation would increase to €1,245m (€5.60 per share).

Q116 group net sales increased 16% q-o-q to €40m, of which Yondelis commercial sales in territories where PharmaMar leads commercialisation rose 15% to €22.8m. Royalties on sales of Yondelis by licencees Janssen and Taiho rose to €1.8m vs €0.6m in Q115, boosted by approvals in the US and Japan in H215. EBITDA fell from €9.0m in Q115 to a loss of €4.7m in Q116 due to a significant increase in oncology R&D expense (+51% to €16.9m) and the previously disclosed completion of the milestone payment schedule under the Coordination Agreement signed with Janssen in 2011. While we expect the growth in R&D spend not to slow in subsequent quarters, we have increased forecast gross R&D spend for FY16 by 4% to 71.8m, a 13% increase over FY15. The issue of €17m of non-convertible bonds in July 2015 has allowed PharmaMar to reduce short-term debt from €44.5m at end 2014 to €35.6m at end Q116. The company ended Q116 with €19.2m of undrawn credit lines plus €44.6m of cash and financial assets which, when combined with anticipated revenue growth flowing from recent Yondelis approvals, puts it in a robust financial position to fund its clinical trial programme.

PharmaMar is subject to various sensitivities common to speciality pharmaceutical companies, including potential clinical or regulatory failure or delay, manufacturing and commercialisation risks (launch, uptake, pricing, reimbursement and competition), and reliance on partners for ex-Europe markets. The chemical business is predominantly exposed to economic factors, although raw material costs, environmental/regulatory requirements and external weather conditions may also affect sales or margins. As mentioned above, successful self-commercialisation of PM1183 in the US could see a 14% valuation uplift compared to our base case out-licensing assumption.

Key stock-specific sensitivities for the core oncology business include, but are not limited to: