PharmaMar — Update 27 September 2016

PharmaMar has filed for approval to market Aplidin to treat relapsed/refractory multiple myeloma in Europe, beating our expectation of a filing in Q4. The filing could potentially lead to approval in late H217 and market launch in late 2017 or early 2018. Aplidin has orphan drug designation in Europe and the US.

In March, the company announced positive top-line results from the 255-patient ADMYRE Phase III trial of Aplidin (plitidepsin) in relapsed/refractory multiple myeloma. The trial met its primary endpoint, showing a statistically significant 35% reduction in the risk of disease progression or death.

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.

Separately, in June the company initiated a pivotal Phase II trial of Aplidin for angioimmunoblastic T-cell lymphoma. We expect the initial approval for Aplidin in the US to be for this ultra-orphan indication, which accounts for 2% of non-Hodgkin’s lymphomas. The single-arm, open-label trial will recruit 60 patients from ~25 sites in Europe and the US; two sites were open at the end of July. Given the ultra-orphan nature of the disease we conservatively allow three years for the trial to complete and assume a US launch for Aplidin in H121. We expect Aplidin to reach global peak sales of US$300m, including US$115m in Europe.

PharmaMar has an Aplidin co-promotion agreement with Chugai Pharma Europe covering certain European countries (France, Germany, the UK, Benelux, Ireland and Austria). PharmaMar will earn a €4m milestone from Chugai for filing the marketing authorisation application to the European Medicines Agency.

Pharma Mar has also licensed marketing rights to Specialised Therapeutics Australia covering Australia, New Zealand and certain Asian countries, and to TTY Biopharm in Taiwan. It 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.

In August the CORAIL Phase III trial of PM1183 in ovarian cancer passed an interim futility analysis on the first 210 patients (50% of the total 420) and was cleared to continue recruiting. Recruitment is expected to complete around the end of 2016 with results likely in 2017. The CORAIL study is comparing PM1183 as a monotherapy in platinum-resistant ovarian cancer to a control arm with topotecan or liposomal doxorubicin. The primary endpoint is progression-free survival (PFS). This pivotal study follows encouraging PFS rates in a Phase IIb trial (Exhibit 3, below).

PharmaMar initiated a second pivotal study of PM1183 in August, this time in small cell lung cancer (SCLC). The ATLANTIS Phase III study builds on the impressive efficacy seen in a SCLC expansion cohort in a Phase Ib study. Preliminary results from the Phase Ib study showed that 67% of SCLC patients responded to PM1183 plus doxorubicin (including 10% complete responses), 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).

ATLANTIS is a multicentre, open-label, randomised Phase III trial in 600 patients with relapsed (second-line) SCLC following platinum-containing therapy. The primary endpoint is progression free survival (PFS) comparing patients treated with the combination of PM1183 and doxorubicin to the control arm where patients are treated with either topotecan or a combination of cyclophosphamide, adriamycin and vincristine.

PM1183 is a synthetic alkaloid that is structurally related to PharmaMar’s drug Yondelis which is marketed for soft tissue sarcoma (STS) and platinum-sensitive ovarian cancer. However, PM1183 is being developed in different indications to Yondelis, including platinum-resistant ovarian cancer, SCLC, NSCLC and breast cancer. The compound has been optimised to improve the pharmacokinetic profile, such that PM1183 can be given at four times 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.

Data 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 PM1183 approval in SCLC from 50% to 65% following the initiation of the Phase III trial. Separately, we have cut back forecast Yondelis growth in Europe to 10% per annum for the period to 2020 (previously 25%, 17%, 14%, 13% and 12% for 2016-20) and have revised peak sales estimates for both STS and ovarian cancer in Europe. Pooled royalties from Taiho in Japan and Janssen/J&J in the US are running ahead of our forecasts at this early stage of their commercialisation (approved in both markets in Q415), so we leave our peak sales estimates in those markets unchanged.

We have also increased near-term growth forecasts for the consumer chemicals business after buoyant 7.4% revenue growth in H116. Revenue growth now 7.7%, 4% and 3% for FY16-18 (previously 2% each year).

The result of these changes and the roll forward of the DCF model is a decrease to our valuation, which now stands at €1.02bn or €4.58/share (vs €1.09bn or €4.91/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 PM1183 could be retained by PharmaMar for self-commercialisation or co-promotion. This would typically provide greater economic returns on these products, 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 €1,098m (€4.94 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 €1,179m (€5.31 per share).

H116 group net sales increased 6.5% half-on-half to €89m. Total Yondelis sales rose 5% to €45m with Yondelis commercial sales in territories where PharmaMar leads commercialisation rising by 10%. Royalties on sales of Yondelis by licensees Janssen and Taiho rose to €3.1m vs €0.8m in H115, boosted by approvals in the US and Japan in H215. Consumer chemicals sales rose by 7.4% to €39.3m. EBITDA fell from €9.9m in H115 to a loss of €5.6m in H116 due to a significant increase in oncology R&D expense (+33% to €35.0m) and the previously disclosed completion of the milestone payment schedule under the Coordination Agreement signed with Janssen in 2011. We expect R&D spend to remain elevated in subsequent periods and leave forecast R&D spend unchanged at €72m for FY16 and FY17. The company is no longer capitalising a meaningful proportion of R&D expenses, so we now fully expense all R&D costs in our forecasts (previously capitalised €4.5m of R&D expenditure in FY16 and FY17). Lower forecast sales of Yondelis in Europe and fully expensing R&D costs sees forecast EBITDA decline from €5.9m previously to a loss of €7.8m in FY16 and from €35.2m to €15.1m in FY17 (Exhibit 5). The company ended H116 with ~€15m of undrawn credit lines plus €40.6m 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: