PharmaMar — Update 25 January 2017

PharmaMar is a Madrid-based company with two business divisions: biopharmaceuticals (based in the Madrid region) and consumer chemicals (based in Galicia). The head company, PharmaMar, is primarily focused on the development and commercialisation of marine-derived oncology drugs, including the marketed anti-cancer drug Yondelis. In addition, it has four wholly owned independent operating subsidiaries (Exhibit 1), with non-core operations in consumer chemicals, molecular diagnostics and RNAi technology. In 2015 the company restructured via a reverse merger, whereby PharmaMar, which was previously a subsidiary, absorbed the holding company Zeltia.

Our valuation of €1.01bn, or €4.55/share, is based on a sum-of-the-parts DCF to 2028. We use an rNPV method to discount future cash flows for the biopharma business (12.5% WACC) and have applied a standard DCF model for the chemicals division (7.5% WACC). Cash flows are taxed at a 25% corporate tax rate from 2020, tapering up from a lower rate to reflect accumulated tax losses.

PharmaMar’s biopharma division is subject to typical sensitivities including potential clinical/regulatory failure/delay, manufacturing and commercialisation risks and reliance on partners. The chemical business is predominantly exposed to economic factors. Specific sensitivities for the core oncology business relate to Yondelis (sales trajectory and ovarian cancer trial outcome), clinical data and deal progress (for Aplidin and lurbinectedin). PharmaMar’s sample library, technology platforms and discovery capabilities could represent unappreciated upside.

Group net sales for the nine months to September 2016 increased 4.7% on the previous corresponding period to €131m. Total Yondelis sales rose 2.8% to €67m with Yondelis commercial sales in territories where PharmaMar leads commercialisation rising by 9.7%. The company had €33.6m cash and financial assets at the end of September 2016, which, when combined with the €30m Chugai upfront receivable in January 2017 and anticipated revenue growth flowing from recent Yondelis launches in the US and Japan, puts it in a robust financial position to fund its clinical trial programme. In our forecasts we assume that the Chugai upfront will be booked as revenue in 2017, but a proportion of it may be treated as deferred revenue and brought to account in future years.

We expect PharmaMar’s profitability to accelerate from 2017 onwards, driven by its leading, marine-derived oncology therapeutics business. Since the first EMA approval of its marketed drug Yondelis, in 2007, PharmaMar has been a fully integrated speciality pharmaceutical company. It uses the sea as a source of first-in-class cancer drugs and has a diverse library of 200k marine samples. It has active discovery and preclinical programmes (with the aim of regularly advancing a new product to the clinic), a prioritised clinical development programme of three marine-derived synthetic compounds targeting multiple cancer indications, and a European sales infrastructure for Yondelis.

The recent launches for Yondelis for soft tissue sarcoma (STS) in Japan (partnered with Taiho Pharmaceuticals) and in the US (partnered with Janssen) will significantly boost PharmaMar’s revenue through royalty receipts and sales of raw material to partners. Edison forecasts Yondelis royalty revenue to grow from €5m in 2016 to €23m in 2020.

Newsflow from the two most advanced pipeline programmes, including Aplidin and lurbinectedin, a second-generation product related to Yondelis, represents further important inflection points over the next years. Exhibit 2 summarises these upcoming catalysts.

The Aplidin EMA approval decision and the readout of the Phase III relapsed/refractory ovarian cancer trial of lurbinectedin are major near-term value drivers that could catalyse lucrative licensing deals or development/commercialisation partnerships for non-European territories. Assuming both drugs reach the market, PharmaMar intends to sell these through its existing European sales infrastructure, in the regions where it retains rights (Aplidin is licensed to Chugai for eight EU territories), with only modest future expansion.

PharmaMar signed a licence and commercialisation agreement with Chugai Pharmaceutical in December 2016 for lurbinectedin in Japan. This is a positive development for PharmaMar in a territory where we had not previously assigned any value for lurbinectedin in our forecasts.

Terms include an upfront payment of €30m (expected to be paid in January) plus double-digit tiered royalties. PharmaMar will also be eligible to receive development and sales milestones that could potentially total over €70m, taking total potential receipts (excluding royalties) to over €100m.

PharmaMar will be responsible for the clinical development for the first two indications of lurbinectedin (platinum-resistant ovarian cancer and SCLC) in Japan, while Chugai will be responsible for regulatory filings and will have the right to conduct clinical development in Japan for additional indications and may contribute to global development.

In order to gain approval in Japan, PharmaMar will need to perform bridging studies in Japanese patients to determine whether the recommended dose is the same in Japanese patients as it is in the largely Caucasian patient population enrolled in PharmaMar’s pivotal trials. PharmaMar is already conducting a Phase I study of lurbinectedin as a single-agent in solid tumours in Japan. This study aims to identify the recommended dose of lurbinectedin in Japanese patients, to evaluate the safety profile and pharmacokinetic characteristics of lurbinectedin in Japanese patients compared to Caucasians. A separate Phase I study of the combination of lurbinectedin plus doxorubicin in Japanese patients will be required, as this drug combination is being tested in PharmaMar’s Phase III SCLC trial.

Following the completion of the Phase I studies PharmaMar will meet with the PMDA (Japanese regulator) to determine what Phase II/III ethno-bridging studies will be required before applying for approval in Japan. PharmaMar has commented that if the recommended dose is the same in Japanese and Caucasian patients then the approval in Japan could be based on the current US/EU pivotal studies.

The likely timing of filing in Japan will not be known until after the Phase I studies have been completed and the result discussed with the PMDA. In our forecasts we conservatively assume that approvals are gained in Japan two years later than the approvals for the equivalent indication in the US and Europe.

PharmaMar will be eligible to receive development milestones for events including study initiation, achievement of results and regulatory filings. No details have been provided on the structure of the potential milestone payments – for modelling purposes we assume half of the potential milestone payments (ie €35m) would be payable based on development progress, with the other half being sales-based milestones.

Chugai Pharmaceutical is a member of the Roche group of companies. Previously, in July 2014 its subsidiary Chugai Pharma Europe entered an agreement with PharmaMar for the promotion of Aplidin for the treatment of multiple myeloma in eight European countries.

Lurbinectedin is structurally related to PharmaMar’s drug Yondelis, which is marketed for soft tissue sarcoma (STS) and platinum-sensitive ovarian cancer. However, lurbinectedin is being developed in different indications to Yondelis, including platinum-resistant ovarian cancer, SCLC and breast cancer. The compound has been optimised to improve the pharmacokinetic profile, such that lurbinectedin can be given at four times the tolerated dose level of Yondelis and offers administration advantages. lurbinectedin 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 in H217 from a Phase III trial of lurbinectedin in resistant ovarian cancer (CORAIL), which completed recruitment in October 2016. The primary endpoint of the 443-patient trial is progression-free survival (PFS). A Phase III trial in SCLC (ATLANTIS) was initiated in August 2016, and we expect a pivotal trial in BRCA1/2 mutated breast cancer to commence in 2017.

In October 2016 PharmaMar announced positive results from its Phase II study of lurbinectedin in 54 patients with BRCA1/2-associated metastatic breast cancer who had undergone no more than three prior chemotherapy regimens.

A significant reduction in tumour size was reported in 22 of the 54 patients (ORR 41%); the primary endpoint of at least 17 responses was comfortably met. The ORR was 61% in the BRCA2 subgroup and 26% in patients with mutations in BRCA1. PFS was 4.1 months, median duration of response was 6.7 months and clinical benefit (tumour response or stable disease for at least three months) was observed in 61% of patients. Over the course of the trial, the initial dose of 7mg IV every three weeks was adjusted to 3.5mg/m2 every three weeks, which improved tolerability while maintaining efficacy.

The investigators concluded that lurbinectedin is active in BRCA-associated breast cancer independently of the prior treatment with platinum drugs. Exhibit 4 shows that response rates were highest in patients who had not undergone prior platinum therapy, who carried BRCA2 mutations, were hormone receptor positive or who had undergone fewer prior lines of chemotherapy. However, a meaningful proportion of patients in each of the less favourable subgroups also responded to treatment with lurbinectedin, including those with triple-negative breast cancer (TNBC).

Exhibit 5 shows that overall survival (OS) in the Phase II trial was substantially higher in patients carrying BRCA2 mutations than those with BRCA1 mutations (median OS 31.8 vs 11.8 months).

PharmaMar has stated that it intends to continue with the clinical development of lurbinectedin in BRCA-associated breast cancer, and in an investor conference call on 4 January 2017 indicated that this is most likely to be in BRCA2 subgroup, which experienced the highest response rates in the Phase II study. We anticipate that a pivotal study in this patient population could be initiated in 2017. We have increased our estimate of the likelihood of success in this indication from 15% to 45% in light of the positive Phase II results. We anticipate that we would further increase the likelihood when the pivotal trial is initiated.

There are varying estimates of the proportion of breast cancer patients who carry inherited mutations in the BRCA1 or BRCA2 genes. Some articles suggest that mutations in the BRCA1/2 genes account for 5-10% of cases of breast cancer overall.1,2 However, a number of those studies were in populations enriched for patients with a family history of breast cancer or who had breast cancer diagnosed at an early age, both of which would increase the likelihood of BRCA mutation.

A meta-analysis by Nelson et al (2013)3 reported a prevalence of 1.8% for BRCA1 and 1.3% for BRCA2 in breast cancer patients (ie 3.1% for BRCA1/2 combined). That analysis was conducted as part of a systematic review of BRCA testing prepared for the US Agency for Healthcare Research and Quality.

A study by Neuhausen et al (2009) reported BRCA1/2 mutation frequencies from several large breast cancer family registries. In over 3,600 families from three population-based family registries the frequency of mutations was 4.0% for BRCA1 and 3.7% for BRCA2 (total 7.7%). However, in two of these registries there was over-sampling based on younger age at diagnosis and cancer family history, both of which would be expected to increase the frequency of BRCA mutations. In ~1,600 families where there was no family history of breast cancer the frequency of mutations was 2.4% for BRCA1 and 2.2% for BRCA2 (total 4.6%) – we believe that this figure is a better indicator of the frequency of BRCA1/2 mutations in the overall population.

In our forecasts we assume that 2% of breast cancer patients carry BRCA2 mutations, a figure that is between the estimates of Nelson et al and the Neuhausen families where there was no family history of breast cancer. With 650,000 new cases of breast cancer each year in the US, EU and Japan, we estimate that there would be 13,000 cases of BRCA2-associated breast cancer each year in these markets. Although this is a relative small patient population, we would expect a high market penetration for a drug that is specifically targeted to the treatment of this patient group.

PharmaMar initiated a second pivotal study of lurbinectedin in August, which is recruiting patients with 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 lurbinectedin 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 6 and 7).

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 lurbinectedin and doxorubicin to the control arm where patients are treated with either topotecan or the CAV regimen, a combination of cyclophosphamide, adriamycin (the brand name for doxorubicin) and vincristine.

SCLC patients constitute 10-15% of total lung cancer patients, representing ~80,000 cases in the US, EU and Japan in 2016 (assuming SCLC comprises 12.5% of all lung cancers). They respond well to first-line treatment, but almost always relapse, with treatment options then largely palliative. About 10% of the total population of SCLC patients remains disease free two years after the start of therapy. The overall survival at five years is 5-10%, reflecting a clear medical need for improved treatment.

The CORAIL Phase III trial of lurbinectedin in platinum resistant ovarian cancer completed recruitment in October, three months ahead of schedule. Four hundred and forty-three patients were recruited from over 100 hospitals in Europe and the US. The study had previously passed an interim futility analysis on the first 210 patients in August 2016. The fact that the study completed recruitment ahead of schedule suggests that there was considerable interest among investigators in the use of lurbinectedin in this patient population.

The CORAIL study is comparing lurbinectedin 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, above).

In September 2016 PharmaMar filed for approval to market Aplidin to treat relapsed/refractory multiple myeloma in Europe. The filing could potentially lead to approval in H217 and market launch in late 2017 or early 2018. Aplidin has orphan drug designation in Europe and the US.

In March 2016 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.

A Phase I trial of Aplidin in combination with bortezomib and dexamethasone in relapsed/refractory multiple myeloma continues to recruit patients in the expansion phase, while a Phase II trial of the same drug combination in myeloma patients refractory to both bortezomib and lenalidomide is also underway.

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 2016 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. 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 earned a €4m milestone from Chugai for filing the Marketing Authorisation Application to the European Medicines Agency.

PharmaMar 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 news flow with Aplidin as the regulatory dossier for European approval will also be valid for more than 40 additional ex-EU countries.

Yondelis (trabectedin) is a synthetic, marine-derived, intravenous anti-tumour drug originally isolated from the colonial tunicate Ecteinascidia turbinate. It has a novel mechanism of action, binding to the minor groove of DNA and interfering with cell division, gene transcription and DNA repair mechanisms causing apoptosis. It is approved in more than 80 countries for advanced soft tissue sarcoma (STS) after failure of first-line treatment or in patients who are unsuitable for the indicated first-line regimen (doxorubicin or ifosfamide), and for relapsed platinum-sensitive ovarian cancer (OC) in combination with pegylated liposomal doxorubicin4 (PLD, Doxil [US]/Caelyx [Europe], Janssen). Its first approval in the EU was for STS in 2007, with EMA approval in OC following in 2009, and the US and Japan for STS in 2015.

In the 577-patient trial Phase III trial, which supported the FDA approval of Yondelis in STS, treatment with Yondelis reduced the risk of disease progression or death (PFS) by 45% compared to dacarbazine (hazard ratio [HR] 0.55, p<0.0001). Median progression-free survival (PFS) was 4.2 months for Yondelis-treated patients vs 1.5 months for dacarbazine.

Yondelis is sold by PharmaMar in Europe and is subject to partnerships with Janssen and Taiho Pharmaceuticals in the US/ROW and Japan, respectively. We expect the recent launches of Yondelis in the US and Japan will be key drivers of earnings growth over the next few years. We forecast peak sales in Japan of €34 in STS (reduced from €130m after correcting a modelling error) and assume a 15% royalty rate. In the US we forecast peak sales of US$130m in STS and assume an 11% royalty on initial sales, rising to 15% in 2020. PharmaMar will also earn a margin on sales of Yondelis raw material to Janssen. Royalty income on sales of Yondelis was €4.2m for the first nine months of 2016, which we expect to grow to €23m by 2020.

Janssen is conducting an ongoing pivotal Phase III clinical trial of Yondelis in relapsed platinum-sensitive ovarian cancer. The 670-patient study is not expected to render final results until late 2018. This trial will form the basis of potential marketing applications in the US and other countries where Yondelis is not yet approved for ovarian cancer.

Recruitment is progressing on schedule in the ongoing Phase II trial of PM184 in hormone-receptor positive advanced breast cancer, which is being conducted in Spain and the US. Recruitment is also ongoing in a Phase I trial of PM184 in combination with gemcitabine in solid tumours.

Exploring the biodiversity of the sea as a source of potential new anti-tumour compounds with differentiated mechanisms means PharmaMar’s drug discovery process is unique. Through annual diving expeditions around the globe, the company has built an extensive library of c 200,000 marine samples that form the basis of its cancer research activities. Exhibit 8 outlines the key activities in the discovery process; once a lead candidate is selected, it enters standard preclinical and clinical development. PharmaMar’s synthetic chemistry capabilities have three major benefits: ensuring drug supply does not rely on natural sources; potential for discovery and synthesis of more potent derivatives; and a strong IP position and barriers to entry, particularly as the underlying molecules are complex (eg Yondelis has an 18-step manufacturing process).

The sample library and IP estate (more than 1,200 granted patents and 600 pending patents in 100 families) represents a significant barrier to entry. Patents cover composition of matter (including of analogues), use, formulation and manufacturing, with the company also benefiting from significant know-how and marketing exclusivities. We also note the significant potential value in the sample library outside oncology as it is likely to contain novel compounds with utility in other disease areas (eg anti-infectives) that could be exploited through potential future IP licensing deals.

PharmaMar’s wholly owned operating subsidiaries are independently managed, allowing each management team to concentrate on its line of activity. Zelnova and Xylazel (consumer chemicals) are leaders in their market segments and are, like molecular diagnostics company Genomica, self-sustaining profitable businesses requiring little external investment. However, consumer chemicals could now be considered non-core legacy businesses, and there may be future potential for the sale or spin-off of this division to create a pure-play biopharma company.

The remaining biopharmaceuticals subsidiaries have both complementary (Genomica) and distinct (Sylentis) activities to marine oncology. Genomica develops and commercialises in vitro diagnostic kits with its CLART platform (launched in 2006) and performs DNA identification analysis. The company is diversifying strategically into cancer molecular diagnostics with the launch of a new line of products (CLART CMA) based on the detection of genetic DNA mutations in cancer genes.

Sylentis is developing drugs based on RNA interference (RNAi) technology, including SYL1001 for ocular pain. PharmaMar reported positive results from a Phase II study of SYL1001 for treating dry eye discomfort in March 2016; the dose of 1.125% significantly reduced pain scores (P<0.016) and redness (also known as hyperaemia, P<0.0134). Following a meeting with the FDA in June, the protocol for Phase III has been defined and centres for the next trial with SYL1001 have been selected. Dry eye represents a significant market opportunity, with an estimated 25 million people in the US affected by chronic dry eye. For example, in 2015 Allergan in-licensed the Phase III dry eye drug Tavilermide in a deal that included a US$50m upfront payment, and undisclosed milestone payments and royalties on sales. Exhibit 9 summarises the Sylentis pipeline.

Our valuation of PharmaMar has decreased slightly to €1.01bn (vs €1.02bn), or €4.55/share (vs €4.58/share). Following the Chugai licence agreement we have for the first time included sales of lurbinectedin in Japan in our forecasts, which, combined with risked development milestones, adds €75m to our valuation. We have also increased our peak sales forecast for lurbinectedin in SCLC to €680m (vs US$200m) based on new bottom-up forecasts, which has added €160m to our valuation of this indication. However, these positive changes have been offset by lower peak sales forecasts for Yondelis (partly due to correcting a modelling error in our forecasts for Yondelis in Japan) and lower peak sales forecasts for lurbinectedin in resistant ovarian cancer (based on a more appropriate target population). The main changes to our forecasts are described below. We have:

Our valuation is based on a sum-of-the-parts DCF model (project-based rNPV for the biopharma business; free cash flow [FCF] for the chemicals division to 2025), as shown in Exhibit 10.

With regard to lurbinectedin 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 lurbinectedin 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 lurbinectedin in the US post approval, our valuation would increase to €1,080m (€4.86 per share). Alternatively, if it self-commercialised lurbinectedin in the US at an operating margin of 45% (subject to obtaining funding to set up a salesforce) our valuation would increase to €1,147m (€5.16 per share).

Group net sales for the nine months to September 2016 (9M16) increased 4.7% on the previous corresponding period to €131m. Total Yondelis sales rose 2.8% to €67m with Yondelis commercial sales in territories where PharmaMar leads commercialisation rising by 9.7%. Royalties on sales of Yondelis by licensees Janssen and Taiho rose to €4.2m vs €1.0m in the first nine months of 2015 (9M15), boosted by approvals in the US and Japan in H215. Consumer chemicals sales rose by 6.7% to €59.2m. EBITDA fell from €16.5m in 9M15 to a loss of €5.6m in 9M16 due to a significant increase in oncology R&D expense (+33% to €53.2m) 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 had €33.6m cash and financial assets at the end of September 2016, which, when combined with the €30 Chugai upfront receivable in January 2017 and anticipated revenue growth flowing from recent Yondelis launches in the US and Japan, puts it in a robust financial position to fund its clinical trial programme. In our forecasts we assume that the Chugai upfront will be booked as revenue in 2017, but a proportion of it may be treated as deferred revenue and brought to account in future years.

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 lurbinectedin 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: