Acacia Pharma — Preparing for US BARHEMSYS launch

Acacia Pharma is at a major inflection point. Its lead drug, BARHEMSYS, will be its first internally developed asset to reach the market. The US approval of BARHEMSYS for PONV (26 February) comes after the receipt of two complete response letters issued in 2018 and 2019, indicating deficiencies reported at the third-party contract manufacturer. We highlight that no further studies or data analyses were required by the FDA, which has now granted a broad label for the drug. BARHEMSYS (10mg) is indicated for treatment of patients with PONV to include ‘rescue treatment’ (patients who are uncontrolled following prophylactic treatment with standard-of-care antiemetics) and prophylaxis of PONV as monotherapy and in combination with standard-of-care antiemetics including a 5-HT3 antagonist. Initial detailing will focus on rescue treatment and we note the total addressable US population is c 34 million patients, a sizable opportunity.

Ahead of potential approval, in 2019 Acacia Pharma’s core US commercial infrastructure was established, with 30 personnel focusing on six regions (medical science liaisons, national account directors and regional business directors) and the back-office support staff in the US. To support BARHEMSYS’s launch, Acacia has identified key sales representatives hires (target is for 30 field managers) to be put in place in the upcoming months.

To successfully commercialise BARHEMSYS, Acacia must ensure the product is accepted on each hospital’s formulary (a list of drugs that healthcare providers in the hospital can prescribe). This often requires the hospital’s Pharmacy & Therapeutics committee to be convinced of the clinical and economic benefits of the drug before approving it. Once it is on a hospital formulary, treatment with BARHEMSYS would be provided under Diagnosis-Related Group (DRG) codes, where the treatment costs would be included in the total cost of surgery. Under the DRG system, hospitals will charge third-party payors a standard price for a procedure. As such, the hospitals are incentivised to reduce costs. Acacia will need to show BARHEMSYS can provide a pharmacoeconomic benefit at its specified price point (as shown by the reduction in post-anaesthesia care unit and hospitalisation stay overall (clinical trials DP10017 and DP10019).

We estimate that through an aggregate investment in SG&A of $100–130m over 2020 to 2022, Acacia could build up its commercial operations including the sizeable salesforce of 60–80 reps it needs to focus on the ~1,600 hospitals that account for ~80% of US surgical procedures. Acacia estimates ~65m surgical procedures are conducted in the US per year that could be eligible for an antiemetic drug to treat or prevent PONV. The modest need for R&D expense (to support the Phase III clinical trial of amisulpride in CINV) coupled with high gross margins leads to our forecast that financial break-even in 2023 is feasible on BARHEMYSYS and ByFavo combined sales of c $92.9m. We note that significant risk remains around commercial execution, particularly as financial investment in the short to medium term will be high and Acacia will need to raise further funds in 2020 to expand the sales force to the critical mass it requires.

In addition to BARHEMSYS, Acacia is developing APD403 (repurposed amisulpride, the active ingredient in BARHEMSYS, in both an intravenous form for use alongside chemotherapy and an oral version for use at home in the subsequent days) for managing chemotherapy-induced nausea and vomiting (CINV) as a follow-on indication. One proof-of-concept trial and one Phase II dose ranging study in patients with highly emetogenic chemotherapy. In December 2018, the company announced its positive Phase II clinical trial data on APD403 in CINV had been published in the journal Supportive Care in Cancer. Management has indicated that a single Phase III clinical trial would be required for submission for CINV. We believe management will refocus on this programme once BARHEMSYS and ByFavo (potential) launches are underway and there is further visibility on cash runway post launch. In 2017, the global CINV market was valued at $1.7bn (source: MarketInsights reports) and the rising prevalence of cancer has led to increased rates of chemotherapy use. The most highly prescribed drugs in CINV are the 5-HT3 receptor antagonist and Neurokinin-1 receptor antagonists. Based on the encouraging Phase II data presented so far, we forecast peak sales potential of $108m in 2031.

During FY19 Acacia continued to build on its US commercial operations in preparation for the potential launch of BARHEMSYS (amisulpride injection). As result, net loss rose in FY19 to $22.8m (vs FY18: $20.7m). SG&A increased in FY19 to $14.0m vs $9.3m in FY18, R&D declined to $3.9m (vs FY18: $5.0m) reflecting the ending of the BARHEMSYS PONV clinical programme and NDA filing costs. Financial income declined to $0.4m (vs FY18: £1.2m) due to the lower cash balances held and a foreign exchange loss for the year of $0.1m vs gain reported in 2018 of $0.9m.

The year-end cash and equivalents was $17m. Acacia has a drawn a $10m credit facility with Hercules Technology Growth Capital (Hercules) in place. The deal with Cosmo provides an additional €35m loan facility (contingent on approvals), interest-rate only until January 2023 and repayable over the following 24 months from then. Until the Hercules debt is repaid, the Cosmo loan interest is 11% then reverts to 9%.

The cash injection from Cosmo (€10m equity stake and up to €35m in loan facilities) related to the ByFavo licence deal is vital to enable expansion of the US commercial team to support the launch and early detailing for BARHEMSYS (and ByFavo). The Cosmo loan facility is repayable over 24 months starting in January 2023. To fund further expansions in US operations, we forecast that, in addition to the loan facility from Cosmo Pharma, an additional c £100m will need to be raised in 2020–22 ($20m in 2020, $40m in 2021 and $40m in 2022). We note that, for simplicity, in our model we illustrate this as a debt raise.

We forecast revenues in FY20 of $2.1m, growing to $28.8m in FY21. In the short term, revenues remain dependent on the successful sales execution of BARHEMSYS in PONV and ByFavo in procedural sedation. Future BARHEMSYS sales could derive from CINV indication and further product in-licensing. We forecast a net loss of $33.7m in FY20 and $39.5m in FY21 and that Acacia will reach break-even in 2023. We anticipate that SG&A costs will increase to $31.5m in FY20, growing to $54.6m in FY21 – this investment is necessary to support product commercialisation.

As Julian Gilbert (former CEO) and Christine Soden (CFO) both stepped down in the last 12 months, new management is more US centric with the appointment of Mike Bolinder (CEO) and Gary Gemignani (CFO). A US listing could make sense in the future depending on market conditions and, importantly, Acacia’s status quo (post approval of BARHEMSYS and ByFavo with sales.

Our valuation of Acacia Pharma, at €963.2m or €15.1/share vs €970.5m or €15.2/share previously, is based on a risk-adjusted NPV model. Our sales forecasts are unchanged but we have adjusted our SG&A assumptions and rolled our model forward. Following the FY results we have moved to US-dollar denominated figures for 2018, 2019 and our forecasts. Our sales forecasts for BARHEMSYS for rescue treatment and prophylaxis of PONV and the CINV opportunity for the US market remain unchanged (Exhibit 1). We include end December 2019 net cash of $7m in our valuation ($17m cash and $10m Hercules debt) and use a 12.5% discount rate.