Basilea Pharmaceutica — Refilling the pipeline for growth

Basilea is focused on developing and commercialising therapies for the treatment of severe fungal and bacterial infections (Exhibit 1). Its two marketed products are Cresemba (or isavuconazole), an antifungal therapy, and Zevtera (or ceftobiprole), an antibiotic therapy.

Cresemba has been approved in 76 countries, is marketed in 71 countries and has Orphan Drug designation in the US, Europe and Australia. It continues to drive top-line revenues for the company, as discussed in our previous update note, and in November 2023 Basilea received an additional $1.25m milestone payment based on a sustained strong sales performance in Asia-Pacific and China. In December 2023, US licensing partner Astellas received FDA approval for Cresemba’s expanded use in children with invasive aspergillosis and invasive mucormycosis (types of mould infections), extending the drug’s market exclusivity in the US by six months (to September 2027). This marks the first approval of an azole antifungal therapy for the treatment of invasive mould infections in children, a market that remains particularly underserved. Basilea expects a regulatory decision by the European Medicines Agency (EMA) on a similar paediatric label expansion in H124, which it expects to extend European market exclusivity by two years (to October 2027).

Zevtera is marketed in selected countries in Europe, Latin America, the Middle East, North Africa and Canada. In October 2023, Basilea announced that the FDA had accepted its NDA, and has set a Prescription Drug User Fee Act (PDUFA) date of 3 April 2024. In our view, this regulatory decision could represent the next most significant catalyst for the company.

In October and November 2023, Basilea entered into three transactions for new assets, in line with its previously disclosed objectives of expanding its product pipeline.

BAL2062 (previously GR-2397) has been acquired from Gravitas Therapeutics (original patent owned by Astellas Pharma). It is a Phase II-ready antifungal compound for the treatment of invasive mould infections, mainly caused by the Aspergillus species. The asset has already received Fast Track, Orphan Drug and QIDP designations from the FDA for invasive aspergillosis. Basilea plans to conduct a preclinical profiling programme to ascertain the optimal clinical development path for BAL2062, with Phase II studies scheduled to commence, upon successful completion of the preclinical work, in H125.

Tonabacase is being evaluated by Basilea as part of a licence and option agreement with iNtRON Biotechnology. Tonabacase is an antibacterial therapy of the endolysin class, offering potential advantages over conventional antibiotics. As part of the agreement, Basilea will evaluate the asset in a range of preclinical studies and, if favourable, this could lead to a licensing agreement for further clinical development at Basilea’s exclusive discretion.

Fosmanogepix is a late-stage clinical asset, for which management plans to commence Phase III trials from mid-2024. The drug has been acquired from Amplyx Pharmaceuticals, an affiliate of Pfizer. Basilea already has an established relationship with Pfizer as a collaborator in the commercialisation of Cresemba in parts of Europe, China and the Asia-Pacific region, and we note that Pfizer continues to hold the right of first negotiation for commercial rights to fosmanogepix, which we believe it will exercise, if clinical data are favourable. We discuss fosmanogepix and the antifungal market in more detail below.

In November 2023, Basilea introduced fosmanogepix as the latest acquisition to bolster its product pipeline. Deal considerations for this Phase III-ready, broad-spectrum antifungal therapy include an upfront payment of $37m and potential milestone payments of up to $506m ($110m to Pfizer and $396m from previous agreements), the majority of which relate to regulatory and commercial milestones, as well as tiered single-digit royalties.

The invasive fungal infection market represents an important area of significant unmet medical need. This is driven by a rise in underlying conditions that predispose people to these infections, including chronic obstructive pulmonary disease, cystic fibrosis and acquired immune deficiency syndrome. Furthermore, immunocompromised patients, such as cancer and transplant patients, are at notable risk to conditions caused by fungal infections. While often overlooked and under-recognised as serious microbial conditions (versus bacterial infections, which have been attracting significant attention as the other component of antimicrobial resistance, AR), we note that such conditions cause c 1.5 million deaths worldwide each year, and this figure is expected to be increasing.

Antifungal therapies can be broken down into four major classes, depending on their chemical structure and mode of action (Exhibit 2):

Beyond these four classes of therapies, there is a limited number of other approved antifungals that operate by a different mechanism of action and/or are restricted to being used as combination treatments. Two examples of note are:

While collectively these available therapies can be used to treat a range of fungal infections, their use is generally constrained by dose-limiting toxicities, drug-drug interactions and possible routes of administration. Consequently, we believe there is ample opportunity to address this area of medical need. Furthermore, in 2022 the World Health Organization (WHO) identified four fungal priority pathogens considered to be of critical concern: Cryptococcus neoformans, Candida auris, Aspergillus fumigatus and Candida albicans. The development of new antifungals should therefore remain a point of focus, if the healthcare community is to address this potentially global threat.

Fosmanogepix is a type of drug called a prodrug, which means it is converted in the body to its active form, manogepix (Exhibit 3). The drug operates by a novel mechanism, working by blocking the function of the fungal enzyme Glycosylphosphatidylinositol-anchored wall protein transfer 1 (GWT1). Inhibition of this protein/enzyme prevents the cell wall from producing mannoproteins, causing cell wall fragility and leading to cell death and decreased potential for biofilm formation (Exhibit 4). The drug is being developed in both oral and intravenous (IV) formulations, allowing for treatment in both inpatient and outpatient settings. It also has Fast Track and Orphan Drug designations from the FDA, as well as a QIDP tag, which should provide more than 10 years of market exclusivity post launch.

To date, fosmanogepix has demonstrated potent broad-spectrum activity (in several in vivo fungal infection models including azole/echinocandin-resistant isolates) against a range of pathogens such as yeasts, moulds and dimorphic fungi, including azole-resistant phenotypes. It is active against all of the pathogens listed in the WHO’s critical priority group, as previously discussed: Cryptococcus neoformans, Candida auris, Aspergillus fumigatus and Candida albicans.

As previously highlighted, while there are available therapies to treat a range of fungal infections, the epidemiology of invasive fungal infections has been changing and evolving, such as the emergence and growing threat of Candida auris, which the US Centers for Disease Control and Prevention has deemed an urgent AR threat. Moreover, growing usage of antifungal agents in prophylaxis, empiric therapy and agriculture has resulted in antifungal resistance to available treatments. Furthermore, the current standard of care treatment options also come with other potential constraints:

Unlike the antibacterial space, where c 15 new antibiotics across five novel drug classes have been approved in the past two decades, no new class of antifungal drugs for the treatment of invasive fungal infections has been approved in more than 20 years (after echinocandins in the early 2000s). This highlights the urgent need for new antifungal treatments with novel and varied mechanisms of action. We therefore believe that fosmanogepix holds the potential to fulfil this unmet need, provided efficacy is established in the Phase III clinical studies, which could translate into a potentially significant opportunity for Basilea.

In terms of the competitive landscape, we acknowledge that there are new and emerging treatment options for severe fungal infections, including ibrexafungerp, olorofim and rezafungin. However, fosmanogepix appears to have the broadest potential based on a comparative analysis of drug activity against different fungal strains, as compiled by company management (Exhibit 5).

Ibrexafungerp (or Brexafemme) was recently in the headlines when GlaxoSmithKline (GSK) in-licenced the product from Scynexis, a New Jersey-based biotech, in March 2023. GSK made an upfront payment of $90m for ibrexafungerp and deal considerations include up to $503m in additional payments based on the drug reaching certain milestones, of which Scynexis has already received $25m. We note that ibrexafungerp has already been approved for the treatment of vulvovaginal candidiasis (VVC) and for reduction in the incidence of recurrent VVC, for which GSK holds the commercial rights now. Scynexis will continue to develop the drug for other indications such as invasive candidiasis, for which it is undergoing Phase III clinical trials. It is considered a first-in-class triterpenoid antifungal therapy, although it operates by a similar mechanism to that of echinocandins. It is distinguished by its oral bioavailability, the fact that few drug-drug interactions provide a favourable safety profile and its activity against multidrug-resistant pathogens.

Rezafungin (or Rezzayo) is the newest echinocandin to join the antifungal market. Shortly after Cidara Therapeutics submitted an NDA to the FDA in July 2022, the drug was in-licensed by Melinta Therapeutics in exchange for $30m upfront, plus up to $60m from reaching regulatory milestones and $370m in commercial milestones. In March 2023, the FDA approved rezafungin for the treatment of candidemia and invasive candidiasis, although usage has been restricted to adults with limited or no alternative treatment options. While it is only available via IV administration, we believe the once-weekly treatment regimen differentiates it from other approved treatment options, which typically require once-daily dosing.

The above-mentioned licensing deals highlight the potential commercial opportunity for effective antifungal therapies, although to our knowledge fosmanogepix is the only advanced clinical-stage antifungal treatment with a novel target as well as a novel mechanism of action. Basilea plans to out-license fosmanogepix for commercialisation following completion of clinical development. As noted above, Pfizer holds the right of first negotiation for commercial rights under the terms of the acquisition agreement. If clinical data are positive, we believe that the ensuing licensing deal may come with a more premium valuation than suggested above.

Fosmanogepix generated encouraging data in preclinical studies, mainly focused on murine (mouse) models. In one study, survival was measured in a disseminated candidiasis model involving Candida auris infection, with a comparison of various dosing regimens of fosmanogepix, as well as anidulafungin, which is commonly used for the treatment of Candida infections. Importantly, mice in each member of the fosmanogepix treatment group exhibited superior survival compared to anidulafungin, highlighting early signs of efficacy (Exhibit 6). A separate study looked at a murine model involving infection by Scedosporium apiospermum. Treatment with either placebo, fosmanogepix (various doses), posaconazole or liposomal amphotericin B (L-AMB) were compared. Survival and tissue burden were measured, showing enhanced survival with fosmanogepix treatment, as with the previous study, and reduced lung, kidney and brain tissue fungal burden was observed with fosmanogepix. Histological observations were also made based on the brain tissue of the mice. The placebo mice showed that Scedosporium apiospermum spores had disseminated from the lungs to the brain, with signs of growth and inflammation. Contrastingly, mice treated with fosmanogepix or L-AMB showed no signs of infection or inflammation, demonstrating comparable efficacy of fosmanogepix to the FDA-approved polyene (Exhibit 7).

Fosmanogepix has also demonstrated a desirable safety and efficacy profile in clinical studies, having been administered to more than 300 patients across seven Phase I trials, a Phase Ib trial and three Phase II trials. In a Phase I trial conducted in healthy adults, 151 (out of 154) participants completed the study, and showed that single and multiple IV dosing of fosmanogepix gave linear and dose-dependent pharmacokinetics. Single and repeat oral administration of fosmanogepix showed a similar trend and the drug also demonstrated high oral bioavailability (more than 90%). Furthermore, no severe treatment-emergent adverse events, serious adverse events or withdrawals due to treatment-emergent adverse events were reported, highlighting a desirable safety and tolerability profile.

A multicentre, open-label, single-arm Phase II trial was conducted to evaluate the safety and efficacy of fosmanogepix, both in IV and oral formulations. Eligible participants had established candidemia and/or invasive candidiasis caused by Candida auris, and had limited treatment options. The patients were treated with fosmanogepix, started with a loading dose of 1,000mg twice daily (IV administration) for day one, followed by 600mg once daily (IV administration), with the option to switch to the oral formulation at 800mg once daily from day four. The primary endpoint for the trial was treatment success based on measures of Candida auris at the end of the study treatment. The secondary endpoint was survival at day 30. Nine patients took part in this study and none were switched to the oral formulation. The treatment was determined to be successful, with 89% (eight out of nine) of the population achieving the defined threshold for clearance of Candida auris from blood/tissue cultures. The remaining patient had failed the treatment and unfortunately developed sepsis and died due to cardiac arrest; the death was considered unrelated to treatment with fosmanogepix. There were no treatment-related adverse events across the duration of the study. With a day 30 survival rate of 89%, the results demonstrate that the drug was safe, well-tolerated and efficacious against this indication.

A separate global, multicentre, non-comparative Phase II trial has also been completed, in this case to assess the safety and efficacy of fosmanogepix as a first-line treatment for candidemia in non-neutropenic adults. Like the Phase II trial mentioned above, patients received 1,000mg twice daily (IV administration) on day one, then 600mg once daily (IV administration), with the option to switch to 700mg orally once daily from day four. The primary efficacy measure was treatment success at the end of study treatment based on clearance of Candida from blood cultures. The results showed that, of the modified intention-to-treat population (n=20), treatment success was 80% (16/20) and survival at day 30 was 85% (17/20). It was noted that the three deaths were deemed unrelated to treatment with fosmanogepix. Of the full 21 in the intention-to-treat to treat population, 10 patients switched to the oral formulation of the drug and this transition showed no discernible influence on safety. Throughout the duration of the study, fosmanogepix was well tolerated and no treatment-related serious adverse events or discontinuations were reported.

Basilea is planning a global Phase III clinical programme for fosmanogepix comprising two clinical trials:

We expect this Phase III programme to have a duration of approximately three to four years. With revenues for Cresemba expected to diminish from 2028 and market exclusivity ending in 2027 in the US and European markets, management hopes that fosmanogepix can fill Cresemba’s shoes. However, we note that this will be sensitive to clinical trials tracking on the planned timelines. Also, while exclusivity ends in the US and the EU, Cresemba was launched later in other regions, including Japan and China (representing approximately 26% of the global potential for Cresemba), and are expected to continue to grow after 2027.

We update our forecasts and valuation for Basilea, now including the potential contribution from the recently in-licensed and most advanced clinical asset, fosmanogepix, with planned Phase III trials in candidemia and invasive candidiasis (mid-2024) and invasive mould infections (late-2024). For both indications, we assume Basilea will exclusively fund the Phase III trials, followed by a subsequent out-licensing deal to commercialise the asset. As previously highlighted, Pfizer holds the first right of negotiation for fosmanogepix’s commercial rights. Note that while management has been working on obtaining non-dilutive funding, for example from the Biomedical Advanced Research and Development Authority (BARDA) to help defray some or all of the R&D costs for fosmanogepix (similar to the funding provided for the Zevtera clinical study), we conservatively assume that Basilea will shoulder all clinical expenses for now. This is subject to revision as more clarity on these talks emerge.

For the first indication (candidemia and invasive candidiasis), we estimate a target population of c 700,000 patients globally per year, of which 46,000 cases are in the US, 48,000 in Europe, 11,000 in Japan and remainder in the rest of the world (RoW). Given the treatment’s first-line positioning in this indication, we assume 20% peak penetration in the US, albeit a lower 10% in the other key geographies of Europe and Japan. For the RoW, we assume a peak penetration of 5%. We estimate market entry in 2029, with peak sales achieved in 2035 across the key geographies (2037 in RoW). We assume a treatment cost (likely to be two- to four-week treatment) of $7,000/patient in the US, with similar pricing in Europe. In Japan we assume a 20% discount to this price. This is broadly in line with the $6,000 treatment cost ($2,000 per vial) of the recently approved Rezzayo for the same indication.

For the second indication (invasive mould infections), we estimate a target population of c 350,000 (of which c 300,000 are cases of invasive aspergillosis, the most common mould infection), with 29,000 patients in the US and Europe each and 6,000 patients in Japan. While management has indicated that fosmanogepix could have utility in front-line therapy in this indication as well, we cautiously assume 10% peak penetration in the US and a lower 5% penetration in other key geographies, given the market dominance of azoles (Cresemba is the US market leader with a 37% share) and possible challenges in patients switching to alternate treatments. For this indication also, we assume market entry in 2029 with peak sales achieved in 2035. While the per-vial costs for the drug across both indications will likely be the same, we estimate the total treatment cost for invasive mould infections to be significantly higher ($28,000/patient in the US with similar discounts as above in the other geographies), given the longer average duration of treatment, especially for the treatment of infections with rare moulds (three to six months).

For both indications, we project a post-launch market exclusivity period of c 10 years and project sales up to 2040, with declining revenues thereafter to 2045. We assume per patient R&D expenses to be $150,000, with around $5–6m in other overheads/year. This adds up to R&D expenses of c $140m across the clinical programme for the two indications. The probability of success has been set at 60% (slightly higher than the typical early Phase III programme due to solid preclinical and clinical data to date and high unmet need in this space) and we use a discount rate of 12.5%, which is our standard for programmes at the clinical stage of development. Our key modelling assumptions across the two indications are shown in Exhibit 8 below.

Note that our estimate for the target patient population is based only on the patients clearly diagnosed with these above infections (eg clear positive diagnosis), although we acknowledge that the drug may also be prescribed and administered in patients without a clear or definitive diagnosis. Treatment usage and administration therefore could potentially be higher than our forecasts. In addition, we do not capture the incremental opportunity from potential utility as an antifungal prophylaxis treatment where the current standard of care is posaconazole and fluconazole.

In line with Basilea’s current business model, we assume that it will seek out-licensing opportunities following completion of the Phase III programme. For simplicity, we currently assume that the company will sign a global out-licensing deal for fosmanogepix across both indications, with the partner taking on complete responsibility of manufacturing, commercialisation and marketing. Taking guidance from Basilea’s deal terms for Cresemba, we estimate that it will out-license fosmanogepix global rights for a total consideration of $1bn (across all markets worldwide), including $300m in potential upfront and regulatory milestones and $700m in potential commercial milestones. We also assume tiered, double-digit royalty payments. As previously highlighted, Basilea made an upfront payment of $37m to acquire the rights to fosmanogepix and is required to make potential milestone payments of $506m, including up to $110m in commercial sales-related milestone payments to Pfizer and up to $396m in development, regulatory and commercial milestone payments from previous agreements. In addition, the company is required to pay tiered single-digit royalties on sales, which we assume to be 5–8% in our model. Management has indicated that the payout, in total, will be in the mid-single digits in the next few years, and we accordingly estimate an annual payout of $1.25m for the duration of the Phase III clinical trials.

After incorporating fosmanogepix, our valuation for Basilea increases to CHF910.4m or CHF76.0/share (from CHF797.8m or CHF66.6/share). For fosmanogepix, we estimate peak sales of $801m (across both indications), which translates to a net present value (NPV) and risk-adjusted NPV of $248.2m and $133.0m, respectively based on a 60% probability of success. On a per-share basis, this comes to CHF11.1/share or 15% of the current group valuation. For Cresemba, our peak sales estimate is unchanged at $691m, although the rNPV goes down to CHF633.7m (from CHF652.3m) as we roll forward our model and the asset approaches maturity. For Zevtera, our rNPV remains broadly unchanged at CHF181.9m (previously CHF183.6m). Note that our valuation does not currently consider the other two recently acquired Phase I assets, BAL2062 (invasive aspergillosis) and Tonabacase (severe Staphylococcal infections) as we await further information of their clinical development plans. As these programmes progress, they may add additional upside to our valuation. Our updated valuation is presented in Exhibit 9 below.

At the same time as the announcement of the fosmanogepix deal, Basilea provided revised guidance for FY23 (see Exhibit 10). Total revenue is now expected to be CHF154–157m (CHF157–160m previously) due to lower than expected BARDA reimbursements, based on lower operating expenses for the phase 3 ceftobiprole program. More importantly, operating profit expectations have been revised to CHF11–15m (CHF50–55m previously), with the decrease primarily driven by the company recognising the $37m upfront consideration for fosmanogepix as R&D expenses in its accounts. We have updated our FY23 estimates to account for these revised expectations.

We have also made certain changes to our FY24 forecasts. Based on a recent filing from Basilea’s US commercial partner, Astellas, we note that Cresemba has achieved in-market sales of $192m in the nine months ending 30 September 2023. At this run rate, we believe Cresemba will exceed $250m (CHF217m) in annualised sales in the US soon. Reflecting this performance, we slightly upgrade our sales estimates for FY24 to CHF183.3m (vs CHF180.7m previously). We also make certain adjustments to our FY24 R&D expense estimates (revised upwards to CHF78.7m from CHF47.9m previously) to incorporate the incremental clinical costs related to the initiation of the fosmanogepix clinical trials in candidemia and invasive candidiasis in mid-2024, as well as the $1.25m (CHF1.1m) milestone payment we estimate that the company will pay for initiation of the first Phase III clinical trial. Our FY24 estimates for cost of sales and SG&A expenses remain broadly unchanged at CHF35.7m and CHF32.5m, respectively (from CHF33.7m and CHF31.9m previously). Overall, we now expect operating profit of CHF36.4m in FY24 versus CHF67.2m previously.

We also update our FY24 interest expense estimates to take into account the company’s recently announced plans to prepay its outstanding senior secured loan from Athyrium Capital Management by the end of Q124, six months in advance of the original repayment date of September 2024. Basilea raised the CHF75m loan (net proceeds of CHF73.9m) from Athyrium in September 2022 to support repayment of its CHF117m convertible bond, due in December 2022. Of this, CHF18.4m of the principal repayment was made in H123 (payment made on a quarterly basis), with a similar payment anticipated in H2. Based on the latest update, the remaining c CHF38m principal outstanding will be redeemed by end Q124, saving the company c CHF1.5m in interest payments and fees, according to management (the loan bore an interest rate of 7.75% plus the lesser of the Swiss Average Rate Overnight, or 3% per year). Basilea will reinvest this sum in progressing its anti-infective drug pipeline. Following this adjustment to our interest expense estimates (in addition to the aforementioned changes to operating profit), we forecast FY24 net income of CHF35.1m (CHF63.2m previously).