PharmaMar — Strong newsflow expected in 2017

PharmaMar signed a licence and commercialisation agreement for lurbinectedin in Japan with Chugai Pharmaceutical in December 2016. Terms include an upfront payment of €30m (paid in January 2017) 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.

The €30m Chugai upfront payment received in January 2017 puts PharmaMar in a robust financial position to fund its clinical trial programme, and strengthens its capacity to pursue self-commercialisation or co-promotion of lurbinectedin in the US, which will lead to higher overall returns from the programme over the long term than would an out-licensing deal. We have now adopted co-promotion of lurbinectedin in the US as our base case scenario in our valuation of PharmaMar, versus our previous out-licensing scenario.

PharmaMar looks to be playing the long game with lurbinectedin development. Its clinical studies to date have produced strong evidence of efficacy in a range of cancers, including reports of high response rates and substantial reductions in the risk of disease progression or death. Initial development is targeting niche conditions with relatively small patient populations - ~15% of ovarian cancers, ~15% of lung cancers and 2-4% of breast cancers.

Targeting niche conditions will help justify higher pricing for lurbinectedin, and is likely to drive high uptake for the approved indications. In the case of BRCA2 breast cancer it is also expected to allow a smaller Phase III trial size (proposed Phase III trial design is a 116-patient single arm trial).

We suspect that lurbinectedin will eventually be used much more broadly than in the niche indications that are the subject of the current Phase III programme; however, in our valuation model we currently only include the three indications where there are Phase III trials underway or in preparation.

In order to capture a small portion of the potential additional sales from label expansion or off-market use of lurbinectedin we have modified our assumed sales growth curve to include growth of 5% per annum (previously 2%) from the time of peak uptake in the approved indication in the sixth year after launch until the expiry of IP protection/market exclusivity, with sales declining at 25% per annum thereafter. Broader uptake of lurbinectedin beyond this modest additional growth represents potential upside from our revised valuation.

Records at the US patent and trademarks office (PTO) show that PharmaMar was awarded additional patent protection for lurbinectedin in the US in August 2016, with the grant of US patent 9,428,524 covering the method of manufacturing the drug. The patent has a priority date of May 2011, and was granted a 19-month patent term adjustment in recognition of delays at the US PTO so it would expire in December 2032. PharmaMar would also be eligible for further patent term extension from the US FDA to allow for the time taken for clinical development and regulatory review of the drug. We assume that patent protection or market exclusivity for the drug will extend to at least the end of 2033, and we now extend our cash flow forecasts for PharmaMar out to 2035 vs 2030 previously.

PharmaMar is pursuing additional patents to strengthen the IP protection for lurbinectedin. For example, US patent application 13/884,874 which covers the use of lurbinectedin in combination with a range of anticancer drugs including anticancer antibiotics such as doxorubicin (the combination of lurbinectedin and doxorubicin is being tested in the ATLANTIS SCLC trial). Lurbinectedin has orphan drug designation for ovarian cancer and SCLC in both the US and Europe, which would ensure market exclusivity for the lung cancer indication (assuming 2020 approval) until at least 2027 in the US and 2030 in Europe independently of the patent protection.

We expect PharmaMar to reach a number of potentially significant milestones in 2017. The key anticipated events are summarised below.

We expect a decision in H217 on PharmaMar’s marketing application for Aplidin (plitidepsin) to treat relapsed/refractory multiple myeloma in Europe, which could potentially allow a launch in late 2017 or early 2018. In March 2016, the company announced positive top-line results from the 255-patient ADMYRE Phase III trial of Aplidin in relapsed/refractory multiple myeloma. The trial met its primary end point, showing a statistically significant 35% reduction in the risk of disease progression or death (hazard ratio [HR]=0.65, p=0.0054).

Separately, in June 2016 the company initiated a pivotal Phase II trial of Aplidin for the rare 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. Aplidin has orphan drug designation in Europe and the US.

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 intends to sell Aplidin through its existing European sales infrastructure, in the regions where it retains sole rights, with only modest expansion of the sales team required.

The lurbinectedin (PM1183) CORAIL Phase III trial in platinum-resistant ovarian cancer is expected to report results in H217. The 443-patient study, which completed recruitment in October 2016, passed an interim futility analysis on the first 210 patients in August 2016.

The CORAIL study is comparing lurbinectedin as a monotherapy in platinum-resistant ovarian cancer to a control arm with topotecan or liposomal doxorubicin. The trial is powered to detect a 30% improvement in the PFS primary end point (ie HR of 0.70).

The regulation strategy for a Phase III trial of lurbinectedin in BRCA2-associated breast cancer was agreed with the FDA at a meeting in December 2016. The company’s January 2017 corporate presentation outlines a proposed 116-patient single arm trial in BRCA2-mutated metastatic breast cancer patients, with objective response rate (ORR) as the primary endpoint. The trial would recruit subjects who have undergone one or two prior lines of chemotherapy (ie using lurbinectedin as second or third line chemotherapy treatment), but patients who have undergone prior treatment with a PARP inhibitor will not be eligible to participate.

The relatively small number of subjects in this pivotal trial reflects the strong 61% ORR observed in Phase II and the relatively small addressable patient population; it is variously estimated that 2-4%1 of breast cancer patients carry a BRCA2 mutation, implying an addressable population of between 13,000 and 25,000 new patients each year in the US and Europe. PharmaMar is working with breast cancer patient advocacy groups to help choose trial sites and educate patients and clinicians about the plans for the trial, in order to facilitate patient recruitment.

We are not aware of any other late-stage trials specifically targeting BRCA2 patients, although several, including the marketed PARP inhibitor olaparib (Lynparza), are targeting the combined BRCA1 and BRCA2 patient populations.

PARP inhibitors prevent the PARP (poly[ADP-ribose] polymerase) enzyme from repairing DNA damage in cancer cells. When this DNA repair pathway is blocked in BRCA1/2 mutated breast cancers, which are already lacking the homologous recombination DNA pathway, the simultaneous loss of both pathways results in cancer cell deaths.

In February 2017 AstraZeneca reported positive results in the 302-patient OlympiAD Phase III trial of single-agent olaparib in metastatic breast cancer patients carrying germline BRCA1 or BRCA2 mutations; the PFS primary endpoint was met, but no detailed data have been disclosed. The trial recruited patients with metastatic breast cancer who had undergone no more than two prior lines of chemotherapy. Olaparib is already FDA-approved for ovarian cancer.

The breastcancertrials.org website lists three ongoing Phase III trials of other PARP inhibitors in BRCA1/2 mutated breast cancer. All three of these trials are targeting advanced breast cancer – either metastatic or locally advanced unresectable cancer: Veliparib in first to third line in combination with carboplatin and paclitaxel; talazoparib as a single agent in second to fourth line; and niraparib as a single agent in second to fourth line.

The 61% ORR for lurbinectedin-treated BRCA2 BC patients is much higher than the response rates reported for PARP inhibitors used as single agents. The response rates for PARP inhibitor monotherapy in BRCA 1/2 BC in trials with at least 10 subjects has ranged from 0-44%2. Looking at just the subjects with BRCA2 mutations in the two largest studies, both involving olaparib, the ORR was 12% (3/16)3 and 25% (5/20)4. If the high ORR for lurbinectedin in BRCA2 BC is confirmed in the Phase III trial then we would expect it to gain significant market share even in the face of competition from PARP inhibitors (if they are approved for use in breast cancer)

The 600-patient ATLANTIS Phase III trial of lurbinectedin in combination with doxorubicin in small cell lung cancer (SCLC), which commenced in August 2016, is expected to complete recruitment in 2018. In a Phase I trial involving 21 patients, the overall response rate was 67%, including 10% complete responses. Guidance in the company’s January 2017 corporate presentation is for data to be reported in 2019; however, given that median PFS in the Phase I trial was 4.6 months, we believe that if recruitment is completed in Q118 then the top-line results for the PFS primary end point could be reported before the end of 2018. A futility analysis is planned after approximately 150 subjects have experienced disease progression events.

Management commented at the 2016 results presentation that the US-based Phase III trial of Yondelis led by J&J is well underway. The study is believed to be approaching the recruitment target of 672 ovarian cancer patients.

PharmaMar is working to initiate a small Phase III trial of its RNA interference (RNAi) technology drug, SYL1001, in treating eye pain associated with dry eye syndrome. A partner will be sought to fund a larger, confirmatory Phase III trial if the results of the smaller trial are positive.

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).

Our valuation of PharmaMar has increased to €1.29bn (vs €1.01bn), or €5.79/share (vs €4.55/share). The main changes to our forecast assumptions are that we have:

We have rolled forward the DCF model to 2017 and updated net debt to reflect the 31 December 2016 balance of €62.0m. The 2016 Yondelis cash flows have dropped out of the model, which sees the value of Yondelis Europe fall from €567m to €530m. The €30m Chugai upfront is included in the valuation in the “Lurbinectedin upfront and milestones” line (rNPV €43.7m).

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 2026), as shown in Exhibit 1.

As mentioned above, we have now adopted co-promotion of Lurbinectedin in the US as our base case valuation scenario. We now consider out-licensing of lurbinectedin in the US to be a low-case scenario (total valuation €1,191m or €5.36/share). Alternatively, if PharmaMar 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 €1,383m (€6.22 per share).

The company’s marketed anti-cancer drug, Yondelis, achieved solid 10.5% volume growth in 2016 in European territories where PharmaMar leads commercialisation, which was in line with our forecasts; however, currency movements and price reductions in Poland, Greece and Portugal saw commercial sales revenue grow by a lesser 7.4% to reach €86.7m. Sales of Yondelis raw materials to partners Janssen (J&J) and Taiho were €1.5m in 2016 compared to €7.8m the previous year when the partners were building stocks ahead of market launches in the US and Japan. The lower Yondelis raw materials sales saw total biopharmaceutical sales fall slightly to €94.4m vs €94.6m the previous year.

Yondelis royalties from partners J&J in the US and Chugai in Japan totalled €5.8m, slightly ahead of our forecast of €5.2m, with ~90% of royalties coming from the US. If the current trajectory is maintained, US peak sales could exceed our forecast of US$130m. At this stage, we leave our US forecasts unchanged until we have a few more quarters of data to confirm the sales trajectory.

We have further trimmed our near-term forecasts for Yondelis sales in Europe to account for the price reductions, but maintain our projection for Yondelis commercial sales by PharmaMar to grow on average by ~8% pa and peak at €130m in 2021. We forecast net commercial sales of Yondelis in Europe of €93.9m in 2017 versus our prior forecast of €95.9m.

We have increased forecast gross R&D expenditure in 2017 to €88.4m versus €71.6m previously, reflecting 30% growth in 2016 and guidance for low double-digit growth in 2017.

Only €6m of the €30m Chugai upfront payment was recognised as revenue in 2016, although the full €30m cash payment was received in January 2017. We expect a further €10m to be recognised as revenue in 2017. Note that we had previously assumed that the full €30m of the Chugai upfront would be recognised as revenue in 2017.

The net effect of these changes is that we now forecast a modest €17.8m profit at the EBITDA level in 2017 versus our previous forecast of €56.5m EBITDA.

The company had €32.4m cash and financial assets and total net debt of €62.0m at the end of December 2016. Pro forma net debt after including the €30 Chugai upfront received in January 2017 was €32m which, combined with anticipated revenue growth flowing from recent Yondelis launches in the US and Japan, puts PharmaMar in a robust financial position to fund its clinical trial programme and pursue self-commercialisation or co-promotion of lurbinectedin in the US market (if approved).