Redhill Biopharma — Transforming into a commercial pharma company

Movantik is the first oral PAMORA drug approved by the FDA and recommended by the American Gastroenterological Association (AGA) guidelines and the National Comprehensive Cancer Network (NCCN) guidelines. Movantik was originally developed by Nektar Therapeutics, which out-licensed it to AstraZeneca in 2009. The drug was approved by the FDA in 2014 and launched in the US in 2015. AstraZeneca described Movantik as an ‘important established medicine and the divestment to RedHill will ensure its continued availability for patients’.

AstraZeneca reported 2019 sales of Movantik of $96m ($108m in 2018) in the US. RedHill highlighted during the Q419 results call that it will be promoting Movantik with a larger salesforce and the opioid constipation treatment market is growing, so management is confident that sales will return to growth.

The deal terms include an upfront payment to AstraZeneca of $52.5m, with another $15m due in 18 months after the deal closes. RedHill will also take over the responsibility for royalty payments to the originator of Movantik, Nektar Therapeutics. AstraZeneca will continue to manufacture and supply Movantik, but RedHill’s management indicated that it plans to take over the manufacturing in due course. In 2015, AstraZeneca entered into a co-commercialisation agreement with Daiichi Sankyo in the US, which will be transferred to RedHill. RedHill expects that following completion of the transfer it will lead all US commercialisation activities and book all sales from Movantik and that it will continue to share costs and pay sales-related commissions to Daiichi Sankyo under that agreement (undisclosed).

The acquisition of Movantik as well as support for RedHill's commercial operations, including the launch to Talicia (announced mid-March 2020) will be financed by a royalty-backed term loan from HealthCare Royalty Partners, which has committed $115m in total (details in Financials section).

RedHill launched Talicia in March 2020 in the US and is marketing it with its own salesforce to approximately 25,000 gastroenterologists, primary care physicians and other healthcare providers. That same month, RedHill announced that the US pharmacy benefit manager, Express Scripts, has added Talicia to its National Preferred Formulary. The company expects to secure more coverage in the short term. Talicia’s price is $650 per prescription. Current retail prices for Prevpac and Pylera are around $950–1,050 per treatment, so Talicia’s pricing is attractive. Prevpac is a branded clarithromycin-based standard-of-care H. pylori treatment and Pylera is a branded bismuth-based standard-of-care H. pylori treatment. Talicia has the same advantages over these drugs as it does over the generic versions of standard-of-care antibiotics, ie improved efficacy due to non-existing H. pylori resistance.

Talicia is RedHill’s first drug developed in-house and approved by the FDA. The label is broad and includes the treatment of H. pylori infection in adults with no requirement for the patients to have any symptoms or complications (such as dyspepsia or peptic ulcer). This potentially positions Talicia to compete as a front-line treatment. Talicia is the only rifabutin-based therapy for H. pylori designed to address the resistance issue. In the Phase III clinical trial conducted by RedHill, no resistance to rifabutin was observed, which will be the key competitive advantage compared to standard-of-care clarithromycin-based H. pylori treatment, for which the resistance is a major and growing issue. Qualified Infectious disease product (QIDP) designation provides eligibility for eight years of market exclusivity in the US, while the existing patent portfolio provides protection until 2034. H. pylori is a group 1 carcinogen as per WHO. 90–95% of gastric cancers are related to H. pylori.

The recently in-licensed drug, Aemcolo, is a branded formulation of rifamycin 194mg in delayed-release tablets. It is a minimally-absorbed antibiotic formulation that the FDA approved for travellers’ diarrhoea (TD) caused by non-invasive strains of E. coli. Aemcolo is entering a proven market (minimally absorbable antibiotics for TD) with interesting market dynamics, in our view (more detailed review is in our last published report).

Aemcolo’s active pharmaceutical ingredient, rifamycin, is structurally similar to rifaximin (Xifaxan), which was developed and marketed by Salix Pharmaceuticals (currently owned by Bausch Health Companies). Xifaxan is approved by the FDA for several indications including TD, but by far the most significant indications for Bausch with this drug are diarrhoea-predominant irritable bowel syndrome (IBS-D) and hepatic encephalopathy, which together accounted for $1.2bn in sales in the US in 2018 (EvaluatePharma). Bausch does not provide a more detailed split of sales, but presumably Xifaxan sales for TD are much smaller. This creates an interesting niche for smaller players like RedHill, which can enter an existing market with a dedicated product and targeted sales strategy.

Aemcolo costs $171 per treatment. Xifaxan 200mg for TD retails at around $650 for 30 tablets. The suggested treatment in Xifaxan’s label is one tablet three times a day for three days ie nine tablets in total. Aemcolo’s price is still well below one third of Xifaxan’s $650 price tag.

RedHill’s FY19 sales of specialty GI products were $6.3m compared to $8.4m in FY18. In FY19 almost all revenues came from RedHill’s specialty product portfolio (Donnatal, EnteraGam and Mytesi). With growing GI drugs portfolio, RedHill decided to discontinue the promotion of these products and from now on will focus on Talicia, Aemcolo and Movantik. Therefore, we have removed revenues from the legacy products from our model. We have already included Talicia and Aemcolo sales in our estimates and we now add the sales of Movantik. As mentioned earlier, AstraZeneca reported Movantik’s 2019 sales of $96m. RedHill management believes that with a larger salesforce, sales should return to growth. In our model, we provisionally assume a conservative 5% annual growth from FY20. Our updated total FY20 and FY21 RedHill’s sales estimates are $99.0m and $141.0m, respectively.

FY19 operating expenses of $47.2m were only slightly higher than last year’s $44.9m. The increase was due to the expansion of the US commercial organisation, while spending on R&D decreased after the completion of the large Phase III studies. In FY19, S&M costs were $18.3m (vs $12.5m in FY18), G&A costs were $11.5m (vs $7.5m) and R&D expenses decreased to $17.4m vs $24.9m in FY18.

We have already assumed an increase in costs associated with the US organisation and the commercialisation of the GI drugs. During the Q419 results call management indicated that it is now targeting c 150 sales representatives, which we reflect in our S&M costs (our previous estimate assumed c 140 representatives). This was somewhat counterbalanced by the lower R&D spending in 2020 and 2021. Our operating loss expectation for FY20 is $14.0m, but we anticipate EBIT break-even in FY21 with $9.6m profit. We note that management guided that it expects to break even on its US commercial operations in FY21. As yet the company does not report its performance by business segment, so we currently do not have detailed segmental estimates. As the acquisition of Movantik is still in progress, we expect to refine our model once more details are known.

Reported cash and cash equivalents were $47.9m at the end of 2019. As described above, in conjunction with the acquisition of Movantik, RedHill entered into a royalty-backed term loan totalling $115m from HealthCare Royalty Partners. The terms include:

This available non-dilutive funding will allow RedHill to ramp up its salesforce, which it needs to optimise the promotion of the three products. Both Talicia and Aemcolo were launched recently, so by the end of FY20 the initial performance will provide insights into the commercial potential of these products and should also serve as a catalyst for the share price.

Our RedHill valuation is higher at $638m or $18.1 per ADS, versus $575m or $16.3 per ADS previously. We have made several key changes to our model. We now include sales of Movantik in RedHill’s GI product portfolio, but we have also increased our S&M costs due to the salesforce expansion in the US and removed the legacy GI products from our model. We have also incorporated financing from HCR and Movantik acquisition. As previously, we include RedHill’s most advanced R&D assets with unchanged assumptions.