Basilea Pharmaceutica — Cresemba growth, pipeline expansion

Basilea has updated full-year 2018 total revenue and operating loss guidance. Revised guidance is for total revenues of CHF120-130m (previous guidance CHF105-115m). This reflects management’s expectations of higher revenue contributions from Cresemba and Zevtera (updated guidance of CHF75-85m from CHF60-65m). Given that Zevtera still accounts for a minority of the combined revenues (H118 CHF1.6m), the upgrade is a reflection of stronger than anticipated Cresemba revenues (CHF26.3m). Of importance is the contract revenue contribution from the deferred revenue recognition related to the Toctino upfront payment of £145.6m (CHF224.1m) received in 2012, which will reduce from CHF18.8m in H118 to CHF4.9m in H218 and to zero in 2019. We expect contributions from Cresemba revenue growth to more than make up the shortfall here.

Management now expects a widening of FY18 operating loss to CHF25-35m from initial guidance of CHF10-20m, R&D expenses are anticipated to be higher due to the $10m upfront paid to ArQule for the in-licencing of derazantinib in H118 and its associated programme-related costs. In H118, net cash used for operating activities increased to CHF60.4m (H117 CHF36.6m), reflecting one-time effects in the period (the $10m upfront payment to Arqule plus cost of in-licensing some preclinical assets). Importantly management expect cash burn in H218 to reduce to CHF7m average per month.

Basilea reported H118 total revenue of CHF59.9m (+30%), which includes product sales of CHF6.5m (vs H117 CHF9.8m), contract revenues of CHF40.1m (vs H117 CHF31.4m) and other revenue of CHF13.3m (vs H117 CHF5.0m), which comprises mainly BARDA reimbursements related to the Phase III ceftobiprole trials required for a US registration. With the commercialisation of Cresemba and Zevtera (ex US) largely in the hands of multiple licensing and/or distribution partners, a higher amount of the associated revenues (be that milestones, royalties, transfer price sales or deferred revenues) will fall into the contract revenue line as opposed to product sales. Exhibit 1 provides details of the H118 revenue breakdown.

Basilea reported H118 operating expenses of CHF80.3m (H117 CHF65.3m), as higher R&D expenses offset lower SG&A expenses. R&D expenses increased to CHF57.8m in H118, reflecting the $10m upfront payment for the in-licensing of derazantinib and its associated development costs, the initiation of the US ceftobiprole Phase III studies as well as the ongoing paediatric studies for both ceftobiprole (Zevtera) and isavuconazole (Cresemba). SG&A expenses decreased to CHF15.9m (H117 CHF34.6m), reflecting the change in the commercialisation model for marketed assets, Cresemba and Zevtera post the Pfizer deal. Basilea reported an H118 operating loss of CHF20.4m (H117 operating loss of CHF19.1m).

Basilea reported gross cash (including financial investments) of CHF247.3m at end June 2018 compared to CHF311m at end December 2017. We believe this should be sufficient to fund operations beyond 2019, even excluding future potential deals for Zevtera in the US or the oncology pipeline. Profitability will be driven by increasing revenues (royalties and milestones on sales of Cresemba worldwide and Zevtera in Europe and the rest of the world); the higher revenues plus fairly stable combined R&D, selling, general and administrative expenses during the next 12 to 18 months will result in a reduction in operating losses in 2019, even in the absence of any deferred revenue recognition related to the Toctino upfront payment.

Basilea has multiple licensing deals in place for its commercially available anti-infective products, Cresemba and Zevtera; over 100 countries are covered by strong regional and global partnerships. So far Basilea has received $230m in total upfront and milestone payments. Under the terms of existing agreements, Basilea could receive a total of $1.1bn in potential regulatory and sales milestones if the assets reach predetermined targets. Exhibit 2 highlights the existing partnerships for both Cresemba and Zevtera and outlines the associated deal economics. We note that in many instances, partners have chosen to in-license both products given the significant overlap in the physician-prescribing base.

Cresemba (isavuconazole) is a broad-spectrum antifungal for the treatment of severe, life-threatening fungal infections. It is available in the US and major European countries through regional partners. In-market sales for Cresemba amounted to $120m in the 12 months ending 31 March 2018 (+94% vs comparable period; we note in-market sales at 31 December 2017 were just over $100m). Exhibit 3 highlights the steady growth in sales in the US and the increasing contribution from key European markets of Germany, UK and France and new markets such as Italy and Spain. In the US, partner Astellas reported sales of $54m (+59%) for H118 ($34m in H117).

Basilea anticipates growth in existing markets and further launches worldwide to drive top-line growth. Pfizer will roll out the drug in stages across Europe (timing is dependent on individual country pricing and reimbursement discussions as Cresemba received approval through a centralised process in Europe). Launches to date in 2018 include Switzerland, Greece, Ireland and the Netherlands. Further EU launches (not disclosed) are anticipated in H218. Outside Europe and the US, partners are filing or have filed for marketing authorisation, so further approvals should come through in additional territories within the next couple of years. In July 2018, Latin American distribution partner Grupo Biotoscana received the first Cresemba approval in Peru under an expedited review triggering a CHF2m milestone payment to Basilea.

In April 2018 Japanese partner, Asahi Kasei Pharma, started enrolment of the Phase III registration study (n=100) for potential approval in Japan for the treatment of invasive fungal infections (deep-seated mycosis, comprising invasive aspergillosis, chronic pulmonary aspergillosis, mucormycosis and cryptococcosis).

Zevtera/Mabelio (ceftobiprole) is a broad-spectrum antibiotic for the treatment of Gram-positive infections, including methicillin-resistant Staphylococcus aureus (MRSA), which are resistant to a number of existing antibiotics, and Gram-negative bacterial infections, including Pseudomonas. The product is available in major European countries (through Correvio), Canada (through Avir Pharma) and Argentina (through Grupo Biotoscana). Additionally, partner Hikma has launched Zevtera in Saudi Arabia and has received approval for Cresemba in Jordan; further roll-out into the Middle East, North Africa and Latin America is expected later in 2018 to 2020. Uptake remains slow as sales of antibiotics take time to build after launch due to the requirement for regional reimbursement across Europe, the need to be added to individual hospital formularies and microbial stewardship programmes, and a tendency to keep new antibiotics in reserve use.

The major commercial opportunity for Zevtera resides in the US market; it is not currently approved in the US (further clinical studies are needed to secure approval). In terms of value, in 2017 the US accounted for 50% of anti-MRSA antibiotics and 70-80% of the branded hospital antibiotic market. Importantly, during H118 Basilea initiated the two Phase III cross-supportive ceftobiprole registration trials needed for US marketing approval in accordance with the Special Protocol Agreements that have been agreed with FDA. The TARGET study in ABSSSI started enrolment in February 2018 and the ERADICATE study in SAB (bloodstream infections) was initiated in August 2018. Both trials will be needed to support a US NDA submission. The TARGET trial aims to recruit 674 patients with ABSSSI who require treatment with intravenous antibiotics. This double-blind, multi-centre trial will compare ceftobiprole monotherapy versus vancomycin plus aztreonam. Unlike ceftobiprole (which has both Gram-negative and Gram-positive activity), vancomycin has no activity against Gram-negative bacteria, hence the necessary addition of aztreonam. We expect the ABSSSI study to have a duration of 18-24 months, so top-line data could be available in late 2019.

SAB is an indication where few antibiotics are currently approved and which the FDA considers an area of unmet need; therefore, the SAB study could further differentiate Zevtera from available cephalosporins. The 390-patient, multi-centre ERADICATE study will include patients with endocarditis and other forms of complicated SAB. Basilea anticipates a three-year duration for the study, thus data should be available in H221. A US launch date of 2022/2023 for ceftobiprole could be feasible, with an initial focus of bacteraemia and ABSSSI. Furthermore, data from the TARGET study could be used to support the post-marketing label outside the US.

Critically, the funding for these trials plus the potential trial in community-acquired pneumonia is in place, with up to $118m from BARDA and Basilea funding approximately 30% of the anticipated costs for the Phase III programme. BARDA is a division of the US Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response.

In addition to its commercially launched anti-infectives, Basilea also has an early- to mid-stage clinical pipeline focused on oncology products that target resistance to current therapies. These include BAL101553 (solid tumours including glioblastoma and ovarian cancer) and BAL3833 (solid tumours). Data from the (BAL101553 Phase I/IIa in recurrent glioblastoma multiforme is expected to read out initial data by year-end. Basilea successfully expanded its oncology portfolio during H118 with the in-licensing of ArQules’s derazantinib. This adds a complementary oncology asset that targets subtypes of cancers, which arise from FGFR genetic aberrations. Cancer is a complex disease, both in how it arises and how it evades treatment options through multiple mutations. Basilea’s R&D efforts are targeting a different part of cancer development and a prolongation cycle for a range of cancers (Exhibit 4). On that note, Basilea recently entered into a licencing and preclinical research collaboration evaluating a biomarker-driven development of a selective kinase inhibitor that controls chromosome segregation during cell division.

In April 2018 Basilea in-licensed the worldwide ex-China, Hong Kong, Macau and Taiwan (Greater China) rights to research and develop, manufacture and commercialise ArQule’s derazantinib. It paid $10m upfront with up to $326m in milestones, in addition to tiered royalties starting in the single digits then going into double digits. ArQule had already licensed derazantinib’s Greater China rights to Sinovant Sciences. This small molecule, oral drug therapy is in registrational Phase II trials for intrahepatic cholangiocarcinoma (iCCA), a form of bile duct cancer. We expect Basilea to start Phase II trials in other FGFR-driven solid cancers mid-2019 as derazantinib could have utility against a wide range of cancers including breast cancer, urothelial cancer and gastric cancer.

Both the FDA and EMA have granted ArQule orphan drug designation for iCCA, which translates into longer exclusivity periods. We assume a US/EU5 launch in 2023 for the iCCA indication following a traditional development path including a Phase III trial. However, we note that depending on the strength of the Phase II data, an accelerated approval in iCCA before this date could be a possibility. Interim analysis of data on 40 patients from the Phase II registrational trial is expected in H119. Given its current stage of development, we model derazantinib for the second-line iCCA indication only. We model peak sales of $59.4m in the US and top EU5.

Our note Oncology product portfolio to drive future growth published July 2018 provides an in-depth dive into derazantinib, BAL101553 and BAL3833.

Our updated Basilea valuation is CHF1,239m (from CHF1,285m) and primarily reflects an increase in our R&D forecasts for the oncology pipeline. We have increased R&D spend forecasts in 2018 reflecting the derazantinib iCCA trial in addition to the cost of the ongoing paediatric ceftobiprole and isavuconazole trials. We have additionally rolled forward our DCF and updated it for a lower net cash position at the interim results (CHF51.3m at 30 June 2018 vs CHF115.8m at end December 2017). The breakdown of our valuation is shown in Exhibit 5.