Basilea Pharmaceutica — From strength to strength

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 for the treatment of life-threatening invasive mould infections, and Zevtera (or ceftobiprole), an antibiotic therapy. In line with the company’s previously disclosed plans of re-stocking its product pipeline, in late 2023 it announced three transactions for new assets, including fosmanogepix (an antifungal therapy), BAL2062 (an antifungal therapy) and tonabacase (an antibacterial therapy). Fosmanogepix is expected to commence two Phase III trials in 2024 (discussed in more detail below), while BAL2062 is expected to commence a Phase II study in H125, provided ongoing preclinical tests are positive. For tonabacase, Basilea holds an in-licensing option, which it plans to exercise if the anticipated preclinical studies in 2024 are positive. This will be followed by a Phase II study in 2025, provided the data are supportive.

We firmly believe that the key upcoming catalyst for Basilea is the regulatory decision on Zevtera in the US. Zevtera is an intravenous (IV) antibiotic that has shown rapid bactericidal activity against gram-positive bacteria, such as Staphylococcus aureus (including methicillin-resistant strains, MRSA), and gram-negative bacteria. The drug has already been approved in selected countries across Europe, Latin America, the Middle East, North Africa and Canada (marketed as either Zevtera or Mabelio). The US region is a key strategic priority for Basilea and could represent a potentially lucrative commercial opportunity, provided that regulatory approval is achieved, given that the MRSA treatment market is projected to be worth c $5.5bn by 2030. Furthermore, the US accounts for the majority of global market for branded anti-MRSA hospital antibiotics (c 85%, according to IQVIA, September 2023), see Exhibit 2.

Basilea submitted the new drug application (NDA) for Zevtera in August 2023 and in October 2023, the company announced that the FDA had accepted its NDA, setting a PDUFA date of 3 April 2024 (Exhibit 3). Basilea is seeking approval based on positive clinical efficacy and safety data from three separate studies:

The Phase III programme for Zevtera was majority funded by the Biomedical Advanced Research and Development Authority (BARDA), whereby it provided c $112m to fund the SAB and ABSSSI clinical studies (c 75% of the costs), alongside related regulatory activities and non-clinical work. We note that the ERADICATE trial, the results of which were recently published in the New England Journal of Medicine, was the largest double-blind, randomised registrational study conducted for a new SAB antibiotic treatment, which we believe that regulators should view favourably. We note that the FDA has already granted qualified infectious disease product (QIDP) designation to ceftobiprole, allowing up to 10 years of market exclusivity in the US, provided Basilea obtains regulatory approval. Management has communicated that it aims to enter a partnership for commercialisation in the US ahead of the 3 April 2024 PDUFA date.

Cresemba continues to be the flag bearer for Basilea’s operating performance, reporting another strong year of sales. FY23 was the best year yet from Cresemba, with the company netting CHF78.9m in Cresemba-related royalties (c 21% growth over the FY22 figure of CHF65m). In addition, Cresemba recorded CHF32.2m in milestone payments in FY23, including CHF26.2m from Pfizer (which included a $25m sales milestone from Europe and another three payments of $1.25m each in sales milestones for other European territories and China; totalling $28.75m, which translates to CHF26.2m at prevailing forex rates at the time of receipt), a CHF5m milestone from Asahi following Cresemba’s launch in Japan and another CHF1m in a first sales milestone from its distribution partner in Latin America, Knight Therapeutics. Collectively, these milestone payments cover various regions, highlighting the commercial success of the antifungal therapy worldwide. We also note that Basilea’s reporting currency (the Swiss franc) has been strengthening against other major currencies recently, making the top-line growth rate even more impressive on a like-for-like basis. This performance has been driven by the continued uptrend in Cresemba’s in-market sales, which reached $445m in the 12 months ending September 2023, c 22% y-o-y growth (Exhibit 4). Management has indicated that this includes growing traction from the Chinese market, where the drug was launched in 2022.

Based on US licensing partner Astellas’s reported sales figure for Cresemba in 2023 ($261m, 22.5% y-o-y growth from $213m in 2022), we calculate that the US is contributing close to 60% of Cresemba’s in-market sales, which highlights the continued importance of this key market. We note that Cresemba is the market-leading antifungal treatment in the US, accounting for 38% of US market share (in value terms) in best-in-class antifungals (31% market share in 2022), see Exhibit 5. By end 2023, Cresemba had been approved in 76 countries and marketed in 73, capturing 15% of the global market (Exhibit 6).

With sales in China and Japan tracking up (accounting for 20% and 5% of the global market opportunity for Cresemba, respectively), recent label expansion in paediatric patients in the US (which extends market exclusivity to September 2027) and a decision expected from the European Commission on paediatric expansion in mid-2024 (slightly later than prior guidance of Q124), we expect Cresemba sales to continue to increase until the loss of market exclusivity in late 2027.

While we expect some sales erosion from 2028 in the US and European markets, management is optimistic that its newly acquired asset, fosmanogepix, could be a worthy successor to Cresemba. We note that although Cresemba’s market exclusivity ends in the US and EU in 2027, it was launched later in other regions like Japan and China (comprising c 26% of Cresemba’s global potential) and revenues generated from these regions could grow beyond 2027.

Fosmanogepix, a Phase III-ready, broad-spectrum antifungal therapy, is Basilea’s most advanced asset from its latest collection of new candidates, for which the company plans to commence Phase III trials from mid-2024. It has already received fast track, orphan drug and QIDP designations from the FDA. The drug was acquired from Amplyx Pharmaceuticals, an affiliate of Pfizer. We note that Basilea has already established a relationship with Pfizer as a collaborator in the commercialisation of Cresemba in parts of Europe, China and the Asia-Pacific region. We also note that Pfizer continues to hold the right of first negotiation for commercial rights for fosmanogepix, which we believe it will exercise (although it is not binding on Basilea), provided clinical data are favourable. Deal considerations for fosmanogepix 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.

In our view, fosmanogepix has the potential to differentiate itself from currently approved antifungal therapies on multiple fronts. For example, it is being developed in both oral and IV formulations, which we believe could improve patient compliance as it may be administered in both inpatient and outpatient settings. This differs from the majority of antifungal therapies used as current standards of care, which are typically only available as IV formulations. Additionally, fosmanogepix has a novel mechanism of action, a key differentiator in our view, making it a promising new treatment option to combat antifungal resistance, an ongoing medical challenge. To further corroborate this, we highlight that fosmanogepix has already demonstrated activity against the pathogens listed in the World Health Organization’s critical priority group. Fosmanogepix also appears to have the broadest potential compared to alternative emerging therapies in clinical development, based on a comparative analysis (performed by management) of activity against different fungal strains (Exhibit 7).

For a detailed discussion of fosmanogepix and how it fits into Basilea’s portfolio of anti-infectives, please see our previous update note.

The planned Phase III programme for fosmanogepix will comprise two separate clinical studies, which we expect to have a duration of approximately three to four years:

BAL2062 was acquired from Gravitas Therapeutics (original patent owned by Astellas Pharma) and is a Phase II-ready antifungal candidate for the treatment of invasive Aspergillus infections. The drug has already received fast track, orphan drug and QIDP designations from the FDA for invasive aspergillosis, which in our view provides a strong foundation for further clinical development efforts. It has demonstrated clinical safety and tolerability in a Phase I study and is being developed as an IV formulation, and we note that it has a novel mechanism of action (Exhibit 8). Basilea plans to conduct a preclinical profiling programme to ascertain the optimal clinical development path for BAL2062. Phase II studies are scheduled to commence on successful completion of the preclinical work from 2025, for which management has communicated that it intends to target the first-line setting for invasive aspergillosis.

Tonabacase is being evaluated as part of a licence and option agreement with iNtRON Biotechnology. Tonabacase is an antibacterial therapy of the endolysin class for severe Staphylococcus infections, potentially offering advantages over conventional antibiotics (Exhibit 9). As part of the agreement, Basilea is evaluating the drug across various preclinical studies. If the results are favourable, this may lead to a licensing agreement for further clinical development. We note that this decision is at Basilea’s exclusive discretion. Management has communicated that it plans to complete these preclinical studies (including pharmacokinetic and pharmacodynamic profiling) by end 2024 and, if in-licensed, Phase II studies could commence from H225.

An antibiotic programme asset purchase agreement with Spexis was announced in January 2024. As part of the agreement, Basilea will pay Spexis up to CHF2m, consisting of an upfront payment, an asset-transfer payment and a potential final milestone payment related to the availability of near-term funding for further development efforts. The programme is focused on a novel class of compounds targeting gram-negative bacteria, which are highly resistant to antibiotics and hence remain a cause of significant morbidity and mortality worldwide.

Basilea produced a strong set of FY23 results, which beat company guidance and our estimates. Total revenue came in at CHF157.6m, ahead of the guided CHF154–157m. The figure included royalties of CHF78.9m for Cresemba (against guidance of CHF76m; FY22: CHF65m) underpinned by stronger than anticipated in-market sales ($445m for the 12 months ending September 2023) of the market-leading anti-infective drug. Top-line growth was also supported by CHF32.2m in milestone payments (CHF23.4m in FY22), including $28.75m in milestone payments by Pfizer, CHF5m by Asahi and another c CHF1m as a first sales milestone from its distribution partner, Knight Therapeutics, in Latin America. Product revenue for the year was CHF37.9m, c 16% y-o-y growth on CHF32.7m in FY22. With the conclusion of the Zevtera Phase III trials, reimbursements from BARDA have continued to fall (CHF4.2m in FY23 versus CHF8.4m in FY22).

Margin structure remained stable over the year, mirroring the trend seen in FY22. FY23 gross and operating margins were 83% and 12.2%, respectively, in line with the 83.3% and 12.5% recorded in FY22. In terms of absolute performance, opex increased by 6.7% to CHF111.6m in FY23 (albeit lower than the previously guided figure of CHF115m). R&D expense went up slightly to CHF77.9m (CHF73.8m in FY22), driven by increased investments in growing its clinical pipeline (c CHF40m according to management). This was offset by lower expenses related to Zevtera’s clinical development, following the conclusion of Phase III trials in 2023 and significantly lower expenses for the oncology projects, which were largely divested and stopped in 2022. SG&A expenses rose 9.6% to CHF33.8m, driven by commercialisation-related activities for Cresemba and Zevtera. Overall, Basilea reported an operating profit of CHF19.2m, materially ahead of the guided range of CHF11–15m and beating our estimate of CHF13.4m. Net income was CHF10.5m (FY22: CHF12.1m), materially higher than the guided range of CHF2–6m (our estimate was CHF5m).

Cash flow from operations for the period was CHF14.2m, doubling from the FY22 figure of CHF7.1m and contributing to cash and cash equivalents, restricted cash and short-term investments of CHF64.3m at year-end (CHF108.6m at end-FY22). We note that the cash balance includes the impact of additional investments in pipeline expansion and accelerated repayment of the CHF75m senior secured loan from Athyrium Capital (CHF59m of the CHF75m loan was repaid by the end of FY23, with the remaining CHF15.5m expected to be paid in Q124). Management has indicated that this early retirement of the loan will help save the company CHF1.5m in interest and fees (the loan bore an interest rate of 7.75% plus the lesser of the Swiss Average Rate Overnight or 3%, payable quarterly). Following this repayment, Basilea will be left with CHF97m in convertible notes on its books, which is due for repayment in 2027. If the cash position remains favourable, we believe the company may try to close this facility early as well.

With the FY23 results, Basilea also provided guidance for FY24.

We update our FY24 estimates to reflect management’s guidance. We now project revenues related to the two assets of CHF179.8m (slightly lower than our previous estimate of CHF182.1m). This includes a Cresemba-related royalty payment of CHF90.0m and milestones of CHF37.0m. We do not estimate any further reimbursements from BARDA in FY24. We project total revenue of CHF183.1m in FY24 (in line with management guidance and our previous estimate of CHF183.3m), although we concede that this figure may change as further clarity in relation to the regulatory decision on Zevtera and subsequent plans for commercialisation becomes available. Cost as a percentage of sales is now estimated to be 17.9% to mirror the historical trend (versus our previous estimate of 19.8%). We tweak our opex estimate (increasing it to CHF120m from CHF111m previously) to incorporate management’s higher R&D and SG&A expectations for the commencement of the Phase III trials for fosmanogepix and possible launch of Zevtera in the US in FY24, provided FDA approval is received. Overall, we now estimate FY24 operating profit of CHF30.3m (versus our previous estimate of CHF36.4m). In total, we expect an operating cash inflow of CHF22.1m, which, accounting for capex and the CHF15.5m outstanding under the Athyrium loan, results in a net cash inflow of CHF5.3m in FY24.

We introduce FY25 estimates, forecasting revenues of CHF204.8m (including CHF97.9m in royalties and CHF25m in milestones). However, the timing of milestone payments is difficult to predict and can vary over the period, so this figure is subject to change. We also estimate higher operating expenses (CHF130.7m), showing the full-year impact of both Phase III trials for fosmanogepix (expected to commence in mid-2024 and end-2024, respectively) and the possible entry of BAL2062 into the clinic in H125, as well as higher marketing costs following the potential launch of Zevtera in the US market. We do not factor in any inflows (upfront/licensing income) from a licensing deal for Zevtera, which could result in a change to our forecasts as the details become available. We believe Basilea is sufficiently capitalised to fund operations through internally generated cash flows in the foreseeable future.

With the FY23 results, we have rolled forward our model and incorporated the latest net debt figure of CHF46.6m (including restricted cash). Along with the changes to our estimates discussed above, this results in our valuation for Basilea upgrading to CHF968.0m or CHF80.7 per share (from CHF910.4m or CHF76.0/share previously).

For Cresemba, our peak sales estimate is broadly unchanged at $686m, although the rNPV goes down to CHF600.2m (from CHF633.7m) as the asset approaches maturity. For Zevtera, we have made certain adjustments to our expected sales ramp for the drug in the US, which results in our rNPV increasing to CHF299.9m (CHF181.9m previously). We continue to anticipate peak sales of c $581m for the drug. For fosmanogepix, a recent addition to our valuation, we estimate peak sales of $802m (across the two targeted indications) but have made certain tweaks to our growth estimates, which results in our net present value (NPV) and risk-adjusted NPV changing slightly to CHF235.0m and CHF114.4m (from CHF248.2m and CHF133.0m previously) based on a 60% probability of success.

Note that our valuation does not currently consider the other two recently acquired Phase I assets, BAL2062 (invasive aspergillosis) and tonabacase (severe staphylococcal infections), which are both expected to commence Phase II trials in 2025 (the former in H125). As these programmes progress, they may add additional upside to our valuation, which is shown in Exhibit 11.