Basilea Pharmaceutica — Profitability sooner than expected

In FY22, the uptake of Basilea’s antifungal product Cresemba continued to drive the company’s top line as launches in new territories increased licensing revenue payments from partners. In particular, royalty income from global Cresemba sales grew 22% y-o-y in FY22 to CHF65m, with the antifungal drug reaching more than $363m in global sales in the 12 months to September 2022. The US remains a key market, contributing over 55% of Cresemba’s in-market sales. Notably, a $20m sales-related milestone payment for US partner Astellas towards yearend 2022 bolstered Basilea’s top line. By end-2022, Cresemba was marketed in 63 countries (and outlicensed in a further 10 countries) and had captured 12% of global antifungal sales (Exhibit 1). Importantly, Basilea has gained a significant portion (31%) of the US antifungal market versus other competing, best-in-class treatments (Exhibit 2). We expect Cresemba’s global reach to continue in FY23, following important approvals in FY22 in China and Japan.

We believe that global uptake of Cresemba will continue in FY23, with a key driver for revenue growth coming from the launch in China, following the drug’s oral and iv formulation approval in the region in FY22 and recent inclusion of the iv formulation in the National Reimbursement Drug List (NRDL). We see the Chinese market as a particularly important opportunity for Basilea as, while accurate invasive aspergillosis (IA) and mucormycosis (IM) case numbers are not available in the country, a recent risk-based assessment of IA prevalence in China estimated that there are 154,000–462,000 hospitalised IA cases in the country each year. If accurate, this would represent a significant increase in the global addressable patient population for Cresemba (management estimates China to be c 20% of the global market opportunity for Cresemba). We note that Cresemba’s recent inclusion on the NRDL is a key development and should support maximising its market penetration in the region.

Another key market is likely to be Japan (c 5% of Cresemba’s overall market opportunity) where Basilea’s licence partner, Asahi Kasei Pharma, received marketing authorisation for Cresemba (for the treatment of adult patients with aspergillosis, mucormycosis and cryptococcosis) from the Japanese regulatory authority in December 2022. Management expects Cresemba’s launch in the Japanese market in H123.

We expect medium-term growth for Basilea to hinge on the success of Zevtera in the US antibiotic market. Basilea plans to submit a new drug application (NDA) for Zevtera’s use in Staphylococcus aureus bacteraemia (SAB), acute bacterial skin and skin structure infection (ABSSI) and community-acquired pneumonia (CABP) in March/April 2023, after which management expects a decision from the regulators by end-2023. Top-line results from the Phase III ERADICATE trial in June 2022 showed that Zevtera met the primary endpoint of non-inferiority to standard-of-care daptomycin (with or without aztreonam) in the intent-to-treat population in patients with SAB. The data also demonstrated that treatment with Zevtera resulted in an overall success rate of 69.8% versus 68.7% for daptomycin, a microbiological eradication rate of 82.0% (77.3% for daptomycin), an all-cause mortality rate of 9.0% (9.1% for daptomycin) and a new SAB complications rate of 5.8% (5.6% for daptomycin) at 70 days post-randomisation in the modified intent-to-treat population. Overall success in the clinically evaluable population was 77.9% compared to 77.8% for daptomycin (Exhibit 3).

In addition, the median time to bloodstream clearance for methicillin-resistant Staphylococcus aureus (MRSA) was three days with Zevtera (four days with daptomycin), and five days for MRSA for Zevtera and daptomycin. Safety data from the study showed that ceftobiprole’s safety profile was consistent with previous data and the overall rate of adverse events was similar in the two groups. We believe this represents a strong clinical profile for Zevtera, considering that the approval of novel, safe and effective antibiotics is an important global health initiative.

In FY23, in addition to the continued market push for Cresemba we expect Basilea to pursue two main strategic goals to maximise shareholder value. Firstly, approval of Zevtera in the United States represents a potentially lucrative opportunity for Basilea, given that the country represents c 85% of global anti-MRSA antibiotics sales (Exhibit 4). The FDA had previously reached agreements with Basilea on trial designs for the Phase III ERADICATE and TARGET studies and has granted Qualified Infectious Disease Product (QIDP) designation to Zevtera, which should allow for priority review following filing of the NDA. The anticipated timeline for approval is end-FY23 and management plans to sign a licensing partner prior to the regulatory decision. We note that the QIDP designation will allow Zevtera 10 years of market exclusivity in the United States, following approval.

With Cresemba closing in on expiration of market exclusivity in multiple key territories in 2025–27 (notwithstanding the possibility of receiving two-year and six-month marketing exclusivity extensions in Europe and the United States, respectively, on paediatric label expansion; FDA/EMA submission planned for H223), the second strategic goal we expect Basilea to pursue in FY23 will be filling the clinical development pipeline with new anti-infective assets. The company has one confirmed preclinical programme (DXR inhibitor) and only minor ongoing clinical activities (ERADICATE follow-up period paediatric trials for Cresemba and Zevtera). We therefore expect Basilea to actively engage in in-licensing and/or acquisition activity to fill the development pipeline with novel anti-infectives. Given the strong balance sheet and profitability guided for FY23, we believe inlicensing/acquisition deals could be internally funded depending on deal terms, mitigating the need for further capital raises.

We value Basilea at CHF785m or CHF65.7 per share (previously CHF921.7m or CHF77.8 per share). Our valuation is based on a risk-adjusted net present value (NPV) calculation for Cresemba and Zevtera and includes net debt of CHF46.7m at end-FY22. We have revisited and updated our assumptions concerning population estimates for global fungal infection rates (based on available data) and have reassessed our pricing and market penetration assumptions for Cresemba (Exhibit 5). Owing to the approval of the oral and iv formulation of Cresemba in China during FY22 and subsequent inclusion of the iv formulation in the NRDL, we now model sales in China independently of the rest of the world (RoW). Our peak sales estimates for Cresemba therefore increase to CHF691m (CHF604m previously). However, the positive effect on our valuation resulting from the uplift in peak sales is largely offset by the rolling our model forward, bringing expiration of market exclusivity in key territories closer although we see higher sales stickiness from China and Japan following regulatory approval in 2022. This results in our per share valuation of Cresemba staying largely unchanged at CHF54.5 versus CHF53.3 previously.

With the addition of China as a distinct territory in our valuation, we have updated the terms of our modelled Pfizer licensing deal to include this region. We include sales from the EU and China in the Pfizer licensing deal, along with 50% of RoW sales to reflect revenues from other important territories (Russia, Israel, Turkey and Asia-Pacific). Our licensing deal assumptions for Basilea’s other commercial partners are unchanged.

For Zevtera, we have revisited our assumptions concerning the drug’s uptake in the United States. Considering the historical average peak market share of other cephalosporin antibiotics and those indicated in bacteraemia, we have raised our US peak penetration rate to 3% (from 2% previously), but expect this to now come in FY33 versus our previous expectation of FY27. We believe this represents a conservative estimate, which encompasses what we believe is a competitive profile for Zevtera in the United States. We also make certain downward adjustments to our market share assumptions for Europe and RoW based on current visibility. Overall our peak sales estimate for Zevtera goes up to CHF581m from CHF550m previously. We now value Zevtera at CHF15.1 per share, from CHF14.3 per share previously. We note that signing a commercialisation deal in the United States will be important in maximising Zevtera’s impact in this market. As communicated by management, finding a deal of this type is a key strategic goal in FY23. Basilea’s aim is to secure a licensing partnership in advance of the US regulatory decision.

Following the recent retirement of Basilea’s 2022 convertible bond issue and receipt of a CHF75m loan from Athyrium Capital Management, the company had net debt of CHF46.7m at end-FY22, which we also include in our valuation. Our model no longer includes any oncology assets. A breakdown of our sum-of-the-parts valuation of Basilea is shown in Exhibit 6.

In FY22, Basilea recorded total revenue of CHF147.8m (FY21: CHF148.1m), including CHF65m in royalty income from global Cresemba sales (FY21: CHF53.1m), Cresemba and Zevtera milestone payments of CHF23.4m (FY21: CHF49.4m), CHF15m from the disposal of oncology assets and CHF8.4m in Biomedical Advanced Research and Development Authority (BARDA) reimbursements (FY21: CHF14m). Overall, this represents income comparable to the year prior, although FY21 revenues were buoyed by unexpected milestone payments. Total operating expenses decreased by 15% in FY22 to CHF104.6m (CHF129.22m including cost of goods sold, COGS, a 12% decrease), led by a 20.8% decrease in R&D expenses (FY22: CHF73.8m versus FY21: CHF93.2m) related to divesting/out-licensing the oncology portfolio. In all, this resulted in Basilea reporting an operating profit of CHF18.5m in FY22 (FY21: CHF1.2m), significantly above guidance, and net profit of CHF12.1m (FY21 net loss of CHF6.8m). Cash flow from operations for the period was CHF7.1m, contributing to cash and cash equivalents, restricted cash and short-term investments of CHF108.6m at year-end. In December 2022, Basilea retired its outstanding 2022 convertible bonds (CHF113.8m outstanding), financed through a CHF75m two-year loan and cash at hand. We note that the CHF75m loan from Athyrium Capital Management bears an interest rate of 7.75% plus the lesser of the Swiss Average Rate Overnight or 3%, payable quarterly.

In FY23 we expect the continued growth of Cresemba- and Zevtera-related revenue to continue, estimating revenues related to the two assets (including royalties, milestones and product revenue) of CHF148.2m, in line with management guidance. In addition, we estimate a BARDA reimbursement of c CHF4m and c CHF2.5m in milestone payments from the out-licensed oncology assets. As a factor of revenues, we forecast COGS at a comparable rate to previous years (c 17%), which we anticipate will result in gross profit of CHF129.9m. Consistent with management guidance (Exhibit 7) and divestment of the oncology portfolio, we forecast a further decrease in operating expenses (excluding COGS) in FY23 to CHF80.7m, again driven largely by a decrease in R&D related costs to CHF51.7m (CHF73.8m in FY22). We therefore forecast an operating profit of CHF49.1m and net profit of CHF40.7m, again in line with company guidance. In total, we expect an operating cash inflow of CHF52.7m, which, accounting for capex and expected repayment of CHF37.5m of the Athyrium loan, results in a net cash inflow of CHF11.8m in FY23.

In FY24, we forecast revenue growth to CHF180.7m. However, we note that this is largely a result of milestone timing, as milestones are difficult to predict. Accordingly, we model an increase in operating profit in FY24 to CHF66.0m with an increase in net profit to CHF62.0m, as the Athyrium loan is repaid over FY23–24. Hence, we forecast a net cash inflow of CHF17.3m in FY24. We note that any significant in-licensing or acquisition deals conducted by Basilea over the forecast period could significantly alter our forecasts, although this will depend on how the company chooses to finance these and each new asset’s stage of development.