Basilea Pharmaceutica — Renewed focus on anti-infectives

Basilea announced with its FY21 results that it plans to exit its oncology activities to become a pure-play anti-infectives company. Basilea’s commercial anti-infective offerings, the antifungal Cresemba (isavuconazole) and antibiotic Zevtera (ceftobiprole), continue to drive top-line growth. Global Cresemba sales surpassed US$324m in FY21, generating royalty payments of CHF53.2m to Basilea during the year. Notable milestone payments from partners for Cresemba and Zevtera of CHF49.4m were also recorded in this period. With the recent approval of Cresemba in China, we see a key future revenue driver as inclusion on the National Reimbursement Drug List (NRDL), which we expect could occur within two years. In our view, future value creation for Zevtera is dependent on approval in the United States provided there is a positive result from the ongoing ERADICATE trial for the treatment of Staphylococcus aureus bacteraemia (SAB). In January 2022, patient enrolment for ERADICATE was completed and top-line data are expected in mid-2022.

The company intends to conduct a series of strategic transactions (as a portfolio or individual assets) with established oncology players to maximise the value of its current oncology pipeline assets in 2022. Key to this strategy will be continued demonstration of the clinical utility and differentiation of derazantinib (a fibroblast growth factor receptor (FGFR) inhibitor) in the FIDES clinical programme. In 2022, the company expects to report results from Phase II FIDES-01 in intrahepatic cholangiocarcinoma (iCCA) and Phase I/II FIDES-03 in advanced gastric cancer after deprioritising the FIDES-02 trial in urothelial cancer. Interim results from Basilea’s second oncology asset, lisavanbulin (a microtubule-targeting tumour checkpoint controller), in glioblastoma (GBM) are also expected in H122. Furthermore, Basilea is continuing with preparations for Phase I trials with BAL0891, a mitotic checkpoint inhibitor, after IND approval from the FDA in December 2021. We note, however, that initiation will depend on a potential future partnering deal.

After revisiting our estimates, our rNPV model suggests a fair value of CHF847.7m or CHF71.6/share (previously CHF106/share). Within this, anti-infectives, comprising the group’s core strategic area of focus, represent more than 87% of our rNPV/share. We have rolled our model forward, with FY21 net debt of CHF69.3. Our risk-adjusted NPV valuation is shown in Exhibit 12 on page 15.

We present an overall indicative valuation for the oncology assets of CHF14.8 per share. This is based purely on our sales, probability and penetration assumptions, but excludes the related costs from FY23, which we anticipate will be borne by a third party. Our valuation makes no estimate nor contains any implied valuation change that may arise as a result of potential strategic transaction activity. We note that positive trial outcomes (FIDES-01 and FIDES-03) represent potential value uplift as Basilea executes its strategic moves in oncology. We have revised our assumptions for lisavanbulin and derazantinib, including, for the latter, removing the urothelial cancer indication. Our FY22 estimates are in line with guidance and updating for currencies has only a minor impact (FX effect on our valuation is c +1.3%).

Our revised rNPV valuation represents 2.0x upside to the current price, suggesting to us the market is ascribing very little to the pipeline, including the ERADICATE US study. We believe a positive outcome could result in a re-rating and we model a 75% probability of success for this study. In the longer term, we anticipate investors will focus on sales development. Our expectations of continued product sales growth and market penetration drive our top-line estimates, which are anticipated to grow by nearly 60% in our forecast period FY21–26e from CHF148.1m to CHF235.4m, representing a CAGR of 9.7%. In the near term, we anticipate that Basilea will refinance its convertible bond, which matures at the end of 2022.

We estimate Basilea will be funded (cash and equivalents of CHF150m at the end of December) to complete its current clinical activities through 2022, even if management retires the current CHF123.5m portion of its convertible bond at the end of the year. However, it is possible that management will refinance this. We anticipate an FY22 operating cash outflow of CHF13.1m, in line with management guidance of CHF10–15m and compared to CHF32.0m in FY21. Assuming the short-term convertible bond liability is refinanced, we anticipate FY22 net debt of CHF84.7m, up from CHF69.3m at end FY21. As a result, we anticipate FY22 cash and equivalents of CHF134.4m, offset by a convertible bond liability of CHF218m. While our model assumes the near-term (CHF123.5m at end FY21) component of this convertible debt is refinanced in FY22, the ability to repay and refinance this debt is a key consideration for management in FY22. The sustained in-market growth of Cresemba sales and the potential US approval of Zevtera in 2023 should enable Basilea to turn cash-flow positive in FY23e. Moreover, at the recent Annual General Meeting (AGM) on 13 April 2022), a resolution was passed for the authorisation to issue 2m new shares (CHF1 per nominal share) for a maximum capital raise of CHF100m. This conditional capital is intended to be used solely for the refinancing of the existing convertible bond maturing in December 2022, if needed. Management will evaluate whether to refinance in H222 in conjunction with progress on the strategic transactions related to the oncology portfolio and the readout of the ERADICATE study. A positive outcome here would create an opportunity to pay down debt.

Near-term risks, both upside and downside, relate mainly to the clinical pipeline, with critical read-outs from the ceftobiprole ERADICATE study as well as from derazantinib in the FIDES-01 and FIDES-03 trials. Our valuation has a downside risk should Basilea encounter challenges in market development for both Cresemba and Zevtera and/or engage in partnering deals with royalty and milestone payments below our estimates. The refinancing/debt reduction relating to the convertible bond is another risk area in 2022, where investors, in our view, will look for a careful balance of non-dilutive repayments (the recent 2m new shares authorisation notwithstanding) while retaining cash for building the anti-infectives pipeline.

Basilea is focused on the research and development of anti-infective therapies and currently has two marketed products, antifungal Cresemba and antibiotic Zevtera. The company’s revenue comprises product sales, royalty and milestone payments from partners and distributors of these two assets. 2022 will see a handful of important events for Cresemba and Zevtera (Exhibit 1). For Cresemba, anticipated market approvals in Japan and China will provide access to a significant portion of the worldwide antifungal market. Also, Zevtera will move closer to US approval with the reporting of top-line results from the ERADICATE study in SAB, if data are positive. The US antibiotic market, in particular the MRSA market, represents a significant potential driver for future Zevtera sales.

Recently, Basilea has also focused on developing an oncology pipeline, which at present consists of three clinical assets: FGFR inhibitor derazantinib, tumour checkpoint controller lisavanbulin and the novel kinase inhibitor BAL0891. Despite progress with these clinical assets, Basilea announced in February 2022 that it intends to separate the oncology pipeline to focus wholly on anti-infectives. To do this it intends to execute strategic transactions with established oncology companies divesting the oncology pipeline either as a whole or as individual assets by the end of 2022. We see the expected data to be reported throughout 2022 (Exhibit 2) driving the potential value of the oncology assets. Results from lead oncology asset derazantinib will be of particular interest as this represents the largest potential value proposition of the present pipeline, in our view.

Basilea’s top line is generated by commercially available anti-infective products, Cresemba and Zevtera. Basilea has multiple licensing deals for both assets covering more than 100 countries globally (Exhibit 3 highlights the existing partnerships). So far, the company has received US$295m in total upfront and milestone payments, and under the terms of existing agreements, it could receive a total of more than US$1.0bn in potential regulatory and sales milestones subject to the assets reaching predetermined targets. Cresemba is the main growth driver of the top line. In FY22, Basilea guides for CHF98–104m in Cresemba and Zevtera related revenues of which ~CHF59m will be from royalty income (~10% increase year-on-year, FY21 royalties: CHF53.2m). The guided decrease in total expected revenue for Cresemba and Zevtera (FY21: CHF131.4m) is due to lower expected milestone payments from partners after a somewhat unusual concentration of milestones in 2021. For Zevtera, the United States remains the significant future value driver (potential launch in late 2023), with filing dependent on the outcome of the ongoing ERADICATE study (SAB).

Cresemba (isavuconazole) is a broad-spectrum antifungal for the treatment of severe, life-threatening fungal infections. It is available in the United States and major European countries through regional partners including Astellas in the United States and Pfizer in most of Europe. The product continues to be the key revenue driver for Basilea. In January 2022, the company reported global ‘in-market’ sales of Cresemba in the 12 months to the end of December 2021 of US$324m (sales of US$244m in FY20), continuing a solid growth trajectory. Cresemba FY21 royalty payments from partners increased by 29% to CHF53.2m (FY20: CHF41.2m) along with an array of sales and regulator milestone payments. The increase in Cresemba related revenues was primarily driven by increasing demand in the marketed territories.

Basilea anticipates Cresemba to be marketed in c 70 countries by end-2022 (it is currently marketed in 56 countries). In Q421, the moving annual total sales of the best-in-class anti-fungal drugs (Exhibit 4) totalled US$3.2bn (source: IQVIA), of which Cresemba had garnered a 10% market share. In December 2021 and January 2022, oral Cresemba was approved in China, for the treatment of invasive mucormycosis and aspergillosis, respectively. The intravenous formulation is currently being reviewed under a separate application in China. We see this as representing significant sales upside given in 2021 China accounted for 19% of the global antifungal drug market, second only to the United States, which represents 22% (source: IQVIA, Exhibit 5). Furthermore, Basilea’s partner in Japan, Asahi Kasei, filed an NDA in September 2021 for the use of Cresemba in the treatment of aspergillosis and mucormycosis. We expect a regulator decision on this in H222.

The invasive fungal infection market remains an area of unmet medical need, driven by the rise of underlying predisposition conditions, such as chronic obstructive pulmonary disease, cystic fibrosis and AIDS. Globally it is estimated that there are more than 1.5 million fungal infection-related deaths per year. We note that Cresemba has reported fewer statistically significant drug-related adverse events and treatment-emergent adverse events (liver, skin, eye) in invasive aspergillosis patients versus market leader voriconazole (Vfend, Pfizer, Exhibit 4) in the Phase III SECURE study (published in 2019).

Given the safety advantages Cresemba offers over other treatments and its broad spectrum of activity (including mucormycosis), the drug is well suited to empiric use when the exact underlying cause of infection is unknown. Importantly, according to European Conference on Infections in Leukemia (ECIL-6) guidelines, isavuconazole is as effective as voriconazole, with a better safety profile. ECIL provides recommendations for therapeutic strategies for various types of infection in patients with hematologic malignancies or hematopoietic stem cell transplantation recipients. We argue that these features differentiate Cresemba from the competition allowing it to be positioned directly against both branded and generic drugs, for example Vfend (Pfizer) and AmBisome (Gilead). Cresemba has exclusivity (ie protection against generics) through 2027 in the United States, with potential paediatric exclusivity extension to 2027 (from 2025) in the EU.

The National Reimbursement Drug List (NRDL) is an important mechanism to support access and reimbursement for new therapies in China’s healthcare market. As of year-end 2021 the initiative covers 2,860 drugs and 98% of the Chinese population (~1.4 billion people). This makes the potential inclusion of Cresemba on the NRDL an important event for Basilea in potentially maximising penetration in the large Chinese anti-fungal market. Inclusion on the NRDL is based on the assessment of multiple factors including clinical necessity (eg unmet need), clinical effectiveness, safety and pricing. Inclusion can have a significant positive impact on market penetration. We expect Basilea to benefit from the considerable experience of its partner in the region, Pfizer, to navigate the NRDL inclusion process for Cresemba (Exhibit 6). We will adjust our geographic peak sales split accordingly as launches continue and the first sales figures in China begin to crystallise.

Zevtera (ceftobiprole) is a broad-spectrum antibiotic for the treatment of drug-resistant, gram-positive infections, including methicillin-resistant Staphylococcus aureus (MRSA), and gram-negative bacterial infections, including Pseudomonas. Zevtera’s differentiation is through its potential utility in SAB bloodstream infections and related complications such as endocarditis, as investigated in the ERADICATE study.

In 2008, Zevtera was rejected by the FDA (via CRL) for the treatment of complicated skin and skin structure infections (cSSSI) based on unreliable and unverifiable clinical data submitted by Basilea’s partner at the time, J&J. The FDA requested two new clinical studies before the drug could be approved, which took form as TARGET and ERADICATE. If approved, Zevtera would be the first beta lactam antibiotic to be approved in the United States for MRSA and methicillin-susceptible Staphylococcus aureus (MSSA) bacteraemia. Staphylococcus aureus infections can be resistant to methicillin or susceptible to it. Tests to identify the bacterial pathogen are dependent on cultivating blood cultures, which can take hours or days; in life-threatening cases, empiric use of broad-spectrum antibiotics with activity against MRSA is required.

Zevtera is approved for the treatment of various bacterial pneumonias in major European countries and some international markets, however the main commercial opportunity remains the US market. Key drivers for this are higher pricing, wider reimbursement and a higher incidence of MRSA infections (323,700 US cases vs 64,769 EU cases in 2017). In August 2019, TARGET, the first of two cross-supportive Phase III trials required for a US FDA filing, reported data for ceftobiprole in the treatment of acute bacterial skin and skin structure infections (ABSSSI). The product met primary and secondary efficacy endpoints including non-inferiority to standard-of-care vancomycin plus aztreonam in the intent-to-treat population. Enrolment for the second Phase III study (ERADICATE), in SAB bloodstream infections, completed in January 2022 and top-line data are expected in mid-2022. Approximately 70% of the anticipated costs for the Phase III programme (plus the potential trial in community-acquired pneumonia) are being funded by BARDA (a division of the US Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response), significantly de-risking the funding of the endeavour.

A US launch date of end-2023 for ceftobiprole with a focus on SAB and ABSSSI is feasible based on a timely and positive readout of ERADICATE. As such, we expect the company will look to partner before approval but after the readout. However, given the crucial nature of the prospective Zevtera launch in the United States, we believe Basilea will lay the groundwork for launching the drug even if it does not conclude a partnership deal in the pre-launch period. We forecast US$550m in peak sales for ceftobiprole, comprising US peak sales of US$317m in 2027, predicated on Basilea securing a US commercialisation partner. Further strengthening the case, we note that the FDA has awarded Zevtera a Qualified Infectious Disease Product (QIDP) designation. This designation extends market exclusivity to 10 years (from five) based on the approval date.

Basilea’s ERADICATE study represents the first double-blind, randomised, Phase III, registrational study in the treatment SAB in adult patients, including infective endocarditis (IE). The study protocol has been approved by the FDA under a Special Protocol Assessment, providing confidence a positive result will meet the standard for regulatory submission and approval. This protocol allows enrolment of patients who displayed a positive blood culture for SAB, due to MRSA or MSSA, within the prior 72 hours (n=390). We note that cases of complicated SAB are also eligible for enrolment and that this group includes patients with ABSSSI. Here we expect positive results akin to those displayed in the TARGET study in adult hospitalised patients with ABSSSIs. Patients were then randomised (1:1) into either the active arm (ceftobiprole iv infusion) or the comparator arm (daptomycin with or without Aztreonam for gram negative infections). The active treatment period lasts up to 42 days, and patient bacteraemia clearance will be monitored by repeat blood cultures throughout that time. The active period is followed by a series of post-treatment visits (Exhibit 7).

The primary endpoint for ERADICATE is the demonstration of noninferiority (15% noninferiority margin) versus standard-of-care daptomycin (± aztreonam) in patients with SAB. Overall success in the modified intent-to-treat population (defined as patients who received any dose of study medication who have a blood culture positive for S. aureus) is defined as all the following criteria:

Secondary endpoints include mortality, microbiological eradication, time to clearance, safety and pharmacokinetics. Several subgroup analyses will be carried out including analyses of demographic characteristics, geographic region, baseline pathogen (ie MRSA vs MSSA), baseline SAB type and antibacterial use prior to study drug. In our view efficacy in the MRSA subgroup will be the most important outcome for ERADICATE as this represents the most valuable indication in the United States.

Building on the development of Zevtera to combat MRSA, Basilea aims to position itself as a leader in the field of antimicrobial resistance (AMR). It is estimated that more than 2.8m antibiotic-resistant infections occur in the United States every year resulting in 35,000 deaths. There are incentives available to companies willing to develop novel antibiotics to combat this growing global health issue. As recognised in a 2019 CDC report, three multidrug-resistant bacteria with a considerable healthcare impact in the United States are pseudomonas aeruginosa, carbapenem-resistant Enterobacteriaceae and carbapenem-resistant Acinetobacter baumannii (Exhibit 8 ). Due mainly to strict CDC antibiotic usage and containment measures, the general trend in cases of US hospitalised patients with infections caused by these microorganisms is decreasing. However, the emergence of new drug-resistant bacteria and the need for novel antibiotics is all but inevitable.

In recognition of Basilea’s experience in this field, the company received a grant in March 2021 of up to US$2.7m from CARB-X, an AMR focused non-profit, to fund one of its preclinical antibacterial projects. This project focuses on combatting the resistant bacteria shown in Exhibit 8 through the development of small-molecule inhibitors of 1-deoxy-D-xylulose 5-phosphate reductor isomerase (DXR), an important enzyme in bacterial survival. Importantly, the enzymatic pathway that DXR feeds is not present in human cells thus making it an attractive target for new generations of antibiotic compounds.

The COVID-19 pandemic serves as a reminder that more needs to be done to tackle the emergence of new infectious pathogens and/or antimicrobial resistance through the development of novel classes of antimicrobial therapeutics. On that effort, ‘push’ and ‘pull’ incentives will be critical to aid pharmaceutical and biotech companies working in this arena. ‘Push’ incentives are aids in the funding of R&D, for example the BARDA funding received for Zevtera and a recent CARB-X grant, while ‘pull’ incentives help to realise acceptable economic returns.

‘Push’ incentives include, for example, the AMR action fund (an initiative created by leading pharmaceutical companies to combat AMR), which launched in 2020 with the aim of bringing two to four novel antibiotics to market by 2030. The AMR action fund expects to invest more than US$1bn into a portfolio of companies to address the funding gap in antibiotic drug development. For ‘pull’ incentives, the UK government has launched a pilot scheme, a world first, to provide new antibiotics to the NHS by offering to share the risk of antibiotic development by guaranteeing a fixed revenue that is not linked to volume utilisation. This scheme also contains some ‘push’ incentives, for example paying pharmaceutical companies upfront at the start of their R&D efforts to incentivise work into novel antibiotic classes. The hope is that more countries will follow suit (in 2021 four US senators proposed the bipartisan PASTEUR Act), and lessons learnt through the acceleration of research in COVID-19 can be implemented for the development of novel antibiotics. Owing to these incentives, recent years have seen an increase in novel antibiotic R&D and FDA approvals, including Zemdri (FDA approval in 2018), Fetroja (FDA approval in 2019) and Recarbrio (approved 2019).

To increase focus and momentum in the anti-infective pipeline we expect Basilea to actively engage in licensing and/or transaction deals for further clinical-stage, anti-infective assets. Here, we envisage the company proceeding with licensing or the outright purchase of assets that are indicated against resistant bacteria/fungi and/or in Phase II or III and/or possess a novel mechanism of action. Examples of such assets are displayed in Exhibit 9. We note that these are examples that fit the above criteria but are however not to our knowledge current acquisition or licensing targets for Basilea.

With the anticipated divestment of the oncology pipeline during CY22, we see deals of this kind as a potential near/mid-term value driver for Basilea, considering its experience in the area.

In tandem with Basilea’s move to focus on its core business of anti-infectives, management has stated that the separation of its oncology pipeline from the core business and a review of its strategic options for the business will be a major priority in 2022. The company aims to optimise the value of its oncology pipeline, potentially through strategic transactions with experienced oncology players. Moreover, Basilea intends to complete the strategic transitioning by the end of 2022 to allow a complete focus on its anti-infectives business. In our view, it will be necessary for Basilea to conclude the ongoing oncology studies (Exhibit 10) to have an optimal data package ahead of any decisive strategic transaction negotiations. Of the three clinical oncology assets (derazantinib, lisavanbulin and BAL0891), derazantinib holds the most potential value, being Basilea’s most clinically advanced oncology prospect.

Derazantinib is a selective and potent oral pan-FGFR inhibitor (FGFR1, FGFR2, FGFR3) anticipated to have efficacy in tumours that test positive for FGFR aberrations (identified through FISH or NGS testing of tumour biopsy samples). Deregulation of the FGF signalling axis has been implicated in oncogenesis, tumour progression and resistance to anticancer therapy across many solid tumours. Beyond the ability to inhibit FGFRs, derazantinib inhibits colony stimulating factor 1 receptor (CSF1R, an important mediator of immune macrophages) in preclinical models at similar concentrations to those required for the inhibition of FGFR. This could be increasingly important in an arena where immunotherapy drugs (CPIs) and rational combinations thereof are being used in earlier lines of treatment across a range of cancers. Additionally, derazantinib’s vascular endothelial growth factor receptor (VEGFR2) inhibition profile produces moderate antiangiogenic effects that may contribute to its antitumour properties. It should be noted that derazantinib is in-licensed from ArQule with an agreement for Basilea to pay single to double-digit, tiered net sales royalties as well as up to US$326m in various regulatory and sales milestones.

The value of derazantinib to prospective partners will begin to take shape in 2022 with readouts from the full FIDES clinical programme (Exhibit 10). Top-line data from cohort 1 (FGFR2 fusions) of the open-label FIDES-01 study have demonstrated preliminary proof-of-concept in iCCA and we do not expect any surprises from the final cohort-2 (FGFR2 mutations and amplifications) results (top-line FIDES-01 results are expected in H122). Over 2022, we will also begin to see whether derazantinib is effective in treating more commercially viable indications such as gastric cancer (FIDES-03). Further, we will also gain clarity on whether the expanded dose regimen of 400mg (maximum tolerated dose in Phase I dose escalation) in FIDES-02 and FIDES-03 will provide meaningful efficacy while retaining the favourable safety profile demonstrated in FIDES-01 interim data (which used a 300mg dose).

Finally, FIDES-03 combination data, with immunotherapeutic agents atezolizumab (anti-PD-L1 antibody) and ramucirumab (VEGFR2 antibody), will outline if derazantinib’s alternate mechanisms of action (CSF1R and VEGFR inhibition) are clinically valuable. FIDES-03 interim results for the Phase II monotherapy are expected in H122. These will be accompanied by reporting (also in H122) of the recommended Phase II dose (RP2D) of the Phase Ib combination arm with Cyramza (ramucirumab) and paclitaxel. Interim efficacy results for the combination are expected in H222. Basilea has deprioritised the FIDES-02 study with derazantinib in urothelial cancer. This decision was prompted by an increasingly competitive landscape and a small patient population causing challenges to the trial enrolment. Basilea will conclude the FIDES-02 sub-study of derazantinib monotherapy in second-line urothelial cancer but will cease enrolment for FGFR inhibitor refractory and first-line patients.

Our assumptions in valuing derazantinib remain unchanged and we continue to forecast first launch in iCCA in 2024, followed by gastric cancer in 2025. As data from the FIDES clinical programme is reported during 2022 and progress on Basilea’s transaction strategy becomes clear, we will revisit our assumptions.

Recent years have seen a handful of FGFR inhibitor approvals (Exhibit 11), for example Balversa (Janssen), Pemazyre (Incyte), and Truseltiq (QED Therapeutics). Accordingly, more companies are progressing FGFR-targeting compounds to late-stage clinical trials (see futibatinib, Exhibit 11). While the increased competition in the FGFR inhibitor space is an obvious threat to derazantinib, we also see the expanded clinical validation as an opportunity for Basilea. The continued industry interest and proven efficacy for FGFR inhibitors could bode well for potential demand for drugs in this class, like derazantinib.

In this increasingly busy therapeutic space, derazantinib’s main differentiation versus the most clinically advanced competition is fewer off-target side effects and thus improved tolerability (adverse events to date include central serous retinopathy, stomatitis, hand-foot syndrome and nail toxicities). On-target side effects, especially high blood phosphorus, are high across differing FGFR inhibitors, but this is a manageable side effect. We think that clinical differentiation of derazantinib depends on two factors: the continued demonstration of meaningful efficacy while maintaining a beneficial safety profile (especially at the 400mg total daily dose in FIDES-03) and whether efficacy can translate into FGFR2 mutations and amplifications in cohort 2 of FIDES-01.

Lisavanbulin (BAL101553), an internally developed microtubule-targeting tumour checkpoint controller, is a prodrug of BAL27862, a novel microtubule-destabilising drug, which induces tumour cell death through activation of a checkpoint important for tumour cell division. At present, there are no approved drugs that target the binding site of BAL27862. Lisavanbulin’s profile includes its ability to cross the blood-brain barrier (confirmed in preclinical models) and potential flexible dosing (including daily oral dosing) schedule. Currently, lisavanbulin is in a Phase II biomarker-driven study in patients with recurrent GBM, utilising EB1 (end-binding protein 1) expression, which appears to be a predictive biomarker for a response and is estimated to have a prevalence of 2–5% in GBM. Interim results are expected in H122, with top-line results in H222.

In parallel, lisavanbulin is also being explored in combination with radiotherapy in a Phase I study in newly diagnosed GBM following surgery (in collaboration with the Adult Brain Tumor Consortium). Confirmation of the recommended phase two dose in this population is expected in H122. We think that proof-of-concept and positive results from the Phase II trial could potentially have broad read across to cancers with a high prevalence of the EB1 biomarker. In June 2021, the FDA granted Orphan Drug Designation to lisavanbulin for the treatment of malignant glioma, permitting a potential seven years of market exclusivity if the product gains approval.

In December 2021 Basilea gained FDA IND approval for a third oncology asset, BAL0891. The company is preparing for Phase I trials with BAL0891 in advanced solid tumours in mid-2022. BAL0891 is a first-in-class mitotic checkpoint inhibitor that acts through potent inhibition of threonine tyrosine kinase (TTK) and transient inhibition of polo-like kinase-1 (PLK1). TTK overexpression has been observed in, among others, lung, thyroid, breast, gastric and ovarian cancers, and is associated with disease progression and poor prognosis. PLK1 overexpression occurs in many different types of cancer; while the causal relationship between PLK1 overexpression and cancer is not fully understood, research has shown that PLK1 depletion causes tumour cell death.

Basilea reports that BAL0891 has shown anti-proliferative activity across diverse tumour cell lines in-vitro and single agent efficacy in in-vivo models of solid human cancers. Phase I trials will be an all-comer solid tumour design and will be important in establishing whether dual inhibition of TTK and PLK1 can prove clinically safe and effective. BAL0891 was in-licensed in 2018 from NTRC, a privately owned biotech based in the Netherlands that specialises in the discovery and development of innovative kinase inhibitors.

Basilea is subject to the usual biotech and drug development risks, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks, and financing and commercial risks. The key sensitivities for Basilea relate to successful commercialisation of both Cresemba and Zevtera in their respective approved territories and the success of the Zevtera Phase III programme in the United States. As such, any pricing and/or margin pressure as well as slower than expected market development is a risk to profitability. This risk becomes more pronounced with the planned strategic change where the future top line is to be entirely generated by Cresemba and Zevtera. For the oncology pipeline, clinical development and trial outcomes remain an over-arching risk. With the new strategic focus on anti-infectives, attention turns to Basilea’s ability to realise optimal value from the oncology assets. Financially the convertible bond refinancing this year calls for careful balancing of debt reduction as well as retaining sufficient cash for building the anti-infectives pipeline. Inability to repay or refinance the bond could result in the use of potentially dilutive equity issuance aside from the current authorised 2m new shares, as decided at the AGM on 13 April 2022.

After revisiting our estimates, our rNPV model suggests a fair value of CHF847.7bn or CHF71.6/share (previously CHF106/share). Within this, anti-infectives, comprising the group’s core strategic focus area, represent more than 87% of our rNPV/share. We have rolled our model forward, with FY21 net debt of CHF69.3. Our risk-adjusted NPV valuation is shown in Exhibit 12.

We present an overall indicative valuation for the oncology assets of CHF14.8 per share. This is based purely on our sales, probability and penetration assumptions, but excludes the related costs from FY23, which we anticipate will be borne by a third party. Our valuation makes no estimate nor contains any implied valuation change that may arise as a result of potential strategic transaction activity. We note that positive trial outcomes (FIDES-01 and FIDES-03) represent potential value uplift as Basilea executes its strategic moves in oncology.

Key assumptions in our valuation of Cresemba include US and EU-5 market share of c 30% with tiered royalty payments from Astellas in the 19–22% range based on annual sales. From Pfizer, we assume a c 14% fixed royalty payment based on monthly net sales. These drive our rNPV of CHF592.4m or CHF50/share. For Zevtera, we see launch in late 2023 and assume Basilea engages with a partner on terms similar to the current agreement with Astellas for Cresemba in the US. For Europe, we currently assume distribution agreements based on sales at transfer prices. We apply a high 30s percentage of gross sales. These lead to our updated Zevtera rNPV, which we estimate at CHF149.9m or CHF12.7/share.

In oncology, our aggregate valuation of CHF14.8/share comprises CHF6.6 for derazantinib and CHF8.1 for lisavanbulin. For derazantinib, the key change is that we have removed CHF10.6/share for the urothelial cancer indication, which management has now deprioritised, in our view effectively stopped. Elsewhere, we incorporate lower peak sales for derazantinib in iCCA due to the accelerated FDA approval of Pemazyre (pemigatinib) and Truseltiq (infigratinib), competitor drugs. We have consequently reduced our estimated peak market penetration in this indication to 40% from 75% and forecast launch in 2024 in the US and EU-5 in 2028. We also reduce our probability of success to 35% from 50% in light of the fact that investments are to be curtailed as Basilea considers strategic options for these assets. Our sales and market penetration estimates for derazantinib in gastric cancer are largely unchanged, although we have reduced the success probability in gastric cancer to 35% from 50% reflecting the Phase II status. For oncology asset lisavanbulin (in-house development in Phase II for glioblastoma), we assume peak sales of $500m with a 35% probability of success, giving an rNPV of CHF96.2m or CHF8.1/share. This reflects an increase from CHF6.9/share as costs are now removed in our model from end FY22.

Overall, the above detailed assumptions drive our indicative valuation for the oncology assets of CHF14.8 per share. They exclude related costs after end FY22, which we anticipate will be borne by a third party. We ascribe no valuation relating to changes that may arise as a result of potential strategic transactions.

For FY21, Basilea reported total revenues of CHF148.1m (FY20: CHF127.6m), a solid growth of 16.1% y-o-y (Exhibit 13). This development was driven by a 65% y-o-y increase (to CHF128.8m) in non-deferred revenue for Cresemba and Zevtera. (Deferred revenue is a non-cash item reflecting sales and services rendered under a given contract for which upfront payment has already been received). Although a precise sales and royalties split between the two products is not given, the company has indicated that c 87% of total revenue is related to Cresemba and Zevtera, and further Basilea reported 29% y-o-y growth in Cresemba royalties (to CHF53.2m). We note that the deferred revenue component declined to CHF2.5m from CHF33.6m in FY20 (of which CHF29.7m was from Pfizer and Astellas). We estimate that the FY21 deferred revenue level is what can be expected going forward. We also note that in FY21 Basilea reported zero deferred revenue from both Pfizer and Astellas, which we infer as indicative that the upfront payments received from these two partners have now been entirely recognised.

The reported revenues in FY21 generated from partnership agreements were CHF62.1m (+9.1% yoy) from Pfizer, CHF48.6m (+26.8% y-o-y) from Astellas and CHF14.0m (+6.1% y-o-y) from BARDA. Basilea’s main partners for Cresemba are Astellas for the United States and Pfizer for most European countries (except the Nordics), Russia, Turkey, Israel as well as countries in the Asia-Pacific region, including China

Total cost and operating expenses decreased slightly year-on-year to CHF147.0m from CHF150.9m, although the improved operating result (CHF1.2m vs a loss of CHF8.2m in FY20) was entirely driven by the significant increase in contract revenue (this includes royalties, milestones and upfront payments received under business partnership contracts). With a largely flat financial cost base and excluding the CHF15m one-off gain from the sale of the corporate HQ in FY20 this led to an improved net loss (normalised) of CHF6.6m versus the loss of CHF29.7m in FY20, also lifting the EPS to a normalised loss of CHF0.57 (CHF0.58 reported) from a loss of CHF2.89 (CHF1.43 reported) in FY20.

We note a 41% reduction in net operating cash outflows to CHF32m in FY21, reflecting both the above-mentioned increase in non-deferred revenue (especially from Cresemba) and a focused cost control effort. Net debt at end December 2021 was CHF69.3m vs. CHF77.9m in FY20. At end December 2021 Basilea’s balance sheet included convertible bonds of CHF218m, of which CHF123.5m is due by end 2022, after having repaid, during 2021, CHF22.7m against the (2022) convertible bond.

For the purpose of our model, we have simplistically assumed that this the convertible bond is refinanced on similar terms. In reality there is a risk that it may not be refinanced and thus have to be repaid, which could result in a need to issue equity, potentially dilutive to shareholders.

We note that management was given authorisation at the April 2022 AGM to issue 2m new shares with the sole purpose of repaying/refinancing the current part of the convertible bond (CHF123.2m). If the company decides to refinance through the issuance of new convertible bonds, the number of shares outstanding could increase to 13.7m. That said, management intends to await the readout from the ERADICATE trial before deciding how to proceed with balancing debt reduction and refinancing of the convertible bond.

Guidance for FY22 is total revenue of CHF106–112m, of which CHF98–104m is non-deferred Cresemba and Zevtera revenue, which includes royalties and potential milestones from partners. Here Basilea guides for c CHF59m in Cresemba royalties, up from CHF53.2m in FY21, reflecting increasing in-market sales. It should be noted that this may prove somewhat conservative as the guidance does not reflect any sales uptake in China should Pfizer get Cresemba included in the Chinese NRDL (see page 6). However, the projected decrease in total non-deferred revenue (versus CHF128.8m in FY21) reflects the fact that FY21 saw an unusual concentration of milestones, and that these should now return to pre-FY21 levels. Milestones and upfronts payments in FY21 (excluding deferred revenue components) were CHF49.4m in FY21 versus CHF9.0m in FY20. Moreover, Basilea guides for further reduction in net cash used in operations to CHF10–15m (from CHF32.0m operating cash outflow in FY21).

The operating loss is guided at around CHF20–25m, in contrast to a profit of CHF1.2m in FY21. This is largely driven by lower expected milestone payments from partners. We see the R&D activity continuing towards the end of the year in the oncology pipeline as Basilea prepares these assets for the planned strategic transactions and, as mentioned above, we note that the current guidance does not include any such transactions. For 2023, we expect sustained in-market growth of Cresemba sales and we also model initial US sales for Zevtera following potential US approval that year, setting the course for Basilea becoming cash flow positive from FY23e. This is further buttressed by guidance for FY23 of an opex reduction of 30% y-o-y. This follows the decision to cease all R&D investments in the oncology assets. We reflect this in our model by reducing our FY23 opex estimates by CHF33m to c CHF80m (against our FY22 opex estimate of c CHF110m). We apportion the FY23e CHF33m cost savings approximately 75% to R&D and 25% to SG&A. Our opex estimates for FY22 and FY23 include BARDA reimbursements of CHF7m and CHF4m, respectively.

With an FY21 gross cash and investments position of c CHF150m, Basilea is, in our view, well-funded to manage the current clinical trials of derazantinib and lisavanbulin, both with read-outs over Q222 and Q322. Altogether we believe Basilea’s funds on hand to be sufficient to complete the current clinical activities over 2022, and if required, to repay the CHF123.5m convertible bond liability due this year (although we expect it is likely to be refinanced, as stated above).