Basilea Pharmaceutica — Strength in numbers

Basilea reported a solid set of 2017 numbers, driven by product sales (Cresemba for mould infections and Zevtera/Mabelio for bacterial infections), royalty income and contract revenues. Total revenues were reported at CHF101.5m for FY17 (+54%), including product sales contributions from Cresemba and Zevtera of CHF16.3m (CHF7.1m in FY16); we assume the bulk of product sales relate to Cresemba – actual numbers by individual assets are not disclosed. Basilea reported contract revenue (including revenue recognition from upfront and milestone payments that were recorded as deferred revenues) of CHF74m (CHF57.7m in FY16), which included CHF31.9m (CHF19.9m in 2016) of income relating to licence agreements with Astellas and Pfizer for Cresemba, and CHF37.7m (CHF37.7m in 2016) recognised from the initial CHF224.1m upfront payment in 2012 relating to the global distribution agreement for Toctino. The US rights for Toctino were returned to Basilea in 2016 and we anticipate the final revenue recognition of CHF23.7m to fall into reported revenues for 2018. Contract revenues also include royalties on US and European Cresemba sales from licence partners of CHF15.0m (CHF7.3m in FY16). Basilea received CHF5.0m in a first sales milestone from partner Astellas as Cresemba reached a predetermined sales number in the US. Total revenues also include CHF10.5m of Biomedical Advanced Research and Development Authority (BARDA) reimbursements relating to Phase III clinical studies for ceftobiprole.

Basilea reported a 68% reduction in operating loss to CHF14.1m in 2017 (CHF43.9m in FY16), versus guidance of CHF1m operating loss/month and our estimate of CHF14.5m for 2017. Net R&D expenses were higher than 2016 (CHF53.5m, compared to CHF48.4m), reflecting progression of the internally developed pipeline. Basilea reported an operating loss in 2017 of CHF14.1m versus a loss of CHF43.9m in 2016; the reduction of loss is mainly due to the significant uplift in total revenues as well as slightly lower operating expenses; higher R&D costs offset reductions in SG&A.

Basilea has provided financial guidance for FY18 for total revenues of CHF105-115m, with royalty and milestone contributions from Cresemba and Zevtera expected at CHF60-65m. Basilea expects operating loss in the region of approximately CHF10-20m in 2018. Guidance does not include the potential impact of any in-licensing deals.

We anticipate gross R&D costs (we no longer net BARDA payments from R&D from 2018, but instead include the contribution as revenues) in the region of CHF85.0m and CHF95.0m in 2018 and 2019, respectively, as Basilea invests in the US Phase III ceftobiprole programme and development of the early- to mid-stage oncology portfolio. This consists of drugs that target cancer resistance (BAL101553 and BAL3833). Nonetheless, growth in the top line should mitigate growth in operating costs from 2019 and we anticipate sustainable profitability from 2020 – the two major swing factors being timing and amount of milestones, actual R&D expenses for the year and any potential in-licensing deals.

Basilea reported cash and cash equivalents of CHF310.7m at year-end December 2017 (CHF289m at year-end December 2016). Our financial model suggests that current cash should be sufficient to fund operations beyond 2019, even in the absence of any milestone payments.

During 2017, Basilea announced multiple licensing deals for its commercially available products, Cresemba and Zevtera. This included several distribution deals: Zevtera (Cardiome in Europe [excluding Nordic countries] and Israel); and Zevtera and Cresemba (Avir Pharma in Canada). Additionally, Basilea signed two notable licence agreements: 1) Zevtera in China with Shenzhen China Resources Gosun (CR Gosun); and 2) the major licensing deal with Pfizer for Cresemba, which initially covered Europe (ex-Nordics), Russia, Turkey and Israel, but which was then expanded to include China and 16 countries within the Asia-Pacific region. Exhibit 1 highlights the existing partnerships for both Cresemba and Zevtera; we note that in many instances partners have chosen to in-license both products, given the significant overlap in the physician prescribing base. We note that licence and distribution agreements now cover over 115 countries for Cresemba and 85 countries for Zevtera worldwide, and that the potential regulatory and sales milestones in aggregate for Cresemba and Zevtera under these agreements total US$1.1bn (but is dependent on pre-specified milestones for each product in individual territories being reached).

Cresemba (isavuconazole) is a broad-spectrum antifungal for the treatment of severe, life-threatening fungal infections. In the US, partner Astellas has reported sales of $77m for calendar year 2017 (+67%), which triggered the first sales milestone payment of $5m to Basilea. Basilea is entitled to a tiered royalty on Cresemba sales, starting in the mid-teens and ramping up to the mid-20s, with up to CHF290m of sales milestones (CHF5m of which was received in FY17).

While the exact structure of the milestone deal with Astellas is not disclosed), we model that further sales milestones payments will be triggered when Cresemba sales in the US hit $100m, which we forecast to be in 2019. Our peak sales forecast for Cresemba includes $250m for the US opportunity in 2022; we believe Cresemba could reach our expectations at its current sales trajectory.

Pfizer launched Cresemba in Spain in November 2017, so the product is now available in the top five EU markets and Austria. In addition, Swissmedic has granted marketing authorisation for Switzerland. Distribution partner Unimedic has launched Cresemba into the Nordic countries. We believe Pfizer is in an optimal position to capitalise on Cresemba’s unique profile among antifungals (broad-spectrum activity plus lower toxicity); furthermore, the extension of Cresemba’s global footprint at this stage (China and 16 countries in the Asia-Pacific region) highlights Pfizer’s commitment to the product in areas outside Europe. We note that Basilea estimates (source: QuintilesIMS SMART MIDAS May 2017) that the top five European countries represent 32% of the global antifungal market and the US represents 24%. We believe Pfizer is well positioned to target a wider range of hospitals and patients than Basilea was able to and we forecast a peak penetration of 45% in Pfizer’s European markets. We have not isolated Pfizer sales in China and the Asia-Pacific region at present, which are presently bundled into our RoW opportunity. We forecast total peak sales for Cresemba of US$0.87bn. Basilea will no longer benefit from booking Cresemba sales in Pfizer-partnered markets; however, it could benefit from substantial milestone payments and royalties on sales. Furthermore, we expect a decrease in the commercialisation costs for Cresemba in Europe, currently borne by Basilea in 2017. In other partnered territories (Canada, Nordics, Latin America and the MENA region), Cresemba’s sales will be booked at the product transfer price to the relevant partner plus prespecified commercial milestones. In Japan, following positive Phase I studies, partner Asahi Kasei Pharma is on track to start the isavuconazole Phase III registration study during 2018.

Zevtera/Mabelio (ceftobiprole) is a broad spectrum antibiotic for the treatment of Gram-positive, including MRSA (methicillin-resistant Staphylococcus aureus) infections, which are resistant to a number of existing antibiotics, and Gram-negative bacterial infections, including Pseudomonas. Zevtera was approved in Europe for hospital-acquired and hospitalised community-acquired pneumonia (excluding ventilator-associated pneumonia) towards the end of 2013. Uptake in this market remains slow as sales of antibiotics take time to build post-launch due to the requirement for regional reimbursement across Europe and the need to be added to individual hospital formularies, microbial stewardship programmes and a tendency to keep new antibiotics in reserve use.

Zevtera is currently not approved in the US (further clinical studies are needed to secure approval), where we believe the bulk of its sales opportunity resides; in terms of value, the US in 2016 accounted for 59% of anti-MRSA antibiotics and 70% of the branded hospital antibiotic market. Basilea has initiated the first of two cross-supportive Phase III clinical trials required for regulatory approval of ceftobiprole; the Phase III Special Protocol Assessments (SPAs) have been agreed with the FDA for both the Staphylococcus aureus bacteraemia (‘SAB’, bloodstream infections) and acute bacterial skin and skin structure infections (ABSSSI) trials. Both trials will be needed to support a US NDA submission. The ABSSSI skin study could be used to support post-marketing label extension in this indication in countries where Zevtera is commercially available. The ABSSSI study started enrolment of patients in February 2018. The 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 to be an area of unmet need; therefore, the SAB study could further differentiate Zevtera from available cephalosporins. The 390-patient, multi-centre study is expected to start in mid-2018 and recruitment will include patients with endocarditis and other forms of complicated SAB; a three-year duration implies that data are due in 2021. A US launch date of 2023 for ceftobiprole could be feasible, with an initial focus of bacteraemia and ABSSSIs.

Critically, the funding for these trials plus the potential trial in community-acquired pneumonia is in place, with up to $108m 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.

Our EU peak sales expectations (based on peak penetration) are a modest $60.7m in 2023 (for the currently approved indications). We anticipate that peak sales in the different regions will likely not be reached at the same time, given that launches in China and the US are later than in Europe and other RoW countries. Our RoW peak sales forecasts are $168m in 2025, plus US peak sales of $317m in 2027, which is predicated on securing a partner. Phase III data from the US trials, if positive, could be used to expand Zevtera’s EU/RoW label to include SAB and ABSSSI indications. Our current peak sales estimates for EU/RoW do not include these indications; therefore this could provide upside to our financial forecasts.

With both Zevtera and Cresemba’s commercialisation strategy largely in the hands of partners, Basilea can turn its focus to its next pillars of growth: Zevtera’s Phase III US clinical trial programme (see above); the early- to mid-stage products (BAL101553 and BAL3833), which are targeting cancer resistance; and bolstering the oncology and infectious disease pipeline further through in-licensing.

To complement the primary focus on anti-infectives, Basilea also has an early- to mid-stage pipeline focused on oncology products that target resistance to current traditional chemotherapies – novel tumour checkpoint controller BAL101553 and RAF kinase inhibitor BAL3833. There could be synergies between the anti-infectives and oncology pipelines, as a large number of invasive fungal and bacterial infections develop in cancer patients that are immunocompromised due to treatment with aggressive chemotherapies.

BAL101553 has part-completed two dose escalation studies in patients with solid tumours (oral once-a-day dosing, and weekly 48-hour IV infusion). The maximum tolerated dose (MTD) has been established and data will be presented at an upcoming scientific conference this year. The Phase I dose-escalation study in a separate glioblastoma arm of the oral study is expected to be completed in the first half of 2018. Furthermore, in 2017 Basilea entered into a clinical agreement with the Adult Brain Tumour Consortium (ABTC) to test BAL101553 in newly diagnosed glioblastoma patients; the ABTC initiated this oral Phase I combination with radiotherapy at end-2017.

BAL3833 is a pan-RAF/SRC kinase inhibitor in Phase I development in advanced solid tumours. Preclinical data suggest that BAL3833 has activity in models resistant to current BRAF inhibitors and in KRAS-driven cancer models, suggesting it could have clinical utility in major tumour types beyond BRAF-driven melanoma. It is currently being tested in a Phase I dose-escalation study; patient enrolment is ongoing and the study aims to determine the maximum tolerated dose.

See our note ‘The future looks bright’ for more details on the pipeline.

Our updated Basilea valuation is CHF1,231m (from CHF1,222m previously), primarily as a result of tweaking our 2018 forecasts following guidance. Additionally, we roll forward our DCF, update US$/CHF FX to 1.07 and adjust for a higher net cash position at end-December 2017 (CHF114.5m vs CHF57.3m at end-June 2017). Our valuation is based on an NPV analysis, which includes the main portfolio of products and net cash. The breakdown of our valuation is shown in Exhibit 2.

Based on $0.873bn peak sales, Cresemba is worth CHF920.5m. In the US, Cresemba is partnered with Astellas and our valuation includes tiered future royalties on sales starting from the mid-teens and ramping up to the mid-20s. Basilea is also entitled to up to CHF290m of sales-related milestones (CHF5m of which was received in FY17), some of which are included in our valuation. In the EU, our sales assumptions are based on Pfizer’s ability to reach more patients as a result of a larger salesforce and existing infrastructure. We assume a 15% royalty, and on peak sales in the EU of CHF400m Basilea would collect CHF60m. Of the $427m in regulatory and sales milestones which Basilea is eligible to receive from Pfizer, we have included CHF280m in our model in the 2017 to 2025 timeframe. At this point, we crudely model the China and Asia-Pacific opportunity by increasing our RoW penetration rates and trajectory of sales pick-up. More visibility on launch or communication of eligible patient populations in these regions will prompt us to refine our modelling assumptions. For the rest of the world (excluding the US and the EU), we assume a rising transfer pricing on sales of 35-50% for both Cresemba and Zevtera; note that the bulk of our sales for each is in the US and Europe.

Our model includes unchanged forecasts for Zevtera in Europe, in addition to risk-adjusted contributions for the US opportunity and the earlier-stage pipeline (BAL101553 and BAL3833). For Zevtera in Europe, revenue forecasts include product sales at transfer prices received from partner Cardiome. For Zevtera in the US, Basilea is considering a commercial partnership; our valuation includes an assumed deal with a total value of CHF100m (a base case assumption, which could prove conservative) and a 20% royalty on sales. Our valuation includes an assumed 30% contribution by Basilea towards the cost of Phase III development ($90-120m total cost for two Phase III trials). With efficacy already demonstrated in previous trials for skin and lung infections, we believe the biggest risk to Zevtera in the US is around partnering, where we have limited visibility on the likelihood of securing any deal. Therefore, we apply a 75% probability of success; however, we note the data for Zevtera in Europe has been better in some indications versus others.

Following the FY17 results, we have made one major change to our model, which now includes the BARDA funding as other revenue as part of operating income. Net R&D consists of gross R&D net off this BARDA income, so the overall impact on the P&L is nil.

Basilea reported a 68% reduction in operating loss to CHF14.1m in 2017 (CHF43.9m in FY16), versus guidance of CHF1m operating loss/month and our estimate of CHF14.5m for 2017. Net R&D expenses increased in 2017 to CHF53.5m from CHF48.4m in 2016. Operating loss in 2017 reported at CHF14.1m vs a loss of CHF43.9m in 2016; the reduction of loss is mainly due to the significant uplift in total revenues as well as slightly lower operating expenses; higher R&D costs offset reductions in SG&A.

Basilea has provided financial guidance for FY18 for total revenues of CHF105-115m, with royalty and milestone contributions from Cresemba and Zevtera expected at CHF60-65m. Basilea expects operating loss in the region of approximately CHF10-20 million in 2018. We have tweaked our forecast for 2018 following the issuance of guidance at the FY17 results. We forecast total revenues of CHF113.6m in 2018 and CHF137.3m in 2019. Our 2019 top-line forecasts include significant sales milestone income for US Cresemba, and EU Cresemba sales from partners Astellas and Pfizer, respectively.

We anticipate gross R&D costs (we no longer net BARDA payments from R&D from 2018, but instead include the contribution as revenues) in the region of CHF85.0m and CHF95.0m in 2018 and 2019, respectively. We forecast operating losses of CHF18.7m in 2018 and CHF6.3m in 2019. Profitability in 2020 is predicated on receipt of significant sales milestones.