Tuesday, 9 April 2013

RedHill Biopharma: Valuation Report by Bioassociate

Bioassociate has released valuation coverage on RedHill Biopharma, Ltd. (NASDAQ: RDHL) (TASE:RDHL.TA). The Report contains a detailed discussion of RedHill's business operations, market dynamics, macroeconomic data and indicators, financial results, potential cash flows, and risks. The valuation Report is available at: http://www.bioassociate.com/research-and-publications/publications/


via our report on SeekingAlpha:


RedHill Biopharma (RDHL) is a biopharmaceutical company focused on development of late clinical-stage new, improved, and patented formulations and combinations of existing drugs. RedHill is currently advancing six clinical programs, two of which are expected to be filed for regulatory review during 2013, and two are entering pivotal clinical studies.

The majority of RedHill's product pipeline is comprised of therapeutic candidates acquired from pharmaceutical companies that encountered cash flow or operational difficulties, resulting in low purchasing prices and leading to maximal potential capitalization of those assets. RedHill's pipeline can be segmented into two primary groups: 

(1) new, patent-protected, formulations of existing drugs and (2) new, patent-protected fixed-dose combination drugs. This approach lowers the risks associated with clinical development since the developed products are based on previously approved drugs, with proven safety and efficacy data and consequently advanced through the 505(b)(2) regulatory pathway.


RedHill's valuation was implemented using the "pipeline" method that is suitable for the developmental stages of most of the company's products. The company's valuation is conducted by examining the company as a holding entity vis-à-vis existing projects, with risk-adjusted net present value (rNPV) capitalization to the net present value, including weighting of several scenarios.

Pipeline summary

RedHill is currently advancing six clinical programs:
RHB-104 -a proprietary antibiotics drug combination for treatment of Crohn's disease.
RHB-105 -an antibiotics and proton pump inhibitor drug combination for eradication of Helicobacter pylori infections.
RHB-102 -a once daily controlled release formulation of Ondansetron for prevention of chemotherapy-induced nausea and vomiting.
RHB-103 -a fast dissolving thin film formulation of Rizatriptan for the treatment of migraine.
RHB-101 -a once daily controlled release formulation of Carvedilol for the treatment of heart failure and hypertension.
RHB-106 -a proprietary oral bowel preparation capsule for GI tract procedures
Upcoming Potential Catalysts
Program
Event
Significance
Timeline
RHB-102 (CINV)
NDA filling
Medium
Q4/2013
FDA marketing approval decision
High
Q3/2014
US Launch
High
Q1/2015
RHB-103
(Migraine)
FDA marketing approval decision
High
Q4/2013
US Launch
High
H2/2014
RHB-104
(Crohn's Disease)
Initiation of Phase III (US study)
Low
Q2/2013
Initiation of Phase III (EU study)
Low
Q1/2014
Completion of Phase III (US study)
High
Q2/2015
Completion of Phase III (EU study)
High
Q4/2015
RHB-105
(H. Pylori)
Initiation of Phase II/III study
Low
Q1/2013
Completion of Phase II/III study
High
Q4/2013
Initiation of Phase III study
Low
Q1/2014
Completion of Phase III study
High
Q4/2014
Valuation Highlights
We analyzed RedHill's pipeline, unallocated costs and non-operational assets/liabilities as of April 1, 2013, at an equity value of $126.5 million, and price per ADS of $14.8, which reflects an upside of 34% on the ADS's price (The company issued ADS on Dec. 2012, with a ratio of 1 ADS for 10 shares).
The main highlights are:
  1. RedHill's pipeline consists of diverse drug candidates. This reduces the Company's dependency on any specific product technology.
  2. RedHill's clinical programs are advanced through the FDA's 505(b)(2) regulatory pathway, hence requiring reduced development costs, risks and time.
  3. RHB-104 for the treatment of Crohn's Disease is RedHill's lead program, and holds that greatest significance to the company's valuation.
  4. RHB-103 has been recently submitted for FDA review towards market approval decision, and RHB-102's NDA submission is expected towards the end of 2013. These programs are the most immediate potential value drivers for RedHill.
  5. The Company operates in a lean, fully outsourced business model that allows a limited burn rate. Considering the planned clinical development activities, the Company's net cash should be sufficient for approximately two years.
  6. We view RedHill's "technological platform" as the management's ability to produce additional worthy technology acquisitions, and incorporate them into the Company's  product pipeline. Equity Bridge Analysis ($ `000) Focus on RedHill's leading clinical programs
RHB-104: antibiotics combination for the treatment of Crohn's Disease
Crohn's disease (CD) is part of a family of inflammatory bowel diseases (IBD), which also includes ulcerative colitis and indeterminate colitis. All IBD-related pathologies are associated with intestinal inflammation, resulting from uncontrolled inflammatory processes in the gastrointestinal (GI) tract lining, which involves the attack of the tissues by the body's own immune system.
At present, CD is considered a result of multifactorial causes, including genetic, immune-related, environmental, and infectious triggers. Among the infectious triggers, the Mycobacterium avium subspecies paratuberculosis (MAP) bacterium is considered as a major contributing factor for a significant sub-population of Crohn's disease patients.
In 2011, Crohn's disease prevalence in the seven major markets (US, Japan, France, Germany, Italy, Spain, and the UK) was approximately 900,000 diagnosed patients, over half of which were in the US. The 2010 global Crohn's disease therapeutics market was estimated at $3.6 billion. Conventional treatment is directed almost exclusively at suppressing the inflammatory processes, although the dysregulation of the immune system is likely secondary to the disease's actual trigger. Main brand names of the different drug classes used for treatment of CD are presented in table 1. Table 1: Leading marketed Crohn's disease therapies
* Sales figure represents income from all approved therapeutic indications.
RedHill's RHB-104 is a patented combination of three generic antibiotic agents - clarithromycin, clofazimine and rifabutin, in a single capsule, for the treatment of MAP infections in Crohn's disease. This treatment's rationale is based on the assumption that CD, at least in some patients, is caused by the presence of MAP bacterium. The drug is currently developed for treatment of moderate-to-severe active Crohn's disease in adults. However, RedHill obtained an FDA Orphan Drug status for RHB-104 for the treatment of CD in the pediatric population, and is likely to pursue a regulatory approval for this population.
RHB-104 was acquired by RedHill in 2010 from Giaconda Ltd. In 2011, RedHill acquired the exclusive rights to a patented diagnostic test for the identification of the presence of MAP bacteria in patients. Later on, RedHill entered into an agreement with Quest Diagnostics to develop a commercial diagnostic test for MAP bacteria DNA in the blood, based on the acquired technology.
Based on data analysis of a Phase III study, performed by Giaconda in Australia, RedHill is currently preparing two pivotal Phase III studies with RHB-104 for the treatment of moderate-to-severe active Crohn's disease. The first study (in North America and Israel) is expected to begin in Q2 2013, and we estimate that the European study will begin during Q1 of 2014. We embrace the company's assumptions relating to the costs of these studies at $14 million. Upon success in these studies, we estimate regulatory submission during 2016 and market launch during 2017.
The CD therapeutics pipeline is robust and varied, with several first-in-class molecules in late-stage clinical development (table 2). The launch of those products is expected to balance the anticipated arrival of several generic/biosimilar drugs (mainly for Entocort EC and Remicade) and expand the current market.
Table 2: Advanced Crohn's disease therapeutics pipeline

Unlike its pipeline competitors, RHB-104 is not an anti-inflammatory agent. This differentiation from the bulk could be an advantage, should this drug candidate prove to be efficient in inducing disease remission without safety issues. However, the different mechanism of action of RHB-104, and the fact that its relation to CD is not widely accepted in the scientific community, could interfere with the drug's commercial potential, if clinical efficacy will not be remarkable. RHB-104's target market is based on the current Crohn's Disease therapeutics market. However, we assume that the actual addressable market for RHB-104 will be smaller (~1.8 billion) due to the therapy's relevance only to MAP-positive patients (~50% of patients), high estimated treatment price (~$8000 per patient per year) and presumed adoption as a second or third line of treatment. We estimate a maximal penetration rate of 30% to the immediate addressable market.
The valuation of RHB-104 is a risk-adjusted net present value (rNPV) capitalization to the net present value. The valuation includes weighting of several scenarios, based upon main assessments described above. The valuation parameters are summarized in table 3.
Table 3: Main valuation parameters for RHB-104
Territory
Current  development stage
Success Rate
Phase III
Regulatory approval success rate
Launch
Patent period
US
Phase III
50%
80%
2017
2029
ROW
50%
80%
2017
Total market per product ($'000)
1,800,000
Market Growth (CAGR)
2.6%
Company share from Market (Peak Sales)
30.0%
Royalties to RedHill
25.0%
Royalties to original developer
20.0%
Given the aforementioned parameters, we estimate the total value of this program at approx. $30.5m
RHB-105: combination therapy for the eradication of Helicobacter pylori infections
Helicobacter pylori (H. pylori) is a gram-negative bacterium that lives in the stomach and duodenum, and is the major cause of peptic ulcer disease in the stomach and duodenum (14 million Americans), as well as of gastric ulcer cases (21,000 new cases per year in the US). 30% of the population in developed countries and 80% in developing countries are infected with H. Pylori. However, treatment for the eradication of the bacteria is almost always performed only upon occurrence of an associated pathology.
International guidelines for first-line H. Pylori eradication recommend a triple combination of a proton pump inhibitor ("PPI" - a class of drugs that inhibit the stomach's proton pumps and induce reduction of gastric acid production) and two of three antibiotics (usually amoxicillin, clarithromycin or metronidazole). These medication combinations typically cure about 70-80% of infections, with antibiotic resistance being the primary cause of therapeutic failure.
RedHill's RHB-105 is an orally administered combination of three approved drugs: omeprazole (a proton pump inhibitor) and amoxicillin and rifabutin, which are antibiotic agents. Rifabutin (RedHill's alteration to the current drug combination) has potential utility against H. Pylori based on the very low prevalence rate of rifabutin resistance, as well as clinical and pre-clinical efficacy data.
RedHill plans to initiate a Phase II/III study with RHB-105 in North America during the first quarter of 2013. We estimate that top-line results from this study will be published by the end of 2013. Should this study be successful, we anticipate an additional Phase III study to be conducted during 2014, prior to an NDA submission during 2015. Market launch is expected during 2016 in the US, and 2017 in non-US markets.
The clinical pipeline for H. Pylori eradication therapies is lean, and comprised mostly of new antibiotic agents in mid-stage clinical development (table 4). Examples of such novel antibiotics include Sequella's SQ109, ActivBiotics' Rifalazil and MerLion's Finafloxacin. Non-antibiotic therapies are in earlier stages of development: anti-H. Pylori vaccines are developed by 2-3 companies, but all products are in pre-clinical stages.
Table 4: Pipeline of H. pylori eradication therapies
In the near future, no major changes are expected in the current H. Pylori eradication guidelines. The insufficient and constantly declining success rates of current treatments, due to antibiotic resistant strains, pose an opportunity for the introduction of new medicine combinations. In this ecosystem, RHB-105 is the only late-stage drug candidate.
RHB-105's target market was calculated based on several assumptions: (1) we estimate this drug will be used as a second or third line of therapy; (2) price per treatment for RHB-105 was assumed to be $550 per patient, reflecting a 20% premium over prepackaged combination products; (3) low penetration rates are predicted in developing countries due to price premium over generic alternatives. We estimate a maximal share of 7.5% to the calculated addressable market, representing annual peak sales of approximately $300 million. In addition to the specified market parameters, the patent family for RHB-105 is set to expire during 2019. According to our estimations, this will result in only 4 years of market exclusivity for RHB-105 before it will be susceptible to direct competition.
The valuation of RHB-105 is a risk-adjusted net present value (rNPV) capitalization to the net present value. The valuation includes weighting of several scenarios, based upon main assessments described above. The valuation parameters are summarized in table 5.
Table 5: Main valuation parameters for RHB-105
Territory
Current  development stage
Success Rate
Phase III
Regulatory approval success rate
Launch
Patent period
US
Phase II/III-ready
80%
90%
2016
2019
ROW
80%
90%
2017
Total market per product ($'000)
1,600,000
Market Growth (CAGR)
0.0%
Company share from Market (Peak Sales)
7.5%
Royalties to RedHill
25.0%
Royalties to original developer
20.0%
Given the aforementioned parameters, we estimate the total value of this program at approx. $17.3m
RHB-102: a controlled release formulation of Ondansetron for prevention of chemotherapy-induced nausea and vomiting.
Chemotherapy induced nausea and vomiting (CINV) is a side effect, which may exhibit itself alongside 30% to nearly 90% of all chemotherapy treatments, depending on the chemotherapy drug and its dosing schedule, and the patient's gender and age, amongst other factors. A chemotherapy drug which induces emesis is referred to as emetogenic, and drugs which prevent emesis as antiemetics. Supportive care products are commonly prescribed to cancer patients to prevent or treat these side effects, allowing the patients to continue to receive potentially life prolonging cancer therapies.
Currently, five medications targeting CINV are on the market, comprising four 5-HT3 receptor antagonists (5-HT3 RA) and one NK-1 receptor antagonist (table 6). Some of the 5-HT3 RA drugs have lost patent protection, and their generic versions are sold under various trade names.
Within the 5-HT3 market, ondansetron (GSK's Zofran), the drug on which RHB-102 is based, remains the physicians' treatment of choice, and this drug currently holds a significant share of the CINV market, with $400 million annual sales, likely due to its low generic price. Aloxi, Helsinn/Eisai's long-acting palonosetron formulation, is RHB-102's most direct competitor due to its long half-life, which is at least four times longer than those of its competitors'. Although significantly more expensive than its competitors, Aloxi's long half-life has allowed it to gain a significant share of the 5-HT3 RA market. This is anticipated to increase further as Aloxi's 500mg oral capsule was first introduced to the market in 2012 and is already exhibiting impressive sales figures.
Table 6: marketed drugs for CINV
* five days of antiemetic therapy
As of now, current treatments available on the market are not effectively treating patients with delayed-onset CINV who are receiving highly emetogenic chemotherapy, which amount to 50-70% of all CINV patients. Additionally, the short-term action of the majority of antiemetics currently available on the market means that drugs have to be taken several times a day. The nausea and vomiting experienced by chemotherapy-treated patients results in compliance problems that could be avoided by increasing the dosing gaps of CINV prophylaxis drugs.
RedHill acquired the rights to RHB-102 in 2010 under an agreement with SCOLR Pharma, pursuant to which the company received a worldwide, exclusive license for the development and commercialization of RHB-102. RHB-102 utilizes a patent-protected technology called Controlled Delivery Technology (CDT) which enables controlled release drug design at a relatively low manufacturing cost. RHB-102, which incorporates the 5-HT3 RA ondansetron to the CDT technology, is expected to prevent nausea and vomiting over 24 hours - a time window which is significantly longer than the effective time of the majority of oral drugs currently available on the market.
Following positive results in a pivotal bioequivalence clinical trial with RHB-102, RedHill is planning to file an NDA with the FDA during 2013. If successful, RedHill plans to partner with a third party for the marketing and sales of RHB-102. The market launch of RHB-102 is anticipated during 2015.
The clinical pipeline of CINV therapeutics currently consists of only twelve molecules in various stages of development. However, the great majority of the molecules are extensions and improved formulations of existing drugs, rather than novel molecules per se. For this reason, over the next decade a diminished competition and stunted growth are expected in the CINV market due to a lack of novel molecules in the pipeline. Key pipeline competitors of RHB-102 are shown in table 7.
Table 7: Key drug candidates in the CINV therapeutics pipeline
There is a demand for longer-acting antiemetics, and particularly those targeting delayed-onset CINV, which would result in higher compliance and ameliorated effectiveness. This is based on the implication that a less frequent drug administration will naturally reduce the chance of non-compliance with physician guidelines among patients. Accordingly, an inexpensive long-acting 5-HT3 RA has the potential to capture a share of the acute-onset CINV market. The potential advantage of RHB-102 compared to Aloxi is its estimated price. In the United States Aloxi in a capsule form costs approximately $170. RHB-102 is expected to be priced cheaper than Aloxi, Nevertheless, Aloxi has demonstrated significant superiority compared to other drugs in the 5-HT3 RA class, which should maintain its market leadership among treated patients.
The valuation of RHB-102 is a risk-adjusted net present value (rNPV) capitalization to the net present value. The valuation includes weighting of several scenarios, based upon main assessments described above. The valuation parameters are summarized in table 8.
Table 8: Main valuation parameters for RHB-102
Territory
Current  development stage
Regulatory approval success rate
Launch
Patent period
US
NDA submission-ready
90%
2015
2019
ROW
90%
2016
2022
Total market per product ($'000)
400,000
Market Growth (CAGR)
2.0%
Company share from Market (Peak Sales)
15.0%
Royalties to RedHill
25.0%
Royalties to original developer
8.0%
Given the aforementioned parameters, we estimate the total value of this program at approx. $14.8m
RHB-103: a fast dissolving thin film formulation of rizatriptan for the treatment of migraine
A migraine is a neurovascular condition (affecting neurons and blood vessels) characterized by localized, pulsating headache which lasts between 4 and 72 hours. The pain is commonly accompanied by nausea, vomiting, and photo- and phono-phobia (sensitivity to light and sound, respectively). Around 10% of the global adult population is believed to be suffering from migraines, and the disease is more prevalent in the developed world. In 2011, the global migraine therapeutics market was valued at $3.3 billion, representing an over $1 billion drop compared to 2008, attributed to the patent expiry of migraine blockbusters, as four leading Big Pharma drugs having gone generic between 2008 and 2013.
The 5-hydroxytryptamine 1B/1D receptor agonists (e.g. triptans) market currently holds 70% of the migraine therapeutics market, and will continue to be responsible for over half of all the projected sales in the next decade. Following the generification of the leading triptan drugs, rizatriptan (originally Merck's Maxalt) and sumatriptan (originally GSK's Imitrex), the migraine market is now characterized by increased crowding and an increasingly dense competition, in addition to a large variety of triptan drugs already competing on the market.
Table 9: Leading and most recently approved Migraine drugs
SC - subcutaneous; IV - intravenous; IM - intramuscular
* Price per treatment specifies price per six tablets, unless indicated otherwise.
** Orally disintegrating tablet (Maxalt-MLT).
Despite a large array of drugs which target migraine, significant unmet need remains in this therapeutic area. Longer-acting medications are desirable, as currently only about half of triptan medications are able to provide a 24-hour relief to migraneurs.
RedHill's RHB-103 is an oral thin film formulation of a leading migraine compound, rizatriptan, intended for the treatment of acute migraines. Rizatriptan was exclusively marketed under the name Maxalt by Merck until December 30, 2012, following which production of generic versions of rizatriptan by at least five generic companies has begun.
RHB-103 is based on a technology called "VersaFilm," patented by the Canada-based IntelGenx Corp. (OTCQX:IGXT) and is being developed as part of a joint development and commercialization agreement between RedHill and IntelGenx. VersaFilm allows the production of thin film strips that dissolve rapidly in the mouth and is designed to facilitate the drug's absorption through the oral mucosa and into the bloodstream. This mode of delivery is particularly convenient for patients whose migraine has advanced into the nausea/vomiting stage, or for patients who have trouble swallowing tablets and water.
RedHill has filed an NDA for RHB-103 with the FDA in March of 2013. The FDA's review timeline for 505(b)(2) submissions is six months, therefore the FDA's decision regarding the marketing approval of RHB-103 is expected before the end of 2013. Based on the bioequivalence study results, we anticipate a high probability of an FDA marketing approval.
The most direct competition for RHB-103 will originate from drugs targeting the acute migraine niche, and in particular from faster-acting oral reformulations of triptan drugs (table 10). Although several generic versions of rizatriptan are being manufactured, as of yet, RedHill's reformulation of Maxalt is expected to be the first rizatriptan thin film reformulation to reach the market after Maxalt's patent expiry.
Table 10: Leading drug candidates in the migraine pipeline
RHB-103's target market is based on the current triptan market size (approx. $2.3 billion). Since this drug candidate is patent protected only in the US, we take into consideration US-related sales only (65% of global market). We estimate the maximal share of RHB-103 to be 3% from this competitive and saturated market .
The valuation of RHB-103 is a risk-adjusted net present value (rNPV) capitalization to the net present value. The valuation includes weighting of several scenarios, based upon main assessments described above. The valuation parameters are summarized in table 11.
Table 11: Main valuation parameters for RHB-103
Territory
Current  development stage
Regulatory approval success rate
Launch
Patent period
US
FDA review
90%
2014
2022
Total market per product ($'000)
1,500,000
Market Growth (CAGR)
2.7%
Company share from Market (Peak Sales)
3.0%
Royalties to RedHill
25.0%
Royalties to original developer
40.0%
Given the aforementioned parameters, we estimate the total value of this program at approx. $8.7m
Pipeline analysis summary
We conclude our pipeline analysis with a total value of $75.7 million:
Pipeline analysis ($ '000)

Technological platform valuation
RedHill's product pipeline is supported by the company's broad business and technological grounds. Valuation of RedHill's "technological basis" is in fact a valuation of the company's "residual value." This valuation was conducted using the Feed Rate methodology that is common in the field of life sciences, rather than using the conventional terminal value, normally used by non-Life-Science companies, for the following reasons:
  1. The terminal value reflects a kind of steady state in the company's sales with a certain fixed growth rate (G) based upon past data. This is not the case for Life Science companies, where the terminal value derives from projects in development.
  2. The terminal value for companies usually constitutes between 70-80% of the company's worth. In contrast, in Life Science companies, the main share of the value is attributed to income generated during several years following product launch (for the most part, about 6-10 years), after which a certain decline occurs (expiration of the patent, competing products, etc.).
The technological platform valuation is based on the average number of new projects that the company can yield annually. Estimating the capitalization value of future projects is based on pre-clinical and clinical development aspects, assessment of unallocated costs, and a higher capitalization rate than the one used during the forecast years, due to the uncertainty of the company's future projects(1). In RedHill, we see the company's technological platform as the management's ability to produce additional worthy technology acquisitions, and incorporating them into the company's product pipeline.
The following formula reflects the value of technology:
Table 12: Main valuation parameters of the technological platform
Average # of New Projects per Year
1
Project Value ($'000)
15,140
Unallocated Costs ($'000)
-2,062
Unexpected Costs ($'000)
-3,028
Tax
25%
Capitalization
29.3%
Terminal Technology Value ($'000)
25,735
Technology Value - 2013-2029 ($'000)
422
Technology Value ($'000)
25,313
Equity value
Non-operational assets/Liabilities and unallocated costs
The unallocated costs of the company are mainly the future G&A costs, calculated with an annual growth rate of 2%. Initial G&A costs are based on the average costs of 2011 and 2012, assuming same cost structure. As of December 31, 2012, the company has non-operational assets (CASH) of approximately $18.4 million. We also included in our valuation, an exercise of the tradable, non-tradable and ESOP warrants.
Tax - The balance of carry forward losses as of December 31, 2012 is $23.9 million. These tax loss carry forwards have no expiration. We assumed with our tax model, carry forward tax losses will be used by the company in the upcoming years until 2017.
In table 13 we present the equity valuation:
Table 13: Equity value
Pipeline Analysis
rNPV ($'000)
RHB-102
Oncology support
14,842
RHB-103
Migraine
8,679
RHB-104
Crohn`s Disease
30,482
RHB-105
H. pylori
17,255
RHB-106
Bowel Prep.
4,441
Unallocated Costs
-10,308
Terminal Technology Value
25,313
Enterprise Value
90,705
Non-operational assets/liabilities (including warrants)
35,784
Equity Value
126,489
Sensitivity analysis
In table 14 we present RedHill's ADS price target in relation to the capitalization rate. We set a range of 0.5% change from our CAPM model as the stock range.
Table 14: Sensitivity analysis - Capitalization rate vs. Target price
Cap. rate
Target price ($)
23.3%
15.7
23.8%
15.2
24.3%
14.8
24.8%
14.3
25.3%
13.9
Given the aforementioned parameters, we estimate the equity value of the company at approx. $126.5 million.
We estimate the ADS price at the range of $13.9 - $15.7, with a mean of $14.8
The Full report can be found here
1 Bogdan & Villiger, "Valuation in Life Science - Practical Guide," 2008, Second Edition.