RedHill: A Slow And Steady Climb Towards Biopharma Success

A Slow And Steady Climb Towards Biopharma Success

RedHill Biopharma (RDHL) is an evolving specialty biopharma based out of Israel, with offices in the US. In earlier years, this small company was almost exclusively a promoter of other people’s legacy products – so it promoted and sold a number of low-grade products like Donnatal, Mystesi, EnteraGam and so on. Starting out in 2017, it used its sales force in the US to promote these products, made very little money, and discontinued the practice last year. However, it must have been a good learning experience for management and the sales team, making them ready for what was to come.

What was to come was two things – first, an excellent pair of deals with AstraZeneca (AZN) and privately held Cosmo, whereby RedHill acquired Movantik and Aemcolo respectively. Movantik is a revenue-generating naloxegol tablet FDA-approved for the treatment of opioid-induced constipation (OIC) in adults with chronic non-cancer pain. Before it was acquired, it was generating around $96 million in annual revenue for AstraZeneca. This is, very roughly, the same amount RedHill will be paying to AstraZeneca as fees and royalties over the next few years. Meanwhile, despite the pandemic, which has badly affected everybody, including this company, it had revenues of $21 million in the November quarter – most of it, I assume, coming from Movantik.

Aemcolo has not had a good year through no fault of RedHill. The pandemic hit right after the company acquired Aemcolo, severely impacting global travel, and Aemcolo is a drug FDA-approved for travelers’ diarrhea caused by noninvasive strains of E. coli in adults. Therefore, the drug didn’t sell, yet, but once travel restrictions are gone and a third of Americans begin going abroad (as they usually do every year), sales should pick up.

Meanwhile, the other thing that’s most important for RDHL and is going to start defining its future – instead of promoting legacy products or even licensing decent-looking small scale products from big pharma, the company is getting FDA approval for new formulations or delivery methods of existing products. Last year, it got approval for Talicia, a combination drug containing omeprazole magnesium, amoxicillin and rifabutin, indicated for the treatment of Helicobacter pylori infection in adults. H.pylori and its effect on peptic ulcers is a big deal; this discovery actually got the Nobel prize in 2005. There are approved antibacterial therapies, but they all suffer from antibacterial resistance. In fact, here’s a little diagram that illustrates this:

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(Source: RedHill Biopharma Corporate Presentation, December 2020)

Interestingly, the last two are active ingredients of Talicia.

Talicia was developed by RedHill in-house. It is true that there is not a lot of R&D development per se in these sort of products that are neither NCEs nor even NMEs. NCE stands for New Chemical Entity, and NME is New Molecular Entity. The difference between NCE and NME is that NCE does not contain a single active moiety that has been previously approved, while NME must contain at least one active moiety that has not been previously approved. However, the company still has to run these molecules through medium-sized phase 3 trials needing time and mainly money. So that sort of effort is what is new for RedHill.

Talicia is the first approved product generated through this effort. RedHill also has a long pipeline of drugs following the same principle of redevelopment.

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(Source)

Of these drugs, the RHB-104 seems to be the most advanced. It has positive top line results from a blinded phase 3 study which appears to be registrational. RHB-102 also does appear to be similarly situated, but on closer look, you will see that the phase 3 study it talks about here was an open-label study completed all the way back in 2017. The company still has to do a confirmatory phase 3 trial for getting an NDA in. The other drugs are in various stages of development.

Market potential and value of the pipeline

Talicia’s US and global markets are estimated at $1.4 billion and $4.8 billion annually.

RHB-204 has an US market potential of $500 million in 2017. RHB-102 has a worldwide potential market of $650 million annually in gastroenteritis and gastritis. In IBS-D, 2019 US market potential was estimated at $980 million annually. For RHB-106, this is $560 million annually. RHB-104 for Crohn’s has a worldwide market estimate of over $12.8 billion. Now, if you add them together, you get a lot of billions. Even a 1% penetration assumption for all these drugs put together gives you over $150 million in annual sales for the company. That rate is immensely conservative in some respects, because Movantik itself is making nearly $100 million per year, annualized from actual revenues, for the company. Nor is RedHill any pushover when it comes to getting approvals. The company has successfully received approval for Talicia and has successfully marketed and sold Movantik despite the pandemic. It has also ably protected its assets with patents. If you read through the corporate presentation, you will see that the company has strong IP for every asset it owns.

Thus, there’s little doubt that RedHill will be able to successfully launch and commercialize most of its pipeline assets over the next 2-3 years, and will also be able to protect its IP. I intentionally gave a 3-year estimate, because these are mainly antibacterial drugs, and treatment duration and therefore trial duration is usually less. The longest-duration trial I think I saw was around a year. So, the company’s only constraint is going to be funding, to which we will now arrive.

Financials

RedHill has a market cap of approximately $330 million and a cash balance of $51 million. The company has not done a secondary offering in the recent past. Its cash burn is approximately $50 million, although this is really guesswork on my part. It appears that RedHill’s existing cash reserves will last for a year, so expect a dilution or at least some non-dilutive financing if the company can manage it.

Bottom line

RedHill looks like a somewhat boring, long-term, relatively risk-free, low-headache investment for investors. Its 52-week range is $3.51-10.82, and the stock is currently trading at $8.82. The pandemic has been both good and bad for RedHill, because while it has halted most of the company’s efforts, this was also when the company made a radical shift in its focus and concentrated on developing its own products. Even a 5-year chart of the company looks relatively stale and uninteresting. If you want to add some anchor to your portfolio, this is a benign-looking investment at current prices.

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p id=”a-disclosure” class=”p p4″>Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Credit: SeekingAlpha

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