Erytech Pharma — Update 16 December 2015

Erytech Pharma — Update 16 December 2015

Erytech Pharma

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Erytech Pharma

Private placement to pursue Graspa strategy

Private placement and clinical data

Pharma & biotech

17 December 2015

ADR research

Price

US$26.8*

Market cap

US$209m

*underlying € price converted at US$1.09

ADR/Ord conversion ratio 1:1

Est. net cash ($m) at end September 2015*

*Excluding €25.4m ($27.7m) proceeds from the private placement.

30.0

ADRs in issue

7.8m

ADR Code

EYRYY

ADR exchange

OTC

Underlying exchange

Euronext

Depository

Bank of New York Mellon

Business description

Erytech is a French oncology company with a red blood cell encapsulation technology. Lead product Graspa has successfully completed a Phase III ALL trial and a Phase IIb in AML is ongoing, in addition to a Phase II in pancreatic cancer. Graspa is partnered with Orphan Europe/Recordati in Europe.

Next events

Start of double-allergic study

Q415

Start of NHL Phase II study

2016

Pancreatic cancer Phase II data

2016

Graspa ALL European approval decision

H216

Analysts

Dr Philippa Gardner

+44 (0)20 3681 2521

Jonas Peciulis

+44 (0)20 3077 5728

Christian Glennie

+44 (0)20 3077 5727

Erytech Pharma is a research client of Edison Investment Research Limited

The recent €25.4m ($27.7m) private placement provides Erytech with a healthy cash balance, which should allow effective execution on the strategy to advance and accelerate Graspa/Eryasp in the US, to move development into front-line ALL (acute lymphoblastic leukemia) and to continue pursuing new indications. Two-year follow-up ALL data for Graspa were recently presented at ASH, reinforcing its potential as an effective, safe therapy for patients with few options in this indication. Our valuation is increased to $354.2m with the higher cash balance.

Year end

Revenue ($m)

PTP*
($m)

EPADR
($)

DPADR
($)

P/E
(x)

Gross yield
(%)

12/13

2.0

(9.0)

(1.9)

0.0

N/A

N/A

12/14

2.2

(9.8)

(1.6)

0.0

N/A

N/A

12/15e

2.9

(15.9)

(2.2)

0.0

N/A

N/A

12/16e

3.1

(16.1)

(2.1)

0.0

N/A

N/A

Note: Converted at US$1.09 to €1 Dividend yield excludes withholding tax. Investors should consult their tax advisor regarding the application of any domestic and foreign tax laws.

€25.4m private placement to advance the strategy

We estimate the €25.4m ($27.7m) private placement has boosted cash to €45-50m. Based on an estimated cash burn of c €12m in 2015 and allowing for an uptick in coming years, this should provide a runway into 2019 and allow Erytech to continue with its Graspa/Eryasp development strategy in leukemia and beyond, in addition to advancing the pipeline. In July 2015, Erytech announced plans to conduct a US IPO; we believe it remains an option, but will be dependent on market conditions.

Two-year Graspa ALL data presented at ASH

Follow-up data from the positive Phase III ALL trial were presented at ASH. Median event-free survival (EFS) was 11.8 months in the native L-asparaginase arm, but had not been reached in the Graspa arm after two years. This highlights Graspa’s potential to improve outcomes for patients, without L-asp tolerability issues.

Graspa/Eryasp in leukaemia and beyond

With Graspa already filed in Europe in ALL and a decision expected by YE16, the focus is on the US and new indications. A Phase Ib study in ALL in the US is ongoing and set to accelerate; data are expected in 2016. Erytech is also planning to move development into frontline ALL, in addition to patients allergic to both forms of asparaginase (‘double-allergic’), which could provide an expedited path to market in the US. A Phase IIb trial in AML (acute myeloid leukemia) is ongoing in Europe, funded by partner Recordati; initial overall survival data are expected in 2017. A Phase II trial in pancreatic cancer is underway and first data are expected in 2016. A Phase II trial in NHL is planned to start in 2016.

Valuation: rNPV of $354.2m or $45.1/ADR

Our valuation has increased to $354.2m (from $340m) largely owing to incorporation of the recent €25.4m private placement. We have made no major changes to our underlying Graspa/Eryasp forecasts, which continue to assume that Erytech will retain development and commercialization rights in ALL in the US.

Valuation

Our Erytech valuation has been updated to reflect the €25.4m ($27.7m) private placement, with our NPV and rNPV both increased with the higher cash balance, in addition to rolling forwards in time. Our increased rNPV is $354.2m (from $340m) or $45.1/ADR with the higher share count. We have made no major changes to our underlying Graspa/Eryasp assumptions (maintaining our peak sales, launch year and probability of success for each indication), which continue to assume that Erytech will build out a small commercial infrastructure in the US, potentially starting in the double-allergic ALL patients. Our valuation, which is based on a risk-adjusted NPV analysis using a 12.5% discount rate is shown in Exhibit 1.

Exhibit 1: Erytech rNPV valuation

Product

Indication

Launch

Peak Sales ($m)

Value ($m)

Probability

rNPV ($m)

NPV/ADR ($/ADR)

GRASPA Europe

ALL

2017

136

91.1

90%

82.2

10.5

AML

2018

180

98.7

45%

45.6

5.8

Eryasp US

ALL

2019

109

129.4

80%

102.1

13.0

AML

2020

131

78.1

35%

30.8

3.9

Eryasp

NHL

2020

240

129.6

20%

21.4

2.7

Eryasp

Pancreatic cancer/solid tumours

2022

327

106.9

20%

15.8

2.0

Estimated net cash at end September and including private placement

56.2

100%

56.2

7.2

Valuation

 

 

 

690.0

354.2

45.1

Source: Edison Investment Research

Financials

Erytech recently completed a private placement raising €25.4m ($27.7m) gross proceeds (we estimate €24.1m/$26.3m net) from issuing 940k shares at €27/share. We have incorporated this in our financial forecasts, with slightly higher interest income owing to the larger cash balance. A summary of the changes to our estimates is shown in Exhibit 2 and our updated forecasts are shown in Exhibit 3.

Erytech reported total cash and equivalents at end-September 2015 of €28.2m ($30.7m). Together with last reported debt of €0.7m ($0.8m) at end-June 2015 (the majority relating to OSEO/BPI France grants, some of which are repayable over the next two years), we therefore estimate Erytech had net cash at end September of approximately €27.5m ($30.0m). This was recently boosted with the private placement, taking net cash to around €51.6m/$56.2m (excluding any potential cash burn). Assuming around €1m/month cash burn suggests current net cash of around €45-50m ($49-54m).

This is a healthy cash balance that will allow Erytech to execute on its strategy to advance Eryasp in the US market, in addition to moving development into front-line ALL, as well as in other indications, including solid tumors and lymphomas. Underlying cash burn in H115 was c €5.9m ($6.4m) and Erytech estimates that cash burn in 2015 will be at the higher end of €10-12m ($11-13m), (we forecast cash burn of €12.1m/$13.2m in 2015). We assume that cash burn will increase in future years to around €13-15m ($14-16m), suggesting the current cash pile should be sufficient into 2019. This does not include the potential milestone payment of €7-8m ($7.6-8.7m), due from partner Recordati upon European Graspa approval, anticipated around YE16, which would therefore extend the cash reach even further.

Exhibit 2: Summary of key changes to our underlying, €-based future financial forecasts

€m

2015e

2015e

Change

2016e

2016e

Change

 

Old

New

Old

New

Revenue

2.618

2.618

0%

2.825

2.825

0%

R&D

(11.300)

(11.300)

0%

(11.610)

(11.610)

0%

SG&A

(6.542)

(6.542)

0%

(6.869)

(6.869)

0%

EBITDA

(14.947)

(14.947)

0%

(15.362)

(15.362)

0%

Net profit (reported)

(14.768)

(14.586)

+1%

(15.281)

(14.791)

+3%

Source: Edison Investment Research

Exhibit 3: Financial summary

$000s

2011

2012

2013

2014

2015e

2016e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

997

6,254

1,964

2,208

2,853

3,079

Cost of Sales

0

0

0

0

0

0

Gross Profit

997

6,254

1,964

2,208

2,853

3,079

Research and development

(4,187)

(3,772)

(5,808)

(7,208)

(12,317)

(12,655)

EBITDA

 

 

(6,545)

(1,489)

(8,036)

(9,452)

(16,292)

(16,744)

Operating Profit (before amort. and except.)

(6,247)

(1,197)

(7,749)

(9,744)

(16,582)

(17,049)

Intangible Amortization

26

26

27

(10)

(12)

(14)

Exceptionals

0

0

0

0

0

0

Other

21

(13)

22

129

0

0

Operating Profit

(6,200)

(1,184)

(7,701)

(9,625)

(16,594)

(17,063)

Net Interest

(245)

(1,176)

(1,221)

(55)

695

941

Profit Before Tax (norm)

 

 

(6,492)

(2,373)

(8,970)

(9,798)

(15,887)

(16,108)

Profit Before Tax (reported)

 

 

(6,445)

(2,359)

(8,921)

(9,679)

(15,899)

(16,122)

Tax

3

(8)

44

22

0

0

Profit After Tax (norm)

(6,468)

(2,394)

(8,904)

(9,647)

(15,887)

(16,108)

Profit After Tax (reported)

(6,442)

(2,368)

(8,878)

(9,657)

(15,899)

(16,122)

Average Number of Shares Outstanding (m)

Average number of ADRs outstanding (m)

EPS - normalized ($)

 

 

(2.05)

(0.76)

(1.90)

(1.64)

(2.16)

(2.05)

EPS - normalized and fully diluted ($)

 

(2.05)

(0.76)

(1.90)

(1.64)

(2.16)

(2.05)

EPS - (reported) ($)

 

 

(2.04)

(0.75)

(1.89)

(1.64)

(2.16)

(2.05)

Earnings per ADR - normalized ($)

 

 

(2.05)

(0.76)

(1.90)

(1.64)

(2.16)

(2.05)

Earnings per ADR - normalized and fully diluted ($)

(2.05)

(0.76)

(1.90)

(1.64)

(2.16)

(2.05)

Earnings per ADR - (reported) ($)

 

 

(2.04)

(0.75)

(1.89)

(1.64)

(2.16)

(2.05)

Dividend per ADR ($)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,391

1,096

992

1,177

1,046

910

Intangible Assets

54

32

16

34

50

64

Tangible Assets

1,107

841

886

1,055

907

757

Investments

231

223

90

89

89

89

Current Assets

 

 

3,995

9,961

18,572

43,084

57,159

43,457

Stocks

107

126

151

216

216

216

Debtors

0

0

95

114

156

169

Cash

2,429

8,584

16,473

40,317

54,350

40,636

Other

1,458

1,251

1,854

2,436

2,436

2,436

Current Liabilities

 

 

(1,835)

(8,150)

(3,831)

(4,641)

(6,049)

(5,895)

Creditors

(1,666)

(3,106)

(3,524)

(4,277)

(5,682)

(5,813)

Short term borrowings

(169)

(5,044)

(307)

(364)

(366)

(83)

Long Term Liabilities

 

 

(5,628)

(7,297)

(924)

(572)

(1,378)

(2,468)

Long term borrowings

(5,420)

(7,055)

(796)

(475)

(1,282)

(2,372)

Other long term liabilities

(208)

(242)

(128)

(97)

(97)

(97)

Net Assets

 

 

(2,077)

(4,389)

14,809

39,048

50,778

36,003

CASH FLOW

Operating Cash Flow

 

 

(5,529)

677

(7,056)

(7,890)

(13,587)

(15,280)

Net Interest

(128)

(1,017)

(2)

(50)

695

941

Tax

0

0

0

0

5

0

Capex

(96)

(53)

(456)

(431)

(143)

(154)

Acquisitions/disposals

0

0

0

0

0

0

Financing

0

0

15,192

31,798

26,281

0

Other

97

37

11,206

682

(28)

(28)

Dividends

0

0

0

0

0

0

Net Cash Flow

(5,656)

(355)

18,885

24,109

13,224

(14,521)

Opening net debt/(cash)

 

 

(2,496)

3,160

3,515

(15,370)

(39,479)

(52,702)

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

3,160

3,515

(15,370)

(39,479)

(52,702)

(38,181)

Source: Erytech accounts, Edison Investment Research. Note: Our financial forecasts exclude Graspa royalty income until formal approval.

Solely for the convenience of the reader the financial summary table has been converted at a rate of US$1.09 to €1. Erytech Pharma reports statutory accounts in euros. These translations should not be considered representations that any such amounts have been or could be converted into US dollars at the assumed conversion rate.

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London +44 (0)20 3077 5700

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New York +1 646 653 7026

245 Park Avenue, 39th Floor

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