Redhill Biopharma — Update 24 November 2016

RedHill Biopharma, an emerging Israel-based biopharmaceutical company, is focused on acquiring, developing and commercialising (in partnerships or alone) advanced clinical-stage, patent-protected, orally administered, small molecule drugs for the treatment of inflammatory and GI diseases, while earlier stage assets also target various cancers. In line with this strategy, RedHill in-licensed or purchased all of its products from different partners (more detail in Exhibits 1 and 7) and now the R&D pipeline includes eight clinical-stage products. RedHill listed on the Tel Aviv stock exchange in February 2011, raising $13.6m, then carried out a dual listing on Nasdaq in 2012, raising $6.5m. Since then Redhill has completed a number of secondary offerings adding $80m.

We value RedHill at NIS1.21-1.29bn or NIS9.5-10.1/share, based on risk-adjusted NPV analysis using a 12.5% discount rate. Our valuation includes $40.5m net cash and other short-term financial assets at end Q316 and is based on the 52-week NIS exchange rate range to the US dollar of 3.74-3.99. According to current R&D plans, we expect trial readouts in 2017 for key products, which could trigger out-licensing deals (Exhibit 1). In our valuation we include five of the company’s eight assets and in a total of nine indications. The inclusion is mostly based on the stage of the development and clear plans for progress. The company’s strategy is to develop the products standalone or out-license in later stages. Among the products in our valuation only Rizaport’s rights were licensed out in one territory so far, while other products are still wholly owned. We assume that the development of the products in Phase III will be finalised by RedHill, but a commercial partner or distributor will be sought due to the number of specialty areas in which the company is involved.

RedHill had cash and cash equivalents (including bank deposits and financial assets at fair value) of $40.5m at the end of Q316 vs $64.2m in Q315 and was debt free. We expect a cash position of $33.2m by the end of this year, which should provide a cash reach into Q417, well past several key R&D catalysts. Notably, we do not take into account potential revenues from Rizaport (although it is included in our valuation) or other products and we do not include any potential licensing-related income in our financial forecasts. RedHill may also attract additional non-dilutive funding via grants as it has in the past.

RedHill is subject to the usual risks associated with drug development, including clinical development delays or failures, regulatory risks, competitor successes, partnering setbacks and financing and commercial risks. Some of the company’s lead products (eg RHB-105, RHB-104 and Bekinda) are repositioned or reformulated generic drugs, which implies a lower R&D risk. On the other hand, if approved they may face generic substitution risk. The competitive advantage of these products versus cheaper generics will dictate the uptake of the market. Also, the composition of matter patents have already expired for the aforementioned products, hence making the overall IP protection vulnerable to challenges; however, formulation patents may provide adequate protection. The biggest near-term sensitivities are related to RHB-105, RHB-104 and Bekinda, which are all in late-stage development. There is also substantial uncertainty about the marketing of the products as they all target rather large patient populations, so a strong marketing partner is likely to be needed. According to our model, the company will need to carry out a fund-raising during the next 12 months.

RedHill’s R&D portfolio is rather diverse in terms of the products’ mechanism of action and therapeutic areas. Exhibit 1 summarises the assets, the indications each product is being developed for and upcoming events (see Exhibit 7 for in-licensing deal details). The most advanced products are RHB-105, which is being developed for H. pylori (second Phase III to be initiated in H117), RHB-104 for CD (enrolment to be completed by end 2017) and MS (final results in Q416), and Bekinda for gastroenteritis (top line results expected mid-2017) and IBS-D (top line results mid-2017).

RedHill acquired RHB-105 from Sydney-based Giaconda in August 2010 (see Exhibit 7 for details, including royalty rates). RHB-105 is a proprietary fixed-dose oral combination of two antibiotics (rifabutin and amoxicillin) and a proton pump inhibitor (PPI, omeprazole) in development for the treatment of H. pylori infection. The prevalence of H. pylori infection is widespread, estimated at 30-40% in industrialized countries and 70% in developing countries (Centers for Disease Control and Prevention, CDC). It is strongly associated with a wide range of upper gastrointestinal diseases, including gastritis, peptic ulcer disease and gastric cancer. Treatment of H. pylori remains a challenge for physicians as there is no single effective regimen (Exhibit 2). Commonly recommended first-line therapy is a PPI-based triple therapy, however, in recent years eradication rates fell to around 70%, with increasingly more patients remaining H. pylori positive, mainly due to increasing antibiotic resistance to clarithromycin and/or metronidazole.1 Alternative therapies, including bismuth-containing quadruple therapy, sequential, concomitant and hybrid therapies are used in areas of high clarithromycin resistance or as second-line therapy after standard triple therapy failure (Maastricht IV/Florence Consensus Report guidelines). Nevertheless, these regimens fail to eradicate H. pylori in around 10% of all cases.2 Rifabutin is a rifamycin-S derivative used to treat Mycobacterium species (specific primarily lung infection in immunocompromised HIV infected patients) and represents a potential strategy for H. pylori eradication as it does not share resistance to clarithromycin. The mean H. pylori rifabutin resistance rate was found to be only 1.3%.4 The antibiotics that constitute RHB-105 are currently an option for a rescue therapy if other regimens fail, although they are rarely used.4 However, RHB-105 contains doses that are different from those in available generics; therefore the PK/PD profile should be a differentiating aspect. RedHill targets first-line treatment indication, which if successful would significantly expand the use of rifabutin-based regimen.

A Phase II proof-of-concept study was published in 2006 by Prof Borody et al., sponsored by Giaconda, validating the use of rifabutin in H. pylori eradication. Australian patients who had failed one or more clarithromycin-based treatments received triple therapy containing rifabutin, amoxicillin (low or high dose) plus pantoprazole for 12 days. Results were very encouraging with eradication rates of 90.8% in the low-dose amoxicillin group, and 96.6% in the high dose group (Exhibit 3).3

RedHill carried out a Phase III study (ERADICATE Hp) in the US in patients with dyspepsia, looking at H. pylori eradication after 14 days of treatment with RHB-105 as a first-line therapy. The final results were published in March 2016 and confirmed an eradication rate of 89.4% for RHB-105. The trial met its primary endpoint of superiority over a 70% historical efficacy rate. The eradication rate in the placebo group with standard of care treatment was 63% (after unblinding, see Exhibit 3). No treatment-related serious adverse events were noted. Following a meeting with the FDA in April 2016, RedHill is planning a second confirmatory US Phase III study to start H117. This double blind, randomized trial will compare RHB-105 against a high dose amoxicillin/omeprazole, as the FDA agreed to a dual regimen instead of usual the triple due to prevalent resistance to clarithromycin.

The Qualified Infectious Disease Product (QIDP) designation granted by the FDA in 2014 endows both fast-track development status and priority review status, and, if approved, eight years US market exclusivity. RHB-105’s potential competitive advantages include superior efficacy, a broader indication and simpler treatment regimen with all-in-one capsules than that of generic peers, including that it has only two antibiotics, which may appeal to physicians and pharmacologists afraid of increasing overall resistance.

The planned indication is the first-line treatment for eradication of H. pylori regardless of ulcer status, which would be broader than its competitors: Prevpac (first-line regimen; lansoprazole, amoxicillin, clarithromycin; Takeda) and Pylera (second line regimen; bismuth, metronidazole and tetracycline; Actavis/Allergan; PPI has to be administered separately) are indicated for patients with H. pylori and duodenal ulcer disease (active or historic). A potential hurdle will be the threat of substitution with generics as all components in RHB-105 are available in a generic form; however the dose of rifabutin in RHB-105 is 50mg given three times a day, while the generic form is 150mg given once, which would not allow for exact substitution including different PK/PD profiles. One of the main competitive advantages will be a more convenient dosing compared to multi-pill generic combinations, which would increase compliance. The conventional regimens include two to three different antibiotics administered three to four times a day, with a proton pump inhibitor (eg omeprazole) two times a day. The RHB-105 treatment is four capsules three times daily, similar to other all-in-one therapies like Prevpac (four capsules twice daily) and Pylera (three capsules four times a day.) Prevpac sales peaked at $150m in 2009 in the US (Bloomberg) before the patent expiry, while Pylera peak sales reached $38m in the US in 2013. The retail price of branded version of Prevpac is $950-1,000 per 14-day treatment in the US, while generic version retails for $165-580 per 14-day treatment (GoodRx.com). Branded Pylera costs $740-780 per 10-day treatment course in the US. Both combination products are composed of antibiotics used in first- and second-line regimens, hence they experienced a steady increase in resistance over the past decade. Currently generic rifabutin-based therapy (PPI+amoxicillin+rifabutin; RHB-105’s constituents) has a retail price of around $200 per 14-day treatment in the US but, since rifabutin-based therapy is not approved specifically for H. pylori eradication, it means off-label use.

Current guidelines discuss rifabutin as a rescue therapy when other second-/third-line options have failed.4,5 However, in our view, if the RHB-105 confirmatory Phase III study is supportive, this product will immediately be an attractive option for third-line or rescue treatments with the potential to move towards front line, once consensus emerges. For example, the Kyoto Global Consensus Meeting in 2015 achieved a high level of agreement on the need to distinguish between functional dyspepsia and H. pylori-associated dyspepsia and proposed diagnostic algorithms and eradication strategies in spite of the ulcer status.6

The US market potential alone is significant with over 100 million Americans thought to be H. pylori-positive and 500,000-850,000 new cases of peptic ulcer disease annually (CDC). Given the observations that around 10-15% (excluding gastroesophageal reflux disease) of the US population has dyspepsia and around 10% of those receive eradication treatment, this translates into c 2.9 million patients representing target population for RHB-105.7,8

RHB-104 is a patented combination of three generic antibiotics (clarithromycin, rifabutin and clofazimine) in an oral capsule for the treatment of MAP infections and was also acquired by RedHill from Sydney-based Giaconda in August 2010. An increasing amount of data supports the link between MAP infection in CD patients and RedHill believes it could induce and prolong remission time by removing one of the exacerbating factors. RHB-104 is in Phase III development for CD, an area where current therapies have limited efficacy and pronounced side-effects, and are often very costly. The first DSMB interim analysis in the ongoing Phase III study with RHB-104 for CD is expected in Q416. A Phase IIa proof of concept study for multiple sclerosis (MS) is also ongoing; encouraging top-line interim results were announced in March 2016 and final results are expected Q416.

Inflammatory bowel disease (IBD), which includes CD and ulcerative colitis (UC) is a lifelong condition with serious quality of life implications. CD is characterised by inflammation of the gastrointestinal (GI) tract, and symptoms include persistent diarrhoea, abdominal pain, rectal bleeding, weight loss and fatigue. Though studies strongly suggest an important genetic component, NOD2/CARD15 gene mutations, which influence immune response, are found in only around 20% of IBD patients (CCFA). It is proposed that a combination of genetic susceptibility and environmental factors may trigger an abnormal immune response (CCFA). One such factor is MAP, which is the causative agent of Johne’s disease, a disease of cattle clinically and pathologically similar to CD, and is seven times more likely to be detected in CD patients compared to UC /non-IBD controls.9 Whether MAP could be a causal agent of CD remains in question, but the use of anti-mycobacterial antibiotics to treat CD has been shown in a number of clinical studies.9 Although a large Phase III trial funded by Pharmacia/Pfizer failed to meet its primary endpoints, several flaws in this trial have been highlighted (discussed below); the causality of MAP in CD is inconclusive and the need for a well-designed trial is compelling.10

Before RedHill, several clinical trials with RHB-104 were conducted with earlier formulations of the triple antibiotic combination, including two positive Phase II studies by Prof Borody associated with Giaconda (Exhibit 4) and the controversial Phase III by Pfizer. In 2000 Giaconda licensed the triple antibiotic to Pharmacia, which was acquired by Pfizer in 2003. The Phase III trial with 213 CD patients demonstrated significantly better short-term remission in the antibiotic arm than the placebo arm at 16 weeks.10 However, the authors concluded there was 'no evidence of sustained benefit' of the anti-mycobacterial treatment in CD as relapse rates were not statistically significantly different from week 104 onward. Pfizer subsequently discontinued development. However, flaws in the design of the trial received criticism;11,12 namely:

In their reanalysis of the Pfizer study Behr and Hanley suggests that looking at remission in the intention-to-treat population from week 16 instead of relapse rates would be more appropriate and would have shown statistically significant improvements in remission in the treatment arm over placebo. The original study design required a very high response rate for a positive outcome. RedHill's Phase III study uses a remission endpoint and is using optimised antibiotic doses.

In September 2013, RedHill initiated a new Phase III trial (several design modifications were announced in October 2016) in moderate to severe CD (the MAP US study), conducted across 150 sites (Exhibit 4). By October 2016, 219 out of the planned 410 patients were enrolled and DSMB safety interim analysis is planned for Q416. Two additional DSMB reviews are planned, with the second one expected in Q217, which will also include interim efficacy analysis with an option for early termination if overwhelming efficacy is demonstrated. RedHill also expects that a second Phase III study in CD will be needed before the regulatory application. MAP infection is very difficult to detect in humans and as part of its strategy RedHill is developing, in collaboration with Quest Diagnostics, a commercial diagnostic test to detect MAP in blood. RedHill also collaborates with three universities in the US to develop PCR-based MAP companion diagnostic tests.

According to the Crohn's & Colitis Foundation of America (CCFA), CD affects up to 700,000 Americans (UC is a similar number) with c 30k new cases every year, most of whom are diagnosed by the age of 35. In Europe there are estimated 1.6 million CD sufferers with 78k new cases every year.13 45% of those in remission will remain relapse-free over the next year, while 35% will have one of two relapses (CCFA). There is no cure for CD, though a variety of immunomodulating and immunosuppressive agents are commonly used to control symptoms. Many of these are associated with significant failure rates, side effects and safety issues (J&J's Remicade has a black box warning on serious opportunistic infections like tuberculosis). Cost per patient ranges from $300-400 per year for the cheaper generic aminosalicylates to in excess of $20k per year for biologics (anti-TNFs such as AbbVie's Humira, UCB's Cimzia and J&J's Remicade and Simponi; or integrin-receptor antagonists such as Biogen's Tysabri and Takeda's Entyvio; source: GoodRX.com). The value of the global CD drug market is projected to be $7.9bn by 2020 (EvaluatePharma).

In addition to CD, MAP has been associated with other diseases including type 1 diabetes, Hashimoto’s thyroiditis, sarcoidosis and MS.14 MS is an inflammatory, neurodegenerative disease when a person’s own immune system attacks the neurons in the central nervous system, leading to a variety of disabling symptoms that usually worsen over time. It has been proposed that a molecular mimicry between MAP proteins and human proteins could induce autoimmune pathologies and, in the case of MS, there could be similarities between MAP proteins and human anti-myelin basic protein (MBP), interferon regulatory factor 5 (IRF5) or gamma T cells. MAP infection prevalence among MS patients is still an unanswered question, although RedHill’s MAP companion diagnostic test may help select the right patients for the treatment. Following several proof-of-concept preclinical animal studies, RedHill is conducting a proof-of-concept Phase II trial to investigate whether using RHB-104 in MS patients has any disease-modifying effect.

RedHill's Phase IIa study (CEASE-MS) of RHB-104 in relapsing-remitting multiple sclerosis (RRMS) is ongoing in Israel. RHB-104 is being evaluated as an add-on therapy to IFN-beta1a in an open-label trial of 18 RRMS patients. The primary outcome is combined unique active (CUA) lesions in MR brain scans, while secondary outcome measures include biomarkers, relapse rates, disability status and burden of disease. Although not powered for efficacy, RedHill published encouraging interim results from this study in March 2016. No clinically significant change was observed for total CUA lesions at week 24, which is supportive of a stable disease state. The annualised relapse rate (ARR, one of the most common primary endpoints in late stage trials in the industry)15 at 24 weeks was 0.288 in the modified intent-to-treat16 (mITT) population and 0.0 in the per-protocol17 (PP) population, comparing favourably with data published for standalone IFN-beta therapies Avonex (Biogen) 0.67 and Rebif (Merck Serono and Pfizer) 0.87-0.91. A total of 88% of the mITT patient population and 100% of the PP patient population were relapse free at 24 weeks, which also compares well with Rebif (75%) and Avonex (63%). Final results of the 48-week study are expected in Q416.

Around 400k people are diagnosed with MS in the US each year alone and around 85% of those have a relapsing-remitting course of the disease, which is in contrast to the progressive type when symptoms gradually get worse over time rather than appearing as relapses. The mainstay of the treatment is disease-modifying therapies with the goal to reduce the frequency of relapses and slowing progression (Medscape) with EvaluatePharma calculating the market will be worth $25bn in 2020.

Bekinda (formerly RHB-102) is a once-daily, bi-modal release, oral formulation of ondansetron and is being studied at different doses in various gastrointestinal disorders. RedHill in-licensed rights to a technology called CDT (see Exhibit 7 for details) that uses salts to provide an extended release of ondansetron. Bekinda-24mg is in a Phase III clinical trial in the US to prevent vomiting in acute gastroenteritis/gastritis (the GUARD study), with top-line results expected in mid-2017. Bekinda-12mg recently began Phase II for diarrhoea-predominant irritable bowel syndrome (IBS-D), with top-line results expected mid-2017.

Ondansetron, originally developed and marketed GlaxoSmithKline and Novartis as Zofran with the patents expired in 2006 and generics available, is a 5-HT3 (serotonin) receptor antagonist approved for the prevention of chemotherapy- and radiotherapy-induced nausea and vomiting (CINV and RINV, respectively) and prevention of postoperative nausea and/or vomiting (on an as needed basis, not routinely). RedHill licensed the patent-protected extended-release formulation from SCOLR Pharma in May 2010, but now has a direct licence with the Temple University, the original inventor. If approved, it could be the first once-daily oral formulation of ondansetron to reach the US and European markets. RedHill is also pursuing marketing approval of Bekinda in Europe for the prevention of CINV and RINV pending additional feedback from EU member states as to whether additional clinical and preclinical work is necessary.

Acute gastroenteritis is a significant problem, with approximately 179 million cases annually leading to c 600,000 hospitalisations and 5,000 deaths in the US alone (CDC). Vomiting is very common in children and adolescents with gastroenteritis, leading to dehydration and starvation which can be difficult to treat if the nausea persists. A safe and effective method of controlling vomiting would reduce the need for intravenous rehydration and potentially reduce hospitalisations. A wide range of oral and intravenous anti-emetics are used in adults and children, though concerns have been expressed about side effects of older anti-emetics. Generally, the 5-HT antagonists have few adverse effects and have been safely used in adults and children.18 Notably one retrospective study of 34,117 paediatric patients found that ondansetron was used in 58% of initial emergency department visits.19 Rarely ondansetron can be contraindicated in persons who have a congenital long QT syndrome (the time interval between specific waves in the ECG).

RedHill began the GUARD Phase III study in September 2014 to test Bekinda-24mg in 320 patients (aged 12-85 years), with vomiting due to acute gastroenteritis or gastritis. The primary outcome is the proportion of patients without further vomiting, who do not require rescue medication or intravenous hydration in the 24 hours after receiving Bekinda or placebo. The enrolment is expected to be completed in 2017. RedHill believes there is a possibility to file for approval of Bekinda if the GUARD Phase III study is successful, without the need for a second study, but that will depend on further conversations with the regulatory authorities and the data.

If approved, Bekinda would be the first 5HT-3 anti-emetic drug indicated for the treatment of acute gastroenteritis. Given that generic ondansetron is already routinely used in this setting, Bekinda’s ability to gain market share will depend on its competitive advantage, which is an extended release formulation and will be used on-label compared to standard ondansetron. Ondansetron (orally disintegrating tablets) currently costs around $30-60 for a two-day course in adults (GoodRx.com). Newer branded treatments that are approved to treat chemotherapy-related nausea, Aloxi (palonosetron iv) and Akynzeo (netupitant/palonosetron) cost around $500 and $600/dose respectively (GoodRx.com) with a newer generation 5HT-3 antagonist palonosetron totalling $456m in sales in 2015 (EvaluatePharma).

IBS is a functional disorder of the bowel that affects around 10-15% of the global population and is characterized by abdominal pain and altered bowel habit (chronic or recurrent diarrhoea, constipation, or both). In the US 25-45 million people are thought to be affected, two-thirds of whom are female, and around half have diarrhoea-predominant IBS (IBS-D) (aboutIBS.org). The causes of IBS are not fully understood but it may result from disturbances in the way the gut, brain and nervous system interact, leading to changes in gut motility.

Some 5-HT-3 receptor antagonists have proved to be effective in IBS by slowing gut transit time. Alosetron (GlaxoSmithKline’s Lotronex) is approved for the treatment of women with severe chronic IBS-D but under a restricted prescribing programme due to serious side effects. Ondansetron has a much better safety record and has demonstrated activity in IBS-D in preliminary studies by significantly improving stool consistency, frequency and urgency.20 Garsed et al. conducted a randomized, double-blind, placebo-controlled study with 120 patients with IBS-D and found that half of the usual dose of ondansetron (4mg three times a day instead of 8mg three times a day) led to significantly improved stool consistency and frequency. RedHill believes Bekinda has the potential to be a superior once-daily treatment for patients suffering from IBS-D. In June 2016 RedHill began dosing in a Phase II trial with Bekinda-12mg for the treatment of IBS-D. The randomized, two-arm parallel group study will be conducted in 16 sites in the US and will enrol 120 patients randomized 60:40 to receive either Bekinda-12 mg or a placebo, once daily, for eight weeks. The primary endpoint for the study is the proportion of patients in each group with response in stool consistency as compared to baseline, per FDA guidance definition. The top-line results are expected mid-2017.

Although studies are at an earlier stage, the opportunity for Bekinda in IBS-D is potentially greater than in gastroenteritis, given the chronic nature of the disorder and the currently underpenetrated market due to a lack of effective drugs. Growth of the US market is likely to be driven by the approval in 2015 of two new drugs for IBS-D, driving both uptake and premium pricing: Salix's Xifaxan (rifaximin, an oral antibiotic), launched mid-2015 and Allergan's Viberzi (eluxadoline, an oral μ-opioid receptor agonist), as a controlled substance, launched slightly later in 2015. Xifaxan had sales of $220m in the third quarter of 2015, up from $148m in the previous quarter. Takeda's. Xifaxan's list price is around $1,800 for 60 tablets, while Linzess costs around $350 for 30 capsules and Viberzi costs approximately $1,000 for 60 tablets (GoodRx.com).

Yeliva (formerly ABC294640) is a first-in-class, orally administered sphingosine kinase-2 (SK2) selective inhibitor. Sphingomyelin is not only a building block for cellular membranes but also acts as a precursor for lipid messengers that have profound cellular effects. Sphingosine kinases (there are two isoforms SK1 and SK2) promote rapid production of sphingosine 1-phosphate (S1P). S1P in turn promotes cancer growth, proliferation and inflammation processes. Yeliva is a specific SK2 inhibitor that decreases S1P synthesis, which has been demonstrated to have an effect on a broad range of fundamental biological processes such as cell proliferation, immune cell trafficking and neoangiogenesis. RedHill in-licensed Yeliva from Apogee Biotechnology on 31 March 2015 (see Exhibit 7). Apogee has demonstrated versatile effects of Yeliva in a number or preclinical studies. Acute and chronic animal toxicology studies showed excellent toxicity profile with a dose of 100mg/kg, at least 10-times below the lowest observed adverse effect level, resulting in plasma level above the IC50 of human SK2, which is sufficient for suppression of tumour cell proliferation.22

Apogee has also completed an open-label, dose-escalation, first-in-human Phase I trial with Yeliva in 21 patients with solid tumours, including gastrointestinal cancers such as pancreatic, colorectal cancers and cholangiocarcinoma. Key findings include good safety profile, drug-like PK/PD profile and first-ever longitudinal analysis of plasma S1P levels as a potential biomarker. Of the 16 patients one had a partial response and six patients had stable disease. Based on these findings RedHill prepared a development plan for Yeliva to explore it in promising indications (Exhibit 5).

Historically the sphingosine-1-phosphate receptor (target for S1P) modulation was first explored for therapeutic potential. Yeliva acts more upstream and decreases S1P (antagonist effect), while modulators can act as agonists or functional antagonists depending on the tissue or cell context. Fingolimod (Gilenya, Novartis) was the first orally available, small molecule S1P receptor modulator that was shown to have a disease modifying effect by reducing the rate of relapses in multiple sclerosis patients by approximately one-half over a two-year period. Global 2015 sales were $2.8bn (EvaluatePharma). With patents due to start expiring in 2019, Novartis has a follow-on programme, siponimod, with a similar mode of action in Phase III. Yeliva has a differentiated mechanism of action and another potential competitive advantage is the well-known fact that fingolimod and likely other S1P modulators cause a dose-dependent decrease in white blood cells, which can compromise the immune system. RedHill noted that Yeliva’s effect on white blood cells is modest.

Rizaport is an oral dissolving thin film formulation of rizatriptan for the treatment of migraine attacks. Migraine is a complex neurological disorder defined by recurrent episodes of characteristic headaches, which in some cases last for two to three days and incapacitate the patient. While mild migraine can be treated with simple analgesics, moderate to severe cases rely on migraine-specific triptan class drugs with several other types of medication available as well. Triptans act as agonist on serotonin 5‑HT1B and 5‑HT1D receptors in painfully dilated cranial blood vessels causing them to constrict and in nerve endings inhibiting the release of vasoactive neuropeptides.21 Triptans are an established class of drugs first introduced in 1990s with a variety of active pharmaceutical ingredients (APIs) off patent. The popularity of this class is mainly due to its high efficacy for classic moderate migraine attacks. For example, sumatriptan, one of the first drugs in this class, demonstrated 67-79% headache reduction rate four hours after the oral administration. Rizatriptan has similar efficacy, but potentially is one of the fastest acting triptans. Rizatriptan was originally developed by Merck & Co and marketed as Maxalt (oral and Maxalt-MLT orally disintegrating tablets) after the FDA approval in June 1998. It had reached peak sales of c $640m in 2011 before patents expired in 2012.

IntelGenx, a Canada-based oral drug delivery formulation company, developed the orally dissolving, thin film formulation VersaFilm. RedHill and IntelGenx entered into a co-development agreement for Rizaport in August 2010. The two companies jointly finalised the development (Phase I bioequivalence vs Maxalt-MLT) in 2012. In March 2013 the two companies submitted an NDA to the FDA under 505(b)(2) regulatory path, but received a complete response letter primarily focusing on third-party chemistry and CMC issues, packaging and labelling. The FDA did not question safety or clinical trial results, therefore RedHill plans to address the issues and resubmit the NDA in H117. In Europe, the two partners received approval for Marketing Authorisation Application. On 5 July 2016, RedHill announced the first commercialisation agreement with Grupo Juste in Spain with potential expansion into other territories in Latin America and Middle East. Financial details were undisclosed with the launch in Spain expected to take place in H217. On 21 September 2016, RedHill announced a binding term sheet with the second commercialization partner Pharmatronic for the commercialisation of Rizaport in South Korea, with the launch seen in Q119. The main competitive advantage of the orally dissolving formulation compared to conventional tablets is evident in the case of headaches with high-frequency nausea (ie, more than half the time), which also accompanies migraine attacks in around 50% of cases, with milder nausea being even more prevalent.22 An injectable formulation requires a healthcare setting, while the patch formulation is a novel approach with the first product (Zecuity, Teva) approved just in 2013, but sales were temporarily suspended in June 2016 after suspicion of burns and scars associated with its use.

RedHill is subject to the usual risks associated with drug development, including clinical development failures, regulatory risks, competition, partnering setbacks and financing and commercial risks. Some of the company’s lead products (eg RHB-105, RHB-104 and Bekinda) are repositioned or reformulated generic drugs, which implies a lower R&D risk. On the other hand, if approved they may face generic substitution risk. The competitive advantage of these products versus cheaper generics will dictate the uptake of the market. Also, the composition of matter patents have already expired for the aforementioned products, making the overall IP protection more vulnerable to challenges; although formulation patents may provide adequate protection. The biggest near-term sensitivities are related to RHB-105, RHB-104 and Bekinda, which all are in late-stage development. Besides R&D risk, there is also substantial uncertainty about the marketing of the products as they all target rather large patient populations treated in different healthcare settings; therefore, strong marketing partners are likely to be needed. This, however, might not be an issue depending on the data obtained in the clinical trials. As discussed, all the products have competitive advantages over generic drugs, but the eventual market uptake is difficult to forecast. On 1 November 2016 RedHill announced a public offering, which was subsequently withdrawn due to market conditions. The amount of funds the company was seeking was not revealed.

We value RedHill based on risk-adjusted NPV analysis using a 12.5% discount rate and the 52-week NIS exchange rate range to the US dollar (3.74-3.99), including $40.5m net cash at end Q316. This corresponds to a value of NIS1.21-1.29bn or NIS9.5-10.1/share. Exhibits 6 and 7 provide assumptions and our valuation of assets in a specific indication. We included five of the company’s eight assets in a total of nine indications. We see most of RedHill’s value in its mid- to late-stage products, excluding programmes in preclinical stages – Mesupron and RP101 – although they both have been explored in clinical trials before and if RedHill obtains convincing preclinical data, we believe the transition into the clinic could happen rapidly and would provide upside to our valuation. We also excluded Bekinda’s indication for oncology support, as we await clarification of whether additional development will be needed in Europe and the extent of the supportive studies needed in the US. Lastly, we do not yet include RHB-106 in our valuation, although we see RHB-106 as clearly differentiated product. This is mainly due to change in the ownership of the rights to the asset after Valeant acquired Salix more than a year ago but has yet to clarify further development plans.

Exhibit 7 summarises the rest of our assumptions for RedHill’s valuation. For the clinical projects we have used standard industry assumptions. Probabilities to reach the market and timelines were selected according to the stage of the project. Product launch dates were estimated based on necessary additional development. RedHill’s strategy is to develop the products standalone or out-license in later stages. Only RHB-106 has been out-licensed so far, while other products are still wholly owned. We assume that the development of the products in Phase III will be finalised by RedHill, but a commercial partner or distributor will be sought due to the number of specialty areas in which the company is involved (5% COGS margin and 30% sales and marketing margin assumed, with the rest retained by RedHill). For the calculation of target patient groups, we use the US population plus the top five European countries, Benelux, the Nordics and Austria with Switzerland.

RedHill reports in US dollars, while the expenses are mostly denominated in US dollars and Israeli shekels. RedHill had cash and cash equivalents (including bank deposits and financial assets at fair value) of $40.5m at the end of Q316 compared to $64.2m in Q315 and was debt free. In line with increasing R&D activities, RedHill’s net cash used in operations increased from $3.7m in Q315 to $7.4m in Q316, the majority of which is attributable to R&D. R&D expenditure totalled $7.0m in Q316 ($3.9m in Q315). Q316 G&A costs amounted to $1.4m ($0.7m in Q315). Our total R&D and G&A forecasts for 2016 are $20.4m and $4.8m respectively. As a result, we expect a cash position of $33.2m by the end of this year. RedHill does not provide guidance, but according to our model and based on current R&D plans the cash reach is into Q417, past several key R&D catalysts. Our estimated need for additional funds in 2018 is around $28m, which we include as illustrative long-term debt in our financial forecasts, although the company may seek to raise this sooner. Notably, we do not take into account potential revenues from Rizaport or other products and we do not include any potential licensing-related income in our financial forecasts. We only included the received grants in our model and due to low visibility we do not forecast any additional grants although RedHill may manage to attract additional non-dilutive funding.