RedHill Biopharma Ltd (RDHL)

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RedHill Biopharma: Spec Play With High Risk/Reward

Nov. 14, 2017 7:57 AM ET|4 comments| About: Redhill Biopharma Ltd. (RDHL)
Kenneth Pittman

https://seekingalpha.com/article/4124568-redhill-worth-green-bills?app=1&auth_param=145sp8:1d0lo91:f286b8b311a4f77fcbe1d625314d2e06&uprof=45&dr=1#alt3

summary

RedHill has dropped significantly and warrants a second look for current holders or those considering investing.

RedHill has marketable products, but they have some concerning features.

RedHill's pipeline is robust in number, but the key is RHB-104 for Crohn's Disease.

The recent dilution for RedHill was disastrous and a black eye for the company.

RedHill can be bought/held as a very speculative play, but carries a significant risk/reward profile.

Background:

In the end of July, I started a position in RedHill Biopharma (RDHL), which is a small Israeli biotech with a solid portfolio of drug candidates. I did this after reviewing articles by Bret Jensen including this one and a "deeper dive" that was a bit older. I also supplemented this with my own research. The stock has had its ups and downs since then and I have bought more with two of the downturns. However, after a recent dilution, the stock reached new 52-week lows sparking fresh concerns and some pulling back from Mr. Jensen himself (basically taking it from a buy to a hold).

Mr. Jensen is an excellent Seeking Alpha author and anyone who follows biotechs should be following him if they are not already (go ahead and click the follow for my page as well to keep up with my articles). Like him, I decided I needed to rethink my position a little and share anything I found with SA readers. This process has worked well for me in the past as I stuck with Dynavax (NASDAQ:DVAX) and dumped Cytori (NASDAQ:CYTX) after similar reviews (both of these articles are PRO-only now). Dynavax is up 29% and Cytori is down 98.2% since those articles were written in 2014. Of note, though, Dynavax did crater in 2016 after my article. Based in part on my previous research, I continued to buy and enjoyed the 400% run-up since that time.

RedHill's Marketable Products

RedHill, unlike many biotechs, does have some source of ongoing revenue due to currently marketable products. However, these have not been significant revenue-generators to this point. In Q2 2017, RedHill only generated a half a million in revenue from the two products they had started to market. However, the Q2 report does say that this was primarily generated from June 12-20th, 2017. Therefore, one could estimate that this would be about 2 million per quarter if there was not much growth (which there should be on one of them in particular). The third product was after Q2 and will become easier to project after Q3 results are released.

RedHill Marketable

(Source: RedHill Website)

Donnatal

Donnatal is a combination of Phenobarbital, Hyoscyamine, Atropine, and Scopolamine used for the treatment of Irritable Bowel Syndrome and Acute Enterocolitis. Rights for the compound are owned by Concordia Pharma (CXRX) and RedHill has a co-promotion agreement with Concordia for Donnatal. It has been around for 40 years, but the generic of it was pulled from the market due to the FDA requiring more testing. Therefore, unless more testing is done, the brand name is the only version available at the moment. When the generic was removed from the market, the cost went from around $0.25 cents per pill for the generic to now around $10 per tablet for the brand name (prices per GoodRx.com). The liquid is about $15 per dose (for the tablet-equivalent dose). In daily costs, the regular tabs are about $30-$80/day and the liquid is $45-$120/day (depending on dosing). This move resembles the infamous Skherli-inspired pricing of Daraprim. The circumstances are a little different (the FDA removing the generic competition was an assist here vs. Turing just purchasing a generic without competition), but the price action is very similar. Donnatal could be subjected to the same scrutiny as Daraprim at some point - and RedHill's association would not be a positive thing if/when that happens.

EnteraGam

EnteraGam is a compound of immunoglobulins and proteins that is derived from cow's blood. It is considered a medical food, but still regulated by the FDA and requires a prescription. EnteraGam is designed to help with the dietary management of chronic diarrhea. RedHill owns the US rights for EnteraGam, which were acquired from Entera Health. EnteraGam is somewhat of a niche product, but will serve as a revenue stream for RedHill while it is waiting on "bigger hits." Enzymotec (ENZY), which is another Israeli Biopharma company that has a portfolio of compounds including medical foods, has generated about $50-60 million/year in revenue primarily off of ~4 compounds. Therefore, I believe it is reasonable to expect EnteraGam to be about a $12-15 million/year revenue generator in the next few years.

Esomeprazole Strontium Delayed-Release Capsules

RedHill also has co-promotion rights to Esomeprazole Strontium Delayed-Release Capsules. These rights were acquired from ParaPRO LLC and RedHill began marketing this in September 2017. This is a generic compound (marketed as a separate brand) that is very similar to Nexium. It has three indications with the primary one being GERD (Gatroesophageal Reflux Disease or simply "Reflux"). ParaPRO/RedHill's compound costs about $6/pill, which is similar to the price of branded Nexium. Generic Nexium is $1-3/pill (depending on pharmacy and coupon). GERD is a very large market and simply capturing a very small portion of it could be helpful for RedHill. However, I do not expect this will give meaningful help to RedHill's bottom line the way that EnteraGam could.

RedHill's Pipeline

Full Pipeline(Source: RedHill Website)

Rizaport (RHB-103)

Rizaport is RedHill's thin-film dissolving triptan for the treatment of migraines. The thin-film delivery system is key for this drug as many of its competitors have to deal with the complication of vomiting due to migraines. Rizaport has been co-developed with IntelGenx. It has been approved in Europe. An initial NDA in the US was completed in 2013 and the company received a CRL in February 2014. The CRL primarily concerned packaging issues. After a long delay, the resubmission of the NDA was announced on November 1, 2017. The PDUFA date is expected to be in the first half of 2018. Rizaport represents RedHill's best hope for more significant revenues within the next 1-2 years.

Talicia (RHB-105)

Talicia is a combination of two antibiotics and a PPI designed to treat H. pylori infections. RedHill previously completed the ERADICATE Hp Phase 3 study which strongly met its endpoint. However, this endpoint was not enough to satisfy the FDA and a second study (ERADICATE Hp 2) was initiated over the summer to better meet FDA approval standards. The positive news here is that the second study should not be a prolonged study (due to how common the infection is) and RedHill received fast-track developmental status with priority review by the FDA if they are able to submit a NDA after this study. The likelihood of success here is fairly good and thus Talicia likely represents the next-best hope for revenues for RedHill. This would likely begin in 2-3 years.

Bekinda (RHB-102)

Bekinda is a once-daily version of ondansetron, a frequently used antiemetic better known by its shorter acting brand name, Zofran. RedHill has released Phase 3 results for Bekinda in Gatroenteritis/Gastritis and Phase 2 results for Bekinda in IBS. Unfortunately, both of these studies were relatively small and barely met statistical significance due to being somewhat underpowered. As was the case with Talicia, I do not believe that the Phase 3 results will be sufficient to pursue a NDA. I suspect that a confirmatory P3 study will be required. RedHill could benefit from additional partnerships to move its drugs forward and Bekinda would be a logical drug to partner with a larger company. Otherwise, RedHill may need to wait on revenue from the above drugs before pursuing another Phase 3 study.

RHB-104

Investors in RedHill often look to RHB-104 as the key compound in RedHill's portfolio. RHB-104 is an antibiotic combination designed to treat a particular Mycobacterium that may play a role in Crohn's Disease. This would be a novel therapy in this fairly debilitating illness. A Phase 3 study is underway in Crohn's and has passed safety board checkpoints. RedHill recently announced that the study completed enrollment and is on track for results in Q3 2018. There is also a second Phase 3 study planned in Non-Tuberculosis Mycobacterium infections, which would represent a second possible indication for the compound. If approved, RHB-104 would likely be a more significant revenue source than all of the above compounds COMBINED. This is due to it being a novel treatment of a relatively common disease. Further down the road, RedHill also plans further studies of RHB-104 in Multiple Sclerosis, another disease with limited treatment options.

If RedHill is going to grow and succeed long-term, then this is the pivotal study for the company. They could potentially be a small player (like Enzymotec) even without it, but RHB-104 gives them much more potential. It also makes them a buyout target - particularly if the study is successful. Of note, the market cap for RedHill is currently ~$88 million. Enzymotec is likely going to accept an offer that values them at ~$290 million.

Mesupron and Yeliva

Mesupron is a protease inhibitor that is in Phase 2 studies for Pancreatic Cancer. RedHill is likely headed to a partnered Phase 2b study for Mesupron in the relatively near future. RedHill also intends to study it in inflammatory gastrointestinal conditions. Mesupron represents another drug with a high ceiling for RedHill, but is much further from potential commercialization and is not yet a significant factor in the value of the company. Mesupron, like Bekinda, could benefit from a larger pharma partner to move it forward.

Yeliva is a first-in-class sphingo kinase-2 inhibitor. RedHill is in early (Phase 1/2a) studies of it in many conditions including GI cancers and inflammatory conditions. At this point Yeliva is important just because it increases the likelihood of partnership and/or acquisition by a larger pharmaceutical company looking for new compounds in its portfolio.

RHB-106

RHB-106 is a bowel cleansing agent that RedHill acquired and then licensed to Salix Pharmaceuticals, which was then purchased by Valeant. RHB-106 would potentially generate revenue if Salix/Valeant were able to get it to market, but there is nothing that appears to be RHB-106 on the websites for either Salix or Valeant. Therefore, I suspect that Salix is not actively pursuing RHB-106 at this time.

Recent Dilution and Financials

RedHill recently had a disastrous secondary offering priced at $5.50. According to their prospectus, RedHill had $40 million in cash at the time of the offering, which they only expected to be enough for one year. They only expect to generate $22 million from the dilution, which represents a little over 6 months runway at their current burn rates. The company is currently valued at about $110 million (adjusted for new share count) despite the fact that it will have almost $60 million cash (at least temporarily, this decreases by over $3 million/month). They do not have significant debt currently.

Perhaps the most troubling aspect of the RedHill dilution was the day before the dilution. On November 6th, the stock closed at 8.30. On November 7th, the stock "inexplicably" went down about 10% and closed at 7.50. While biotechs were somewhat weak on that day, the 10% seemed excessive. That was until the dilution on the 8th, which sent the stock down to 5.25. The most significant concern here is that news of the dilution may have been leaked giving an advantage to some shareholders (or shorts). The other concerning fact is that the dilution actually lowered the overall market cap for the company (compared to the 6th or even the 7th) even though they gained 22 million in cash. This is despite several pieces of relatively good news recently without any significant negative news.

Thoughts on a Position

As I stated above, I have purchased RedHill stock on three occasions. Unfortunately, one of these was the day before the dilution after it "inexplicably" dropped 10%. However, that loss is done and I must evaluate my current position based on the future - while taking into account the possibility of leaky news. It is certainly a very speculative stock with significant risk, but potentially significant upside. Here is a summary of the major risks and upsides:

Risks

Leaky news related to dilution combined with the potential for further dilution in the future
Donnatal could generate negative publicity for the company
EnteraGam could not ramp in sales well and is likely the primary source of near-term revenue
RHB-104 failure would be devastating for future revenue potential
There are currently insufficient revenue sources to pursue studies of all the "shots on goal" in the portfolio, meaning that some compounds may be frozen in their development
Rizaport could have a second CRL, which would damage the efforts for additional sources of revenue in the next two years
Upsides

Rizaport could be approved as early as Q2 2018, which would give the potential for additional revenue in late 2018 or early 2019
There are several candidates for partnerships in the portfolio and RedHill could/should pursue partnerships for Bekinda, Mesupron, and Yeliva
At the current market cap, RedHill would make an attractive takeover candidate for a company looking to add several compounds to its portfolio
RedHill could divest 2 or 3 compounds to generate cash and prevent further dilution. Doing so may actually improve their market cap (especially if they could get significant money for Mesupron or Yeliva)
Positive RHB-104 results in Q3 2018 would be tremendous step forward for the company and they now have the cash to make it to those results
Talicia could move to approval at a rather fast pace once the 2nd P3 study is completed
The ultimate conclusion for me is that I will retain a small speculative position in the company, but may use my "base and swing" method more with RedHill in the future to swing trade the price moves. While I like the "multiple shots on goal" approach, I believe that RedHill needs more focus before I could return to a significantly overweight position.

Disclosure: I am/we are long RDHL.

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.