RedHill Biopharma Ltd (RDHL)

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RedHill Biopharma: When Good News Means Nothing

https://seekingalpha.com/article/4123294-redhill-biopharma-good-news-means-nothing?app=1&auth_param=145sp8:1d0bhsl:083cf10486276ed1da65de7635fca197&uprof=45&dr=1

Nov. 10, 2017 10:36 AM ET|4 comments| About: Redhill Biopharma Ltd. (RDHL)
ONeil Trader

Summary

RedHill announced positive phase 2 results of Bekinda in IBS-D in early October.

The company also decided to reduce the size of the RHB-104 phase 3 study in Chron's disease.

The progress the company is making is punished instead of being rewarded. I offer some thoughts on why that's the case.

RedHill Biopharma (RDHL) made two important announcements in early October – the company is reducing the size of the phase 3 study of RHB-104 in Chron’s disease and it announced positive phase 2 results of Bekinda in IBS-D. The Bekinda phase 2 results were greeted with strong selling, a reaction similar to the previously announced phase 3 results of Bekinda in acute gastroenteritis in June. RedHill continues to make progress and that progress is not being rewarded – to the contrary, the stock is down almost 50% year-to-date, which compares unfavorably to the strong gains made by biotech stocks so far in 2017. In this article, I provide a general overview of the developments over the last 12 months and what we should expect going forward. And while I continue to maintain a small position in RedHill, I will share some critical thoughts on the company's approach to drug development and commercialization.

Bekinda phase 2 results in IBS-D

RedHill announced positive phase 2 results of Bekinda in IBS-D in early October. The study met the primary efficacy endpoint of stool consistency by an absolute difference of 19.4% versus placebo (54.7% vs. 35.3%, p=0.05).

Source: RedHill presentation

The results compare favorably with previously reported efficacy outcomes from two phase 3 studies of Xifaxan (10.5% difference) and two phase 3 studies of Viberzi (13.5% difference).

Source: RedHill presentation

Secondary endpoints did not reach statistical significance but were all better than placebo and they too compare favorably to Xifaxan and Viberzi phase 3 data.

The lack of statistical significance for the secondary endpoints and the primary endpoint barely meeting statistical significance is a function of the study's size, but may have driven last month’s negative investor reaction. It should be noted that results from this study will need to be repeated in a phase 3 study. RedHill plans to discuss the results with the FDA in early 2018. The company also announced that it is designing a confirmatory phase 3 study to support an NDA for Bekinda for acute gastroenteritis and gastritis. Some investors might have hoped that approval is possible based on the single phase 3 trial, which I believed was unlikely and shared those thoughts with Growth Stock Forum subscribers at the time.

I believe that the phase 2 results in IBS-D are encouraging and that Bekinda has a decent chance to succeed in the phase 3 trial. However, it is clear that the phase 3 trials (two of them) will cost a lot of money since RedHill will have to enroll far more patients than in this phase 2 trial to demonstrate statistical significance on primary and secondary endpoints.

The IBS-D market has grown rapidly over the last few years with approvals of Xifaxan and Viberzi and has reached $400 million in 2016 and is expected to grow to $2 billion by 2026. RedHill believes Bekinda has the potential to be the new standard of care in IBS-D.

Source: RedHill presentation

Why is RedHill wasting time with single phase 3 studies?

This is the main issue I have with RedHill. The company is wasting a lot of time to conduct single phase 3 studies. The company knows it can’t get a product approved after these single phase 3 studies and that it needs to conduct a confirmatory phase 3 study after the one it successfully completes. I believe that this is a significant waste of time and that it potentially misleads investors into believing that a product candidate can be approved based on the first phase 3 trial. The advantage of this strategy is that the company saves money by doing just one trial which makes it easier to abandon the program if it is not successful, but that's what phase 2 studies are for. I believe that the time wasted is worth far more than the money saved since doing a confirmatory trial slows the product’s arrival to market by at least 2-3 years. And that’s a generous estimate.

Take the RHB-104 study in Crohn’s disease as an example. The phase 3 trial was initiated in October 2013 (more than four years ago) and it should be completed by mid-2018 – that’s almost five years, and the trial's size was reduced to complete faster. By doing a single trial, and assuming it is a success, RedHill saved some money but it wastes the time it takes to do a confirmatory phase 3 trial, which will probably enroll faster, but which will probably take another 4-5 years. Add the time to submit the application and the wait for the regulatory review, and you get RHB-104 approved in 2023, instead of 2019 for example (best case timing scenarios). And all of that assuming the results are positive. How much would two phase 3 trial cost instead of one and how much revenues does RedHill lose by wasting four years to conduct the confirmatory trial? Your guess is as good as mine, but I think it would have been worth the risk to do two phase 3 trials if the product has the chance to become the standard of care in Crohn’s disease.

I should note that there is an upside scenario here. I think chances are low, but RedHill could receive FDA approval for Crohn's disease based on the single phase 3 trial, or perhaps accelerated approval with the obligation to do a post-marketing study. This is not something I would base my investment thesis on, but a scenario that could be possible with the “new FDA” as they call it under Dr. Gottlieb. In this case, RedHill’s CEO Ben-Asher is celebrated as a genius.

However, that scenario didn’t happen with RHB-105 (Talicia) and now Bekinda in gastroenteritis. The company announced positive phase 3 results in H. Pylori in June 2015 and the confirmatory phase 3 trial is ongoing. RHB-105 is not getting approved before 2019 or perhaps even 2020 – that’s a 3-4 year time cost (assuming it was approved in 2016, a year after the positive results from the first phase 3 study).

Turning to the study changes for RHB-104 RedHill announced last month. The company decided to cut the target sample size from 410 to 325 patients. Enrollment was completed this week. The decision was based on the overview of the blinded data which show consistent blended remission rates superior to pre-specified protocol assumptions. The study is now 80% powered (down from 90%) to detect a 15% treatment difference between RHB-104 and placebo. The company noted that placebo response rates in previous Crohn’s studies were between 7% and 25% with the last two approved products seeing a 7% and 20% placebo effect.

The obvious risk here is that the placebo response is higher than RedHill anticipated based on the data from previous studies, but it’s a risk worth taking since enrolling 85 more patients wouldn’t have helped much anyway if the placebo response was higher than expected. I think chances of success are decent based on previous results and the fact that the company is seeing strong blended efficacy rates (the company remains blinded to trial data). The trial changes shorten the development timeline by approximately one year and should reduce the cost of the trial by approximately $14 million. RedHill now expects to report top-line data by mid-2018.

Thoughts on the commercialization strategy

RedHill has assembled a 40-person sales team which now has three products to promote – Donnatal, EnteraGam, and Esomeprazole Strontium. I think these products are basically unattractive and don’t expect too much in terms of revenue generation, though I would love if the company can prove me wrong by executing much better than I currently expect. It is also impossible to make any kind of reliable estimates on these products since we don’t know the percentage of sales RedHill gets on these products. One of the reasons I am not particularly excited about any of these products is quite simple – would any company with a highly attractive product out-license it, or sign a co-promotion agreement for nothing upfront and with a company with no market experience? RedHill signed two of these three deals before having a sales team to sell them.

I am, specifically, the least excited about Donnatal. This is what Concordia management said on the Q2 earnings call (emphasis added):

Revenue for the three months ended June 30, 2017 decreased by $34.8 million or 43%, compared to the corresponding period in 2016. The decrease was primarily due to a $15 million decrease from our Plaquenil authorized generic and a $6.3 million decrease from Donnatal.

The declines on both products were primarily due to competitive pressures. Revenue for the six-months ended June 30, 2017 decreased by $81.6 million or 48%, compared to the corresponding period in 2016. The decrease was primarily due to a $36.2 million decrease in revenue from our Plaquenil authorized generic, a $12.6 million decrease in revenue from Donnatal, and $2 [ph] million decrease in revenue from Lanoxin, and $11 million decrease in revenue from Nilandron.

Regarding Donnatal, subsequent to quarter-end, a US District Court upheld its grant to the company of treble damages, against Method Pharmaceuticals, LLC and its principal owner. However, late in the second quarter of 2017, we became aware that a second competitive product to Donnatal has entered the market. To date, this new entrant has had a modest impact on our market share.

However, this product combined with the first non-FDA approved copy of Donnatal that ends at the market last year has taken approximately 30% of Donnatal's market share. We continue to assess the legal rights of the second product to be on the market and are assessing our legal options against this third party. We will continue to provide updates as appropriate.
Concordia also recorded a $106.9 impairment charge on the product rights associated with Donnatal as it determined that “the continued market share pressures from existing competitors and the launch of an additional competitive product during the second quarter of 2017 represented a triggering event for impairment.” The impairment speaks to Concordia's future expectations of Donnatal.

Donnatal is a deeply troubled product that is losing market share. The legal moves by Concordia may or may not help improve Donnatal’s position, but I believe it is reasonable to assume that RedHill won’t be able to move the needle too much with this product.

EnteraGam is a medical food intended for the dietary management of chronic diarrhea and loose stools which must be administered under medical supervision. 2016 net sales in the U.S. were over $5 million – that’s more than three years into its launch (it was launched in August 2013). I don’t know what RedHill can do to alter this slow launch trajectory and even if it takes half of those net sales, that's just $2.5 million a year, assuming no growth. But we will probably see some growth with EnteraGam.

Esomeprazole Strontium is the latest product that was added. This is a prescription PPI (proton pump inhibitor) indicated for adults for the treatment of gastroesophageal reflux disease (GERD), risk reduction of NSAID-associated gastric ulcer, H. Pylori eradication to reduce the risk of duodenal ulcer recurrence and for pathological hypersecretory conditions. This is one of many PPIs and it remains to be seen how successful RedHill will be with it.

To summarize - I think none of these three products have strong commercial prospects and that they will, in an optimistic scenario, cover the cost generated by the sales force.

However, there is a far more important part of the story here – RedHill has started to build relationships with physicians ahead of the potential launches of its pipeline products (RHB-104, RHB-105, and Bekinda), they are “getting a foot in the door,” which will make it easier to promote the pipeline products if/when they are approved. This could prove to be a good decision in the long-run as it would help accelerate the uptake of the pipeline products, which are the real value drivers for RedHill.

What will drive shareholder value and when?

Perhaps I am being overly critical, but I believe we have nothing to gain by being overly optimistic (or pessimistic) and I am always trying to assess the situation in the most realistic way possible.

Putting the criticism aside, RedHill does have some promising pipeline candidates.

Bekinda has shown promising results in two indications – IBS-D (phase 2) and acute gastroenteritis (first phase 3 trial). Getting just one of these two indications approved could drive the share price significantly higher.

The most important catalyst for RedHill is the phase 3 trial results of RHB-105 in H. Pylori. This is a confirmatory phase 3 trial and this candidate could reach the market much sooner than the others. RedHill is enrolling patients, and based on the protocol at clinicaltrials.gov, the estimated primary completion date is July 2018, which means we should see the results before the end of 2018.

The second most important catalyst over the next 12 months is the phase 3 trial results of RHB-104 in Crohn’s disease. The company now expects to report results in mid-2018. Strong results would de-risk this candidate. Again, as mentioned earlier in the article, RedHill will probably need to conduct a confirmatory phase 3 trial, which probably puts the approval timeline for RHB-104 in Crohn’s to 2023.

There are also several planned and ongoing studies with Yeliva, Mesupron, and RHB-105. These trials are potential long-term drivers, but we won't be seeing data from these studies in the next few quarters.

Financial overview

RedHill’s cash position could be another factor keeping the stock depressed. The company ended Q2 with $51 million in cash and equivalents and is burning $10 million a quarter, which, along with approximately $20 million raised this week, leaves it with 3-4 quarters worth of cash before it needs to raise additional capital – assuming it doesn’t wait to deplete the cash before raising and assuming modest contribution from the three products the sales force is promoting.

Partnering Rizaport (NDA was submitted last week) in the U.S. is a potential source of cash, but I doubt the company will get much upfront for this product. I think another equity offering is likely in 2018.

Conclusion

The situation at RedHill is far from perfect, but the company is making progress with its pipeline and we have two important trial readouts in 2018 - RHB-104 in Crohn’s disease in mid-2018 and RHB-105 in H. Pylori in 2H 2018. Potential upside in the near-term could come from outperformance of the three commercialized products but I am not counting on it. The Q3 report is scheduled for next week and we should see one full quarter of Donnatal and EnteraGam contribution. I intend to hang on to my small stake in RedHill but have no intention of buying more until the company proves itself by executing properly on either the commercial or clinical side.

Author's note: Growth Stock Forum subscribers had an early look at an expanded version of this article on October 5, and have access to regular exclusive updates on every stock I am covering.