RedHill: Given Up For Dead
Apr. 30, 2022 1:52 AM ETRedHill Biopharma Ltd. (RDHL)
Summary
RedHill has had a busy pandemic which has been distressing for shareholders.
RedHill has mastered the art of tiny deals with plentiful future prospects, whether they can ever add up to anything is unsure.
RedHill's forward liquidity will be highly challenging.
RedHill (NASDAQ:RDHL) has been working mightily to establish itself as a leader in gastrointestinal (slide 5) and infectious diseases. I have been following its progress since 08/2017's "Redhill's Dilution Remedy, A Work In Process".
This article evaluates its forward prospects in light of its Q4, 2021 earnings call (the "Call") and its current travails.
COVID-19 has had a long, complex and generally negative impact on RedHill
The COVID-19 pandemic was first identified as such by the WHO on 03/11/2020. America's chief pandemic poohbah, Anthony Fauci, has recently declared that in the US the pandemic phase has finally given way; the wide incidence of the disease, coupled with vaccination and boosting has cut the number of new cases to below the level of a pandemic.
During the pandemic RedHill's shares have saw-toothed widely. They have had dramatic, and invariably short, updrafts against a horribly negative backdrop for the most recent eight months.
Chart
Data by YCharts
Its late 08/2021 spike up, as shown above, built from its Q2, 2021 earnings call. It included tantalizing tidbits on its oral sphingosine kinase-2 (SK2) COVID-19 inhibiting prospect opaganib, such as quoted below:
In parallel, our team and our partners are doing everything humanly possible to get to the finish line with opaganib's global 475 patient Phase 2/3 study in severe COVID-19. With last patient out announced last month, we are nearly there. Remarkably, this study only commenced about a year ago. It was planned and executed by RedHill and its partners at the speed of light, in pharma terms, and it was driven by the urgent medical need all around...
Subsequently, successive encouraging opaganib reports fueled its upward momentum. Everything came to a screeching halt a short month later in mid September 2021. On 09/14/2021, RedHill reported preliminary data showing that this trial did not meet its primary endpoint.
On 09/13/2021, RedHill was trading in the $7-8 range. The next day its price dropped to a high of $5.30, ranging to a low of $4.65 on a volume of over 7 million shares compared to its more normal volume, often trading <200,000 shares.
Sadly, as I write on 04/28/2022, RedHill is trading ~$1.73, not far from its 52 week low of $1.60. Today on Seeking Alpha it bears a dreaded quant warning:
When you check out the explanation, it is thoroughly daunting. RedHill has a quant system "strong sell" rating. This rating is based on RedHill's abysmal profitability ratings compared to the health care sector generally.
The pandemic has not been kind to RedHill. It has exhausted significant funds in pursuing its COVID-19 therapeutics opaganib and its Serine Protease Inhibitor upamostat (RHB-107). Neither has yet produced any product revenue nor regulatory approvals.
Additionally, the pandemic has eviscerated any potential revenues that it might otherwise have generated from its travelers' diarrhea therapy, Aemcolo; it acquired Aemcolo at just the wrong time, months before the pandemic lockdowns and travel restrictions began taking effect.
RedHill has mastered the art of small ball and visualization of a brighter future
Back in 2017, I questioned RedHill's strategy of acquiring therapies with dubious economic prospects. It didn't take long for these to prove ineffective; RedHill "abandoned its initial in-licensing foray (Donnatal, EnteraGam and others) in 01/2020".
Its replacement in-licensed therapies have shown better prospects. Movantik (naloxegol), sub-licensed from AstraZeneca (AZN) in 02/2020, has generated significant revenues totaling ~$77 million in 2021 (2021 20-F, p. F-38). In-licensed Aemcolo and Talicia (developed by RedHill), have combined to contribute ~$9 million.
Talicia's actual revenue contribution is a mystery. We do know from the Call that it has increased 132% over 2020 and from the 20-F that it is <$9 million, implying that the exciting percentage revenue jump is from a very small base. Talicia has also contributed an out licensing deal with a $2 million upfront license fee from RedHill's Emirates partner, Gaelan Medical. The deal calls for unspecified milestones and tiered royalties up to the mid-teens.
In addition to its Gaelan deal, the Call also included an announcement of a two part deal with Kukbo, a South Korean company, as follows:
The first part is a strategic investment of up to $10 million by Kukbo in RedHill.
The second part is the licensing agreement for opaganib for COVID-19 in South Korea, with upfront and milestone payments of up to $7.1 million plus royalties.
RedHill's Q4, 2021 earnings press release amplified on this indicating that Kukbo had already paid $1.5 million upfront for opaganib.
In addition to the two deals that it has completed, CBO Goldberg offered the following blue sky possibilities for investors to consider:
We are in active discussions for potential future licensing deals for our therapeutic products, as we're seeing an increase in interest in our pipeline. We also see interest in our commercial products and - we also have discussions ongoing to add new commercial products that would be synergistic with the products we currently promote...
During the Call, CFO Chorin further tantalized investors announcing:
...we are in intensive discussions for additional licensing and other business transaction - transactions, potentially totaling dozens of million dollars, which together with our continued organic and non-organic growth expected in 2022 set the stage for our financial independence in the near future.
As I write on 04/29/2022, over a month after the Call, these intensive discussions have yet to generate any announced results.
RedHill's finances are complex and scary.
During the Call, RedHill announced its cash for the close of 2021 at a balance of $54.2 million. It indicated that it had reduced its cash burn, but did not indicate to what level it currently resides.
Indeed the call was replete with additional examples of incomplete financial information such as:
Reports on Talicia's growth in revenues and prescription volume without its actual revenue figures,
Report that quarterly operating expenses declined by $5.9 million in Q3, and $6.4 million in Q4, 2021, without any mention of the amount of such expenses.
Although not in the Call, more information is available. As an Israeli company, RedHill files no 10-K. It does however file a less familiar but analogous 20-F as cited above. At page 12 of its 20-F, RedHill recites a familiar litany of risks of the sort that stalks many if not most development stage biotechs.
In RedHill's case these include, among others:
Accumulated losses to date of $367.9 million,
Recent annual net losses of approximately $97.7 million in 2021, $76.2 million in 2020, and $42.3 million in 2019,
Except for its already approved Talicia, its remaining late stage pipeline candidates "will likely require successful additional clinical trials" before regulatory approval,
Its restricted cash of $16 million as required by its credit agreement with HCR Collateral Management, LLC ("HCRM").
In its Liquidity and Cash Resources section of its 20-F, RedHill reveals a number of nagging obligations which will pose recurring challenges for its ongoing cash flow including:
Remaining payment to AstraZeneca of $7.5 million by 12/31/2022,
Payments to Daiichi Sankyo of $5 million in July of 2022 and 2023,
Miscellaneous milestones for various of its pipeline candidates acquired in earlier deals,
Payments totaling at least $22 million prior to 2025 for Movantik inventory,
Miscellaneous Movantik royalties.
To this point RedHill has been financing its significant ongoing cash need with ATM sales of its stock. These include three 2021 offerings totaling ~$72 million at prices ranging from $7.84 (~3.2 million shares - 01/14/2021), to $8.00 (~4.6 million shares - 03/04/2021) to $3.20 (~4.7 million shares - 11/18/2021).
It took about 12.5 million shares to generate the ~$72 million. At its current (04/29/2022) price of $1.68 per share, it would take ~$43 million shares to generate $72 million.
Conclusion
RedHill management has proven itself resourceful in coming up with sundry deals over the years. Optimists can take heart that management may forge a new deal that will protect it from its otherwise bleak future.
Ever the optimist, I am hopeful that such will be the case for RedHill. As a realist, I have to rate RedHill as a sell.
This article was written by
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Out of Ignorance
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Writing under the pseudonym "out of ignorance", I very much regard investing as a learning process. Investing failures are tuition paid. Investing successes enter the trove of lessons learned. In my Seeking Alpha articles I share my experience from decades of investing and from ~5 years of focused research on a variety of stocks, in recent years with a primary emphasis on healthcare stocks. I greatly appreciate those who take the time to share their reactions to articles, particularly those who share relevant anecdotes and experiences.
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