Business Context and Reporting Period
Company: RedHill Biopharma Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: RedHill is a clinical development-stage biopharmaceutical company focused on acquiring and developing late-stage, orally-administered drugs for inflammatory, gastrointestinal (GI), and oncology indications. The company has no commercial products currently generating significant revenue, with the exception of RIZAPORT, which received marketing approval in Germany but has not yet been marketed. The company relies on public and private equity offerings and licensing agreements to fund operations.
Key Financial Metrics
| Financial Metric (in thousands USD) | 2015 | 2014 |
|---|---|---|
| Revenues | $3 | $7,014 |
| Cost of Revenue | $0 | $1,050 |
| Research & Development Expenses | $17,771 | $12,700 |
| General & Administrative Expenses | $4,134 | $4,011 |
| Operating Loss | $(22,002) | $(10,647) |
| Net Loss | $(21,090) | $(10,711) |
| Cash and Short-Term Investments | $58,138 | $22,945 |
| Working Capital | $54,996 | $24,299 |
| Total Assets | $66,828 | $28,856 |
| Total Liabilities | $6,751 | $3,845 |
| Accumulated Deficit | $(61,944) | $(42,218) |
Material Changes vs. Prior Period
- Revenue Decline: Revenues dropped significantly from $7.0 million in 2014 to $3,000 in 2015. The 2014 revenue was primarily driven by a $7 million upfront payment from the licensing of RHB-106 to Valeant Pharmaceuticals. 2015 revenue consisted of negligible royalty payments.
- Increased Operating Loss: Operating loss more than doubled to $22.0 million in 2015 from $10.6 million in 2014. This was driven by the absence of the significant 2014 licensing revenue and a 40% increase in R&D expenses.
- R&D Expense Growth: R&D expenses increased by $5.1 million (40%) to $17.8 million, primarily due to clinical trial costs ($13.6 million) for Phase III studies of RHB-104 (Crohn's disease), RHB-105 (H. pylori), and BEKINDA (gastroenteritis).
- Liquidity Improvement: Cash and short-term investments increased by $35.2 million to $58.1 million. This was funded by two underwritten public offerings in 2015 (February and July) which generated approximately $54.7 million in net proceeds.
- Financial Income: The company reported net financial income of $0.9 million in 2015, compared to net financial expenses of $0.1 million in 2014, largely due to fair value gains on derivative financial instruments.
Guidance, Outlook, and Risks
Outlook and Capital Requirements: The company states that its current cash position ($58.1 million as of Dec 31, 2015) is insufficient to complete the research and development of all therapeutic candidates. RedHill expects to incur additional losses in the future and will need to raise substantial additional capital through equity or debt financing, or through commercialization agreements, to fund operations and clinical trials.
Key Risks and Contingencies:
- Regulatory Approval: No therapeutic candidates (except RIZAPORT in Germany) have received marketing approval. Failure to obtain FDA or other regulatory approvals will prevent commercialization.
- Clinical Trial Uncertainty: Clinical trials are expensive and have uncertain outcomes. Negative results or delays in trials (e.g., RHB-104, RHB-105, BEKINDA) could materially harm the business.
- Third-Party Reliance: The company relies on third parties for manufacturing, clinical trials, and commercialization (e.g., Valeant for RHB-106). Failure of these partners to perform could delay development.
- Intellectual Property: Success depends on maintaining patent protection. Loss of patent rights or infringement claims could reduce market share.
- Geopolitical Risk: Operations are based in Israel, exposing the company to risks related to political and military instability in the region.
- PFIC Status: The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. tax purposes, which could result in adverse tax consequences for U.S. investors.
Important Facts for Investor Verification
- Cash Runway: Verify the sufficiency of the $58.1 million cash balance against the projected costs of ongoing Phase III trials for RHB-104, RHB-105, and BEKINDA, and the timeline for potential future capital raises.
- RHB-106 Milestones: Confirm the status of the $5 million in potential milestone payments and royalty structure from the Valeant license agreement for RHB-106.
- RIZAPORT Regulatory Status: Verify the status of the FDA New Drug Application (NDA) for RIZAPORT, which received a Complete Response Letter (CRL) in 2014, and the resolution of chemistry, manufacturing, and controls (CMC) issues regarding raw material suppliers.
- Patent Expirations: Review the patent expiration dates for key assets, noting that some patents for RHB-106 and RP101 expire as early as 2016-2018, while others extend to 2034.
- Related Party Transactions: Review the terms of the asset purchase agreement with Giaconda Limited and the option agreement for RP101 with RESprotect GmbH for potential future payment obligations.