Business context and reporting period
RedHill Biopharma Ltd. filed this Form 20-F for the fiscal year ended December 31, 2017. The Israeli specialty biopharmaceutical company develops drugs focused on gastrointestinal diseases and cancer and began U.S. commercial operations through its new wholly owned subsidiary in 2017. Its six late-clinical-stage candidates had not received marketing approval; commercial activity centered on EnteraGam, Donnatal and Esomeprazole Strontium.
Financial statements are audited and prepared under IFRS as issued by the IASB. The auditor gave an unqualified opinion. The company reported 212.7 million ordinary shares outstanding at year-end.
Financial results and liquidity
| Metric (U.S. dollars, millions except per-share data) | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | 4.007 | 0.101 |
| Cost of revenue | 2.126 | — |
| Gross profit / gross margin | 1.881 / 46.9% | 0.101 / not meaningful |
| Research and development expense | 32.969 | 25.241 |
| Selling, marketing and business development expense | 12.014 | 1.555 |
| General and administrative expense | 8.025 | 3.848 |
| Operating loss | 51.972 | 30.543 |
| Net loss | 45.544 | 29.370 |
| Basic loss per ordinary share | $0.26 | $0.23 |
FY 2017 revenue comprised $3.240 million from product commercialization and $0.767 million from promotional services. The filing reports $46.2 million of cash and short-term investments at year-end, versus $66.2 million in 2016. Working capital was $39.8 million, total assets $57.3 million, total liabilities $12.3 million and equity $45.1 million. The balance sheet lists no conventional borrowings; liabilities include payables, accrued expenses, an intangible-asset payment and derivative instruments.
Cash used in operating activities was $44.8 million, compared with $28.3 million in 2016. Investing activities used $18.6 million, versus $24.5 million provided in 2016, largely reflecting deposits and purchases or sales of financial assets. Financing provided $25.7 million, mainly from the November 2017 equity offering and exercises of warrants and options. The company raised approximately $22.5 million gross in the November offering and reported approximately $4.0 million in U.S. commercial revenues for the year.
For the unaudited fourth quarter of 2017, revenue was $2.001 million, cost of revenue $0.919 million, operating loss $14.366 million and net loss $10.413 million. Fourth-quarter 2016 revenue was $0.100 million and net loss was $8.350 million.
Material changes versus prior periods
- Revenue rose from $0.101 million to $4.007 million as U.S. promotion and commercialization began in 2017; gross profit was $1.881 million.
- Operating loss widened to $51.972 million from $30.543 million. R&D expense increased mainly with the TALICIA Phase III program and YELIVA studies; selling and marketing costs rose as the U.S. commercial organization was established.
- Net loss increased to $45.544 million from $29.370 million. Net financial income of $6.428 million partly offset operating losses and included a $5.687 million fair-value gain on derivative instruments.
- Cash and short-term investments declined by about $20.0 million year over year. The company also issued shares in the November offering; weighted-average shares used to calculate loss per share rose to 176.6 million from 128.5 million.
Outlook, management commentary and principal risks
- Management said a cost-reduction plan aimed to reduce average quarterly operating cash use to approximately $8.5 million and stated that existing resources should fund current and planned operations for more than 12 months. However, the filing also says resources are insufficient to complete development of all candidates and sustain all commercial plans; additional capital may be needed.
- Management expected TALICIA Phase III top-line results in the second half of 2018. The RHB-104 Crohn’s disease Phase III study completed enrollment of 331 participants after the target was reduced from 410; results were expected mid-2018. The company estimated the change could shorten development by about a year and save approximately $14 million, while noting that it remained blinded and could not assess the effect on the final outcome.
- BEKINDA’s completed Phase III study for acute gastroenteritis met its primary endpoint, but a confirmatory study and further FDA discussions were still planned. Results of its IBS-D Phase II study, announced in January 2018, met the primary stool-consistency endpoint; pivotal study designs remained under discussion.
- Material regulatory uncertainty surrounds Donnatal, a pre-1962 product subject to unresolved FDA DESI review, and EnteraGam, whose classification as a medical food could be challenged. Regulatory action could restrict or end sales. The company also depends on commercial partners for manufacturing, supply, pricing, promotion and regulatory responsibilities.
- Other key risks include clinical-trial failure or delay, competition and reimbursement pressure, reliance on third-party manufacturers and collaborators, need for financing and potential shareholder dilution, intellectual-property challenges, and geopolitical and currency risks. Two products the company described as illegal copies of Donnatal were being sold in the U.S.; the filing says this harmed commercial success.
- The company terminated its RIZAPORT co-development arrangement as it prioritized GI programs; it recorded an $0.8 million write-off related to the non-core migraine candidate. Total other expense was $0.845 million, including a separate $0.045 million option-related write-off.
Important facts for investors to verify
- Confirm current cash, short-term investments, burn rate and financing needs against the filing’s stated greater-than-12-month runway and cost-reduction assumptions.
- Track TALICIA and RHB-104 trial results, subsequent FDA feedback and any additional studies required; for RHB-104, assess the impact of reduced enrollment.
- Check the status of Donnatal’s FDA DESI review and the regulatory basis for EnteraGam’s medical-food classification.
- Review commercial-product revenue, gross margins, partner arrangements, reimbursement and product supply; 2017 revenue was concentrated, with two customers contributing 59% and 19%, respectively.
- Assess dilution from equity offerings, outstanding options and warrants, and the effect of non-cash derivative fair-value movements on reported earnings.