Sosei Group Corporation

Transcription

1 Update 30 June 2010 Sosei Group Corporation Price =85,500 Market Cap 10.1bn Year End Revenue ( m) PBT* ( m) EPS* ( 000s) DPS ( ) P/E (x) Yield (%) Share price graph 03/ (4,569) (41.5) 0.0 N/A N/A 03/ (2,067) (19.9) 0.0 N/A N/A 03/ (179) (1.5) 0.0 N/A N/A 03/11e 810 (252) (2.2) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding goodwill amortisation and exceptional items. Investment summary: New technology platform Sosei is to acquire the privately-held Japanese biopharmaceutical company Activus Pharma, for c 500m ($5.5m) in cash. Activus has a nanoparticle drug formulation technology (APNT) and an early-stage antioxidant drug pipeline. APNT has the potential to generate revenue for Sosei through strategic partnerships/collaborations, and in the longer term can be used to create new pipeline candidates. In the near term, Sosei s investment case remains reliant on the successful development of COPD therapies NVA237 and QVA149, jointly licensed to Novartis with Vectura, and SOH-075, an emergency contraceptive under NDA registration. Activus Pure Nanoparticle Technology APNT can be applied to produce contaminant-free, high-purity formulations of otherwise poorly soluble drugs, with potential uses in life cycle management of drugs nearing patent expiry, or in reformulating generics with improved delivery properties. Activus deal terms: Cash and profit share Sosei will acquire 100% of Activus through a stock exchange, although shareholders will receive a cash consideration broadly equivalent to Activus s net cash balance rather than new shares. Activus s common stockholders also receive an undisclosed share of gross profits from the acquired assets (up to 1bn for up to five years). Upcoming news flow: Clinical data and approvals Both Novartis partnered assets are now in Phase III, with earliest data from the first NVA237 trial expected in early Approval of emergency contraceptive SOH-075 in Japan is possible by March 2011 (NDA filed September 2009), and would boost Sosei revenues through royalties and milestones from Aska. Valuation: 16.5bn ( 119m); EV 7.6bn ( 54m) Our model indicates a valuation of 16.5bn ( 119m assuming 138.5/ ) vs Sosei s market cap of 10.1bn ( 73m) and EV of 7.6bn ( 54m). This valuation principally comprises an rnpv of the key drug programmes (which will rise as products advance in the clinic) and forecast net cash for the financial year ending March 2011, but it does not capture the value of potential milestones ($70m pre-launch, NPV 4.6bn or 33m) or future collaborations based on Activus s APNT. Share details Code Listing Sector Shares in issue 4565:JP MOTHERS Pharmaceuticals & Biotechnology 118m Price 52 week High Low 208,000 72,600 Balance Sheet as at 31 March 2010 Debt/Equity (%) N/A NAV per share ( ) 87.9 Net cash ( ) 2,554m* * Pro forma including QVA149 milestone. Business Sosei Group Corporation is a Japanbased biopharmaceutical company focused on R&D and drug re-profiling. It is active in licensing both its proprietary programmes, and external rights for the Japanese market. Valuation e P/E relative N/A N/A N/A P/CF N/A N/A N/A EV/Sales ROE N/A N/A N/A Revenues by geography UK Europe US Other 0% 74% 0% 26% Analysts Lala Gregorek Robin Davison healthcare@edisoninvestmentresearch.co.uk Sosei Group Corporation is a research client of Edison Investment Research Limited

2 2 Edison Investment Research Update Sosei Group Corporation 30 June 2010 Update: Acquisition of Activus Pharma Co. Ltd. Sosei will acquire privately-held Japanese biopharmaceutical company Activus Pharma Co. Ltd. for a cash consideration c 500m ($5.5m, 3.6m). The deal is expected to close on 30 July. Activus was formed in 2006 as a spin-off from DIC Corporation (Dainippon Ink & Chemicals). The company s corporate history is summarised in Exhibit 1. Activus has an early-stage pipeline of three antioxidant drugs and a nanoparticle drug formulation technology (Activus Pure Nanoparticle Technology, APNT) derived from the ink industry. Sosei disclosed that it is this platform technology which forms the strategic rationale behind the acquisition. Exhibit 1: Activus corporate history Year Event 2006 Spun out from DIC Corporation in October, with initial capital of 24m (c $230k). All pharmaceutical R&D and IP/know-how transferred from DIC to Activus Initiation of R&D and business development activities. Pipeline of three anti-oxidant pipeline candidates plus a novel nanoformulation technology platform (patent covering production method for micronized nano-particle of organic compounds filed). In March, raised 1.2bn ($13m) from mainly Japanese investors (including JAFCO, SBI Investment, NIF SMBC Ventures, Nomura Research & Advisory, Oryx Capital, Yasuda Investment, Mizuho Capital, Nihon Venture Capital, Nissei Capital) Phase IIa proof-of-concept trial of TA-270 in asthma initiated in Eastern Europe. Nanoparticle drug formulation technology optimised for contact manufacturing. Additional $6m raised (preferred shares issued to some existing investors) Phase IIa proof-of-concept trial of TA-270 in COPD initiated in the UK. Availability of contract manufacturing using nanoparticle technology. Results of TA-270 Phase IIa trials read out (not yet published) Acquisition by Sosei Group Corporation for c 500m announced. Acquisition rationale Since 1999, Sosei s business model has been based on the R&D of in-licensed and in-house programmes (both new chemical entities and re-profiled drugs). Activus s APNT provides Sosei with a new technology platform which has a variety of applications and enables the production of high purity formulations of otherwise poorly soluble drugs. APNT has the potential to generate near-term revenues for Sosei through strategic partnerships or collaborations, and in the longer term can be used to generate new proprietary development candidates. Potential partners for the technology are diverse, including companies managing the life cycles of marketed drugs nearing patent expiry, or those seeking to expand beyond the scope of standard generics business by reformulating drugs so that they have differentiated, and unique, properties or delivery. Re-profiling known drugs for new indications is one of Sosei s core capabilities, a capability that was strengthened by the July 2005 acquisition of private UK company Arakis (now Sosei R&D) for 106.5m ($187m) through a cash and share deal. The Arakis acquisition added chronic obstructive pulmonary disease (COPD) programme NVA237 1 (and subsequently QVA149) to the Sosei pipeline. These Phase III programmes, partnered with Novartis, are Sosei s main value drivers. The acquisition of Activus and its APNT should further enhance Sosei s capability in this area, and has the potential to generate future revenue growth either through partnership or pipeline expansion. It is understood that Sosei will inherit Activus s existing contacts and continue deal negotiations. Exact details of the impact of this acquisition on the company s growth strategy are unlikely to be communicated until the first technology collaboration deal is announced. 1 NVA237 is an optimised inhaled formulation of glycopyrronium bromide, a long-acting anti-muscarinic used intravenously in anaesthesia and to treat chronic gastric ulcers, and in oral form for sialorrhea (excessive saliva) and hyperhidrosis (excessive sweating).

3 3 Edison Investment Research Update Sosei Group Corporation 30 June 2010 Activus assets: Pipeline and technologies Activus is focused on the R&D of antioxidant drugs and its nanoparticle formulation technology, Activus Pure Nanoparticle Technology (APNT). Its R&D pipeline consists of three early-stage drugs targeting diseases related to oxidative stress; these drug candidates are derived from reductone (a novel antioxidant based on vitamin C, but which does not emit free radicals). Sosei plans to outlicense or divest these assets rather than to further develop them by itself. The Activus pipeline is presented in Exhibit 2. Exhibit 2: Activus R&D pipeline Programme Indication Dev stage Notes TA-270 Airway inflammation (asthma/copd) Phase IIa Oral quinolinone derivative. Antioxidant activity (peroxynitrite scavenger). Optimised as inhibitor of delayed type allergic inflammation in animal models. Improved both allergic and non-allergic airway inflammation. Safety for single and multiple (7-day) oral administration confirmed in Phase I. 360-pt eightweek placebo-controlled Phase IIa in mild-to-moderate asthma at Russian and Ukrainian study sites, plus UK-based Phase IIa in COPD both completed (results not yet published). TA-264 Thrombosis (peripheral Preclinical Oral anti-thrombotic with no fibrinolytic or anti-platelet activity. Preclinical TA-381 circulatory disorders) Acute cerebral infarction Preclinical efficacy in rat model better than ticlopidine, with improved safety profile. Intravenous antioxidant. In vivo models indicate potential efficacy and duration of action advantage over Mitsubishi Tanabe s Radicut (edaravone). The APNT platform technology can be applied to produce various high-purity formulations of otherwise poorly soluble drug compounds. It yields active pharmaceutical ingredients (APIs) with particle sizes in the range of nm, and can be used to develop drug formulations which can, for example, be injected, inhaled or administered in ophthalmic solution. Unlike other nanoparticle processing technologies, APNT ensures a compound s purity as it uses salt and polyol in the grinding process, both of which can be removed by washing with water. Activus acquisition deal terms Sosei will acquire 100% of Activus through a stock exchange, but rather than issuance of new shares to current Activus shareholders they will instead receive a cash consideration of c 500m (broadly equivalent to the net cash balance of Activus). This consideration is expected to be divided between preference shareholders 2 and common shareholders 3 as follows: If Activus s net cash balance is more than or equal to m, preference shareholders will receive m, while common shareholders will receive the difference between the net cash balance on the day prior to the day of share exchange and the cash consideration paid to preference shareholders. If Activus s net cash balance is below m on the day prior to the day of share exchange, preference shareholders will receive the net cash balance, and common shareholders will receive 1 per share. In addition, common shareholders will receive an undisclosed share of gross profits generated from the acquired Activus assets. This profit share will continue for up to five years from the date of deal closure or until gross profit reaches 1bn, whichever is sooner. 2 Preference shareholders: include JAFCO, Yasuda Investment and Daiwa-SNBC Capital. 3 Common shareholders: founders, SBI and various preferred shareholders who also hold common shares.

4 4 Edison Investment Research Update Sosei Group Corporation 30 June 2010 Sosei R&D pipeline In the near term, Sosei s investment case remains reliant on the successful development of COPD therapies NVA237 and QVA149, exclusively partnered with Novartis under a $375m milestone and royalty deal (economics shared 50:50 with partner Vectura). Key development and regulatory catalysts over the next two years should bring significant milestone revenues for Sosei ($70m in milestones are due before US/EU launch). Sosei s R&D pipeline is summarised in Exhibit 3. Exhibit 3: Sosei Group R&D pipeline Programme Indication Dev stage Notes/partners NVA237 (glycopyrronium bromide) COPD Phase III Partnered with Vectura: worldwide rights exclusively licensed to Novartis. Likely to be second LAMA to reach the market. Uses Breezhaler DPI device. Two Phase III studies underway: 1,065-pt one-year trial with tiotropium as active comparator (results: March 2011) and an 800-pt 26-week placebo controlled trial (results: December 2010). Seven-arm 360-pt Phase II ongoing, presumably to pre-empt dose-related questions from the FDA as with Novartis s Onbrez QVA149 (glycopyrronium bromide + indacaterol) SOH-075 (levonorgestrel) Norlevo SD 118 (formerly also NSL-043) submission (results: February 2011). NDA filing mid COPD Phase III Partnered with Vectura: worldwide rights exclusively licensed to Novartis. Aims to be first LAMA/LABA combination to market. Uses Breezhaler DPI device. Two Phase III studies underway: 1,998-pt one year superiority trial vs NVA237 monotherapy (results: March 2012) and a 339-pt one-year placebo controlled safety and efficacy study (results: January 2012). NDA filing due Emergency contraceptive Neuropathic pain Registration Phase I completed Sensitivities Japanese commercialisation agreement with Aska Pharmaceuticals; exclusive distribution rights (Japan and Australia) licensed from Laboratoires HRA Pharma. Sandoz markets SOH-075 as NorLevo in Australia. Aska will acquire a stake in Sosei (predetermined but currently undisclosed) via purchases in the market, and will pay up to 300m in upfront and milestone payments plus a significant royalty on net sales. Japan NDA submitted (Sept 2009) following a positive Phase III trial (62/63 pregnancies successfully prevented in Japanese adult females, with no serious adverse events); approval anticipated by March Global development and commercialisation rights (ex-japan and Asia); percentage of future revenue due to NeuroDiscovery/NeuroSolutions over life of patent (previous 50:50 co-development agreement re-negotiated March 2010). Oral, re-profiled, small molecule drug. Preclinical and pharmacological profile shows equivalent efficacy to gabapentin, with longer duration of action; Phase I showed better tolerability. Exploring licensing/funding opportunities for further development. Sosei is subject to the usual biotech-associated risks, ie clinical or regulatory failure or delay, patent litigation and commercial risks (eg pricing and reimbursement). Sensitivities specific to our model assumptions, both on the up and the down side, include: high single product risk (clinical and regulatory progress of NVA237/QVA149), SOH-075 commercialisation (pricing/reimbursement likely to influence uptake of this first-in-class drug), upside from partnering activity (economics from existing or future deals on Activus technologies or divested/non-core assets are not included in our model), FX fluctuations and accounting standards (Sosei reports in Japanese yen to Japanese GAAP, but the bulk of expected milestones are US dollar denominated). Valuation We maintain our Sosei valuation of 16.53bn ( 119m assuming 138.5/ ). This comprises a riskadjusted net present value (rnpv) of key assets 4 (calculated at 14.6bn, or 105m), a 390m ( 3m) or three times sales value to Australian Norlevo sales and forecast net cash of 1,573m ( 11m) for 4 Sosei s three key clinical programmes are NVA237, QVA149 and SOH-075.

5 5 Edison Investment Research Update Sosei Group Corporation 30 June 2010 the year ending March For our assumptions and a detailed discussion of our valuation rationale, please see the previous Update note, Milestone boosts cash, published 26 May We highlight that, as with our Vectura model, our Sosei valuation model does not capture the value of potential milestones ($70m in connection with NVA237/QVA149 pre-launch) given little visibility on their breakdown and payment schedules. Milestone receipt could represent significant upside. Assuming equal split of pre-launch milestones between both assets and payment in the period (on Phase III results, regulatory filing and US/EU approvals), applying a 75% risk-weighting generates an NPV of c 3.96bn ( 28m). We also highlight that the Activus acquisition may represent additional upside to Sosei. As Sosei has not disclosed plans for the early-stage pipeline and there are no current APNT collaborations/partnerships, we presently do not ascribe an explicit value to these acquired assets. However, once Sosei has communicated its plans and/or a partnership is announced, we would anticipate valuing these technologies/collaborations. Financials P&L guidance for the year ending March 2011 is summarised in Exhibit 4. We have not changed our financial model as Sosei does not expect the acquisition to have a major earnings impact, nor will Activus G&A (one facility with seven staff) impact the previously guided costs. Exhibit 4: Sosei Group s financial guidance for 2010/ /11 forecast ( m) Comment Net sales 800 QVA149 milestone and Norlevo sales in Australia Operating expenses: 2,520 R&D costs 300 Novartis funds development of NVA237/QVA149 SG&A costs 632 Actively pursuing further reductions Goodwill amortisation 1,588 Relates to 2005 acquisition of Arakis Operating income/(loss) (1,840) Ordinary income/(loss) (1,840) Net income/(loss) (1,845) Sosei reported net cash of 1,857m for the year ending March 2010 (vs 1,769m at end-2008/09), which will be supplemented by the $7.5m milestone received on the initiation of QVA149 Phase III trials in May. As Sosei will acquire Activus for its net cash value, we continue to expect Sosei to end 2010/11 with cash of 1,573m, in the absence of any further milestones from either Novartis or Aska Pharma. However, substantial milestones are likely to be triggered by successful development of NVA237 and QVA149 (Exhibit 5), and approval of SOH-075 all of which may occur during Japanese stock market regulations prevent Edison publishing 2011/12 estimates at this stage. Exhibit 5: Terms of the NVA237/QBA149 licensing deal with Novartis Note: Figures represent Sosei s 50% share of $375m joint deal (with Vectura). Headline deal terms: $15m upfront, up to $172.5m in milestones and mid-single digit (ie 6%) royalty. Milestones received: $30m to date: $15m upfront (April 2005), $7.5m on NVA237 Phase III initiation (June 2009) and $7.5m on QVA149 Phase III initiation (May 2009). Milestones outstanding: $157.5m in total: $70m in milestones are due before US/EU launch. Our financial forecasts, presented in Exhibit 6, are consistent with Sosei s published guidance. 5

6 6 Edison Investment Research Update Sosei Group Corporation 30 June 2010 Exhibit 6: Sosei Group Corporation financial results and forecasts m 2007/ / / /11e Year end 31 March JPN GAAP JPN GAAP JPN GAAP JPN GAAP PROFIT & LOSS Revenue Cost of Sales (122) (122) (128 ) (130) Gross Profit EBITDA (4,700) (2,106) (292) (28 4) Operating Profit (before GW and except.) (4,663) (2,079) (266) (257) Intangible Amortisation (1,607) (1,58 8 ) (1,58 8 ) (1,58 8 ) Exceptionals (556) Other (47) (510) 0 0 Operating Profit (6,8 72) (4,051) (1,8 54) (1,8 45) Net Interest Profit Before Tax (norm) (4,569) (2,067) (179) (252) Profit Before Tax (FRS 3) (6,779) (4,038 ) (1,767) (1,8 40) Tax (2) (5) Profit After Tax (norm) (4,8 97) (2,351) (18 1) (257) Profit After Tax (FRS 3) (6,503) (3,939) (1,769) (1,8 45) Average Number of Shares Outstanding (000) EPS - normalised ( '000) (41.5) (19.9) (1.5) (2.2) EPS - FRS 3 ( '000) (55.2) (33.4) (15.0) (15.6) Dividend per share ( ) Gross Margin (%) EBITDA Margin (%) (663) (1,377) (32) (35) Operating Margin (before GW and except.) (%) (658 ) (1,360) (29) (32) BALANCE SHEET Fixed Assets 11,934 10,319 8,694 7,106 Intangible Assets 11, ,196 8,612 7,024 Tangible Assets Investments Current Assets 5,470 2,048 1,977 1,693 Stocks Debtors Cash 4,908 1,769 1,8 57 1,573 Current Liabilities (1,621) (229) (296) (296) Creditors (1,621) (229) (296) (296) Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets 15, ,138 10,375 8,503 CASH FLOW Operating Cash Flow (3,950) (2,986) (63) (28 4) Net Interest Tax (2) (5) Capex (62) (1) 0 0 Acquisitions/disposals Financing (335) (97) 0 0 Dividends Net Cash Flow (3,954) (3,025) 22 (28 4) Opening net debt/(cash) (8,955) (4,908 ) (1,769) (1,8 57) HP finance leases initiated Other (93) (114) 67 0 Closing net debt/(cash) (4,908 ) (1,769) (1,8 57) (1,573), Sosei Group Corporation accounts EDISON INVESTMENT RESEARCH LIMITED Edison is Europe s leading investment research company. 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