Stifel.
Summary
Our investment thesis in Pharming is that Ruconest maintains its share of the US HAE market, despite perceived headwinds and the profits generated can be successfully deployed to develop enhancements to Ruconest and new pipeline opportunities. FY18 results, showing US sales of $149m (vs Stifel $153m) helping to generate adj operating profits of ?40.6m (Stifel ?43.5m) were slightly below expectations but latest sales data supports our 'retain market share' thesis. Pharming also ended the year in a net cash position of ?9m, with ?81.5m in gross cash, even after starting to pay-down the $100m Orbimed loan. Taking the slightly lower 4Q18 exit rate for Ruconest and tempering growth expectations through 2019 reduces our sales forecast by 10% and lowers our NPV-based TP to ?1.45 (also adjusting for Pompe disease development timelines). However, we note that our TP does not currently ascribe any value to the planned expansion of Ruconest into larger indications (pre-eclampsia or acute kidney injury) or other early-stage programmes (Fabry's disease). Hence we continue to see further upside potential on successful pipeline execution, and reiterate our Buy rating.
Key Points
Results broadly in-line with expectations.
Total reported FY18 revenues of ?135.1m increased 51% vs FY17, and just below expectations (Stifel ?137.2m; consensus ?136.3m). 4Q18 US sales declined c. 8% to $38.7m (Stifel estimate) compared to 3Q18, which was the high-water mark for 2018. This relatively modest decline comes despite increased competition from the prophylaxis treatments, with Haegarda supply increasing and Takhzyro being rolled out (launched in September 2018). We continue to expect the overall HAE market will inevitably shift to more convenient and effective prophylaxis treatment options, but the real impact will be on sub-optimal Cinryze, the battle between Takhzyro and Haegarda, and more likely results in market expansion than market rotation. This leaves a significant market opportunity for acute, rational treatment of HAE attacks, and assuming more convenient formulations of Ruconest can be developed, we believe Ruconest offers the best profile in this setting. This applies to use of Ruconest as a standard acute treatment regimen, but also in treating breakthrough attacks which will inevitably occur in patients on the prophylactic options.
Tempering growth forecasts but remains a strong platform to build from.
Pharming expects 'continued growth' in Ruconest sales in 2019. Given fluid market dynamics (continued switch to prophylaxis, potential US generics to Firazyr by July 2019), we have prudently taken the lower 4Q18 US sales exit rate and added 5% growth to forecast FY19 global sales of ?151.5m (includes +30% sales performance in Europe) vs ?168m previously based on +10% growth (see overleaf). For reference, in FY18 US Ruconest sales achieved +6% annual growth on top of the 4Q17 exit rate. The prospect of Firazyr generics entering the US market this year may appear an obvious potential headwind, but recent real-world data, showing the high acute treatment failure rate with Firazyr and the >90% effectiveness of C1 esterase inhibitors such as Ruconest, is likely to impact patient, physician and payer support for Firazyr.
Strong operational performance.
Group adjusted operating margin in FY18 increased to 30% compared to 25% in FY17, despite a 35% increase in total opex with adjusted R&D spend +40% to ?26.3m. We expect further increases in R&D in FY19 as Pharming seeks to: 1) develop more convenient formulations of Ruconest (IM, SC, intradermal), 2) expand the use of Ruconest beyond HAE, into pre-eclampsia (Phase II due in 1H19) and acute kidney injury (trial protocol being designed), and 3) leverage its recombinant protein technology platform to develop new product candidates for Pompe and Fabry's diseases. With scale up of manufacturing ongoing and IND-enabling studies yet to start, we have prudently pushed back the potential launch for a Pompe disease candidate by 12 months into 2024. We reiterate our Buy rating with Ruconest still valued at ?1.22 on re-based forecasts.