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Basilea Pharmaceutica AG (BSLN-CH): Derazantinib deal adds third oncology asset
Recommendation: OUTPERFORM
Target Price: CHF108 (increased from CHF107)
Current Price: CHF70.05 (COB on 3^rd May 2018)

KEY TAKEAWAY

Basilea has signed an in-licensing agreement with ArQule for late-stage oncology asset derazantinib (ARQ 087), a small molecule that targets the fibroblast growth factor receptor ("FGFR") family of kinases. Derazantinib is in Phase II development for second-line intrahepatic cholangiocarcinoma ("iCCA"), a rare cancer with limited treatment options and a poor prognosis. Under the terms of the deal, Basilea will pay $10m upfront and up to $326m in milestones. We estimate that only c.$5m are related to iCCA and the remainder to large, non-orphan solid tumour indications being assessed. We forecast launch in Q4/2023E and peak sales of c.$70m in iCCA, with Basilea paying ArQule an estimated 8% royalty rate. There could be upside to our forecasts if derazantinib receives accelerated / conditional approval in late 2021E based on data from the ongoing Phase II trial. We nudge our target price ("TP") to CHF108 per share and maintain our OUTPERFORM recommendation.

Initial focus on iCCA patients with FGFR2 fusions

Basilea will continue to pursue iCCA, where ArQule has already generated encouraging Phase I/II data and a Phase II trial is currently ongoing. Derazantinib is being developed as a second-line agent for the c.20% of iCCA patients with an FGFR2 fusion, the most common type of genetic alteration in the FGFR2, yielding an addressable patient population of c.2,500 patients in the US and Europe. Surgical resection or liver transplantation currently represent the only curative treatments. In patients with advanced disease, standard of care is combination chemotherapy consisting of gemcitabine / cisplatin. Patients who relapse after first-line chemotherapy have limited treatment options and a poor prognosis.

Encouraging efficacy signals in Phase I/II; Phase II data expected in H2/2020E

In an open-label Phase I/IIa study in 119 patients with advanced solid tumours with FGFR genetic alterations, derazantinib monotherapy led to an overall response rate of 21% in the 29 iCCA patients with FGFR2 fusions, including six partial responses. A c.100-patient Phase II trial started in Q4/2017 and results from an interim analysis in >40 patients are expected in H2/2019E, with full data anticipated in late 2020E.

Nudging TP to CHF108 per share

Adding our risk-adjusted net present value ("rNPV) for derazantinib in iCCA to our valuation increases our TP by c.CHF1 per share, based on assuming a probability of success of 25%. Our updated financial models reflect the $10m upfront payment to ArQule in 2018E (booked in R&D) and slightly higher R&D costs overall from 2018E onwards owing to the additional expenses associated with the development of derazantinib in iCCA. This has increased our 2018E operating loss forecast to CHF29.8m and pushed back expected profitability by one year to 2021E.

Kind regards,

Brigitte de Lima, PhD, CFA | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

The Stanley Building, 7 Pancras Square, London, N1C 4AG, England, UK.

T +44 (0) 203 859 7725 | brigitte.delima@goetzpartners.com / healthcareresearch@goetzpartners.com

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