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Published to the market and investors on 23^rd April 2019 @ 6.38am (BST).

Basilea Pharmaceutica AG (BSLN-CH): Derazantinib has potential in iCCA and beyond
Recommendation: OUTPERFORM
Target Price: CHF108 (increased from CHF107)
Current Price: CHF42.56 (CoB on 18^th April 2019)

KEY TAKEAWAY

The in-licensing of fibroblast growth factor receptor ("FGFR") inhibitor derazantinib in April 2018 marked a turning point for Basilea: it brought in a late-stage oncology asset with potential across multiple cancers, thus complementing earlier-stage pipeline assets BAL101553 (Ph II) and BAL3833 (Ph I). The demonstration of proof-of-concept in intrahepatic cholangiocarcinoma ("iCCA"), a rare cancer of the bile duct, paved the way for the pursuit of larger indications. A Ph I / II trial in urothelial carcinoma ("UC") (the most common form of bladder cancer, "BC") in combination with anti-PD-L1 Tecentriq is due to start in mid-2019E. In this research report, we take a deep dive into the FGFR inhibitor landscape to elucidate derazantinib's potential positioning compared to other molecules in the same class. We conclude that the compound's profile should allow it to capture at least 25% market share in each iCCA and UC. Since our forecasts only reflect limited value for derazantinib in iCCA, we see upside from adding sales in UC as we gain more clarity on the design of the pending Ph I / II trial. We maintain our OUTPERFORM recommendation and nudge up our target price ("TP") to CHF108.

Derazantinib is a spectrum-selective FGFR inhibitor with unique features

The four identified FGFRs are transmembrane receptor tyrosine kinases ("RTKs") that are involved in multiple essential cellular processes. It has been shown that a variety of molecular alterations such as amplifications, mutations and translocations / fusions are involved in many solid tumours. This has made FGFRs attractive therapeutic targets, with small molecule tyrosine kinase inhibitors ("TKIs") currently the preferred approach. Innovators have been shifting towards selective inhibitors to improve safety and tolerability, but this needs to be balanced against the development of resistance. Careful patient selection is emerging as a key factor of success given the heterogeneity in FGFR aberrations that drive individual tumours and differences in FGFR inhibitor profiles. Derazantinib has strong affinity for FGFR1-3, and additionally colony-stimulating receptor 1 factor ("CSF1R"), which is unique compared to other selective FGFR TKIs and may play a role in the context of combination therapy with immune checkpoint inhibitors ("ICIs"). Available clinical data also suggests a potentially more benign safety profile.

Proof-of-concept in iCCA paved the way to pursue larger indications

Preclinical work showed that derazantinib is particularly active against FGFR2 fusions, as confirmed in a Ph I / II trial in 2nd-line iCCA in patients with this type of genetic alteration: the compound demonstrated an overall response rate ("ORR") of 21% and a disease control rate ("DCR") of 83%. The data was recently matched in a planned interim analysis of the ongoing registrational Ph II trial, which could thus form the basis of accelerated approval following final data in mid-2020E (we conservatively model approval in 2023E following Ph III data). Reasons underlying the decision to pursue UC in combination with Tecentriq (atezolizumab) include: (1) Metastatic UC has a high percentage of FGFR aberrations (15% - 20%), (2) UCs resistant to ICIs are predominantly cold tumours with a high presence of FGFR3 genetic aberrations, (3) inhibition of CSF1R may enhance the susceptibility to PD-L / L1 inhibition, (4) strong data in preclinical bladder cancer models. We estimate the total addressable FGFR-driven UC market at >$600m.

Upside to valuation from successful development in UC

Our valuation for Basilea currently only includes CHF1.7 per share (c.2%) for derazantinib related to sales in iCCA, based on the assumption that the company will develop and commercialise the compound on its own and pay licensor ArQule a $5m approval milestone in 2023E and 8% royalties on sales. We estimate peak sales in iCCA of c.$70m in 2034E. Hence, there is upside to our estimates from (1) accelerated approval in iCCA based on the ongoing Ph II trial and (2) the inclusion of sales for UC, which could also be approved on positive Ph II data. There are many precedents in the oncology space for approval on Ph II data, including other FGFR inhibitors: J&J recently received approval for erdafitinib for advanced UC based on a 87-patient Ph II trial. Incyte is planning to submit an NDA for pemigatinib for 2nd-line iCCA in H2/2019E based on a 140-patient Ph II trial.

Kind regards,

Brigitte de Lima | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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

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