Pharming Group N.V. BUY. 3 August Initiation of Coverage. Treating hereditary angioedema, one rabbit at a time.

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1 Pharming Group N.V. BUY Pharmaceuticals Treating hereditary angioedema, one rabbit at a time Initiation of Coverage Driven by its lead product Ruconest, we believe Dutch biotech company Pharming Group N.V. is finally poised for growth. Launched in the US in November 2014, Ruconest, a recombinant human protein for the acute treatment of the rare genetic disorder hereditary angioedema (HAE) has had a successful launch to date. We expect growing sales of the drug to deliver profitability from 2017, and believe the sales potential of the drug is under-appreciated. We therefore initiate coverage of Pharming with a Buy recommendation and set a 12-month target price of Targeting near-term profitability. Pharming looks set to be transformed through the commercialisation of its key product Ruconest, sales of which have accelerated since US launch in November The company is now funded through to profitability, with growing Ruconest sales likely to deliver this from Expansion of the drug's approval to include prophylaxis and paediatric use should boost growth from 2018E. Longer-term growth may come from other potential uses for Ruconest, in indications such as Acute Pancreatitis and Ischaemic Reperfusion Injury (IRI). Pharming is also in the process of reinvigorating its pipeline of potential novel transgenic therapies. We forecast sales of Ruconest of $335m by Having received FDA approval in July 2014, Ruconest was launched in the US by marketing partner Valeant in November 2014 and has had a successful launch to date, with revenues of c.$11m. Pharming has various ways to achieve further upside from Ruconest; regaining further EU territories from marketing partner SOBI to leverage its growing EU infrastructure and optimise margins; expanding indications to include prophylaxis and paediatric use; and future potential in other inflammatory diseases such as Acute Pancreatitis and Ischaemic Reperfusion Injury (IRI). For now, we believe Ruconest is well on track to meet our forecasts of $37m in sales for 2015 and forecast $335m of sales by 2020E (assuming approval in prophylaxis in 2018). Innovative technology platform to provide future pipeline. In August 2014 Pharming acquired five potential new product leads from French company Transgenic Rabbit Models, from which Pharming plans to build a pipeline of new biological drugs. Through a collaboration with the Shanghai Institute of Pharmaceutical Industry (SIPI), Pharming is developing the first of these, a recombinant human Factor VIII protein as a replacement therapy for the hereditary disorder Haemophilia A. Pharming is planning to enter preclinical trials at the end of 2016 and will look to address a portion of the $4bn global Haemophilia A market. Initiating coverage with a Buy recommendation and 0.88 target price. Driven by a very encouraging launch in the US, we believe Ruconest has the potential to take Pharming to profitability in 2017 and beyond. On an NPV basis we value Pharming at 0.88 a share, representing significant upside from its current price of 0.33, based primarily on the potential of Ruconest as a treatment for HAE. Price (31 July 2015) 0.33 Changes Rating Target Price Previous Share price performance (indexed) Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Key data Stock code Absolute - - Current BUY 0.88 Rel.Amsterdam Stock Exchange Amsterdam Mi PHARM NA Market cap ( m) 136 Amsterdam Stock Exchange Amsterdam Midkap Index 729 1mth perf (%) mths perf (%) (1.2) 12mths perf (%) (24.1) 12mth high-low ( ) 0-0 Free float (%) 100 Key financials Year to Dec 2014A 2015E 2016E Sales ( ) EBIT adj 3 (9) (0) EBIT margin (%) 13 (60) (1) EPS adj (EUc) (1.4) (1.7) (0.3) EV/EBITDA (x) PE adj (x) NA NA NA DPS (c) Div yield (%) FCF yield (%) Prices are as of close 31 July 2015 All sources unless otherwise stated: Company data, FactSet, Stifel estimates Olivia Manser [email protected] +44 (0) Max Herrmann [email protected] +44 (0) UK Sales desk +44 (0) Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages of this report.

2 Key data 1 Key valuation ratios (x) 2014A 2015E 2016E 2017E PE adj (x) NA NA NA 14.8 ROCE (% incl. gross goodwill) (0.2) (0.3) (0.1) 0.3 Div yield (%) Key profit and loss data ( ) 2014A 2015E 2016E 2017E Sales ( ) EBITDA adj 3 (9) (0) 10 EBIT adj 3 (9) (0) 10 EBIT adj margin (%) 12.7 (59.8) (0.8) 22.4 Net income (6) (7) (1) 9 EPS adj (EUc) (1.4) (1.7) (0.3) 2.3 DPS (c) Key cash flow data ( ) 2014A 2015E 2016E 2017E Operating profit 2.7 (9.0) (0.2) 10.3 Depreciation Other Operating cash flow 1 (15) (6) 8 Taxes paid Net interest Capex Free cash flow 1.6 (14.6) (6.4) 8.5 Dividends Change in cash 23 (15) (6) 8 Net debt (32.5) (18.2) (11.8) (20.3) Key balance sheet ( ) 2014A 2015E 2016E 2017E Intangible assets PPE Cash Key information Target price methodology/risks Target price is based on our risk-adjusted product-based NPV valuation. Risks to the investment include Pharming's reliance on distribution partners to execute commercialisation strategy for Ruconest, along with the risk that market acceptance is lower than expected or unforeseen safety and efficacy issues affect the global growth. Competition may also increase from 2018 onwards, and the increasing tendency of health insurers to reduce costs and reimbursement may provide additional headwind to Ruconest commercialisation. Business description Pharming is a Dutch biotechnology company with a platform technology for producing recombinant proteins in rabbit milk. The company's lead product, Ruconest, is approved in Europe and the US for the treatment of hereditary angioedema. Senior management Chairman - Jaap Blaak Chief Executive Officer - Sijmen de Vries Chief Operating Officer - Bruno Giannetti Key dates Major shareholders Kingdon Capital Management % Website 1 Year end December Data in millions, except per share and percentages Source: Company data, FactSet, Stifel estimates Page 2

3 Investment case Through the growing commercial success of its lead product Ruconest, Pharming has transformed itself from a financially constrained business to one that looks likely to become cash generative by Expanding indications for Ruconest including prophylactic and paediatric use, alongside its potential use as a treatment for acute pancreatitis should ensure a healthy revenue stream to Pharming through partners and distributors. This, combined with Pharming's recently expanded pipeline of novel transgenic technology platforms, suggests the company is poised for growth and looks attractive to us at its current valuation. Ruconest is key We believe Ruconest has the potential to gain significant market share in the c. $1.1bn hereditary angioedema (HAE) market. It is the first recombinant human protein to be approved for this rare genetic disorder. The ease of production and the elimination of the risk of transmitting viruses such as CJD are clear advantages of using recombinant products over plasma-derived products. Ruconest is therefore well placed to take share from the current therapies on the market. We forecast sales of Ruconest of $250m by 2020 in the acute segment for HAE, in a market that we estimate to be worth $2.7bn by that date. but acute HAE is just the beginning. We believe there is significant upside potential to be gained from Ruconest beyond acute HAE, in particular through approval for prophylactic use, where we forecast an additional $85m of sales by 2020E. Having announced positive results from an exploratory study, Pharming has initiated a Phase II clinical trial (Jan 2015) as the first step of a 50/50 shared cost collaboration with US partner Valeant to develop Ruconest for the prophylaxis of HAE. Following the likely requirement of a Phase III trial, we anticipate FDA submission in 2H17 with launch possible in late 2018E. Further geographic expansion and approval in paediatric use are likely to provide additional upside to this. Other diseases. Further to expanding indications in HAE, Ruconest is also being explored for use in other inflammatory diseases such as Acute Pancreatitis (AP) and Ischaemic Reperfusion Injury (IRI). Having obtained Ruconest as part of its April 2015 acquisition of Salix, Valeant will decide whether to undertake the development of the drug in AP as part of its ongoing prioritisation discussions, either in collaboration with Pharming or alone, which could provide longer term upside to our forecasts for Ruconest. Equally, Pharming has supplied Ruconest to the US Army for studies in shock-induced IRI, a collaboration which may also bear fruit at a later stage. Acquisition of five potential new therapeutics from TRM. Pharming s recently acquired rabbit founder lines from French company Transgenic Rabbit Models provide five potential therapy areas in which to use Pharming s technology to develop recombinant products. Its strategic collaboration with the Shanghai Institute of Pharmaceutical Industry (SIPI) should ensure that joint collaborations can be developed and leveraged to their full potential. The first of these collaborations is to develop a recombinant replacement therapy for the hereditary disorder Haemophilia A, a market worth $4bn globally. Initiating with a Buy recommendation and 0.88 target price. At its current share price, we believe Pharming is significantly undervalued. The success of the US launch of Ruconest appears to have gone unnoticed by the market, in our view, and we believe the continued uptake of Ruconest there will drive strong near-term share price appreciation. Based on our risk-adjusted NPV, we value Pharming at 0.88 a share; more than double the current share price. With the expanding launch of Ruconest in the US and other indications on the horizon, we believe the company is firmly placed for growth. Page 3

4 Valuation We have valued Pharming using a risk-adjusted product-based NPV valuation. We have only included Ruconest s potential in HAE in the valuation, given the large uncertainty over its potential in acute pancreatitis and ischaemic reperfusion injury. We have not valued Pharming s newly acquired transgenic rabbit founder line programmes. We apply a 100% chance of success for Ruconest to reach the market in acute HAE since it is already approved in Europe and the US. However, we assume a 50% chance of success of the drug in prophylactic use since it is still in clinical development. Figure 1: Pharming NPV analysis Drug Indication Partner Status Launch Peak Ruconest Acute HAE Ruconest Prophylaxis HAE Factor VIII Haemophilia A Valeant/SOBI Marketed (US/EU) 2014 (US) Peak sales Valeant/SOBI Phase II Early-stage development Net royalty Probability 30-40% (US) 30-40% (US) NPV/ share 100% % 0.19 > Cash 0.08 Total 0.88 Source: Stifel estimates Included in our per share calculation and cash figure above is an assumption that the 26.4m of warrants outstanding at 18 March 2015 are exercised. We have not included any dilution from the 37.3m options (9.1% of issued share capital) outstanding at this date. Risks to the investment case Several other companies are developing treatments for HAE, although Pharming is the only one with a recombinant rather than blood-plasma product. In Europe, two other plasma-derived C1 inhibitor products and one other product have been approved for the treatment of acute HAE attacks. In the US, one plasma-derived and two other products have been approved for acute HAE attacks and one plasma derived product for prophylaxis. Pharming is reliant on its distribution partners to execute the commercialisation strategy for Ruconest, apart from in Austria, Germany and the Netherlands, where Pharming is commercialising the product directly. As with all companies launching new drugs Pharming faces the risk of market acceptance, and whether Ruconest remains safe and efficacious from a therapeutic and cost perspective relative to competing treatments. The increasing tendency of health insurers to reduce costs by lowering the level of reimbursement for new products provides additional headwind for commercialising Ruconest. Page 4

5 Business Overview Pharming Group N.V. is a Netherlands-based biotechnology company focused on the development, production and commercialisation of human therapeutic proteins from novel transgenic platforms. Its key product Ruconest is a recombinant human protein approved in the EU since the end of 2010 and in the US since July 2014 for the treatment of swelling attacks in patients with a rare genetic disorder known as hereditary angioedema (HAE). We believe the success of Ruconest has the potential to take Pharming to profitability - our assumptions suggest the company will become cash positive by History Pharming Group N.V.listed on the Amsterdam stock exchange in 1998, having spun off from its predecessor GenPharm in In the early 2000 s Pharming had a co-development deal with Genzyme for Pompe disease. Financial difficulties at the time, however, prompted a restructuring of the business, during which time Pharming had to surrender its Pompe disease drug to Genzyme and terminate its joint venture to focus on its HAE programme. Pharming today CEO and CFO: Sijmen de Vries After numerous dilutive financing rounds and stock dilutions, Pharming finally received approval for Ruconest in the EU in late 2010, which signified a turning point for the company. Having subsequently received FDA approval for Ruconest, the company is now poised for growth, and stands with 30m of cash on its balance sheet, 15m from recent debt financing and an increasing revenue stream from sales of its lead product Ruconest. Pharming currently has around 65 employees; three based in France, six in the US and the rest in the Netherlands. We believe the potential growth of Ruconest sales combined with the future upside potential from its novel transgenic platforms is not reflected in Pharming s current valuation. Management Pharming is led by Chief Executive Officer and Chief Financial Officer Sijmen de Vries, who has extensive experience in the pharmaceutical and biotech industry. Mr de Vries joined Pharming as CEO in 2008, having been CEO of Swiss-based 4Antibody and Morphochem AG. Before this, Mr. de Vries held senior business and commercial positions at Novartis Pharma, Novartis Ophthalmic and SmithKline Beecham Pharmaceuticals. He holds a Masters' Degree from the University of Amsterdam and an MBA in General Management from Ashridge Management College. He also holds non-executive directorships in Midatech Pharma plc and Sylus Pharma Ltd. Mr. de Vries has stated Pharming s intention to appoint a CFO in the near future, as the company expands into a more commercial stage and develops new compounds. COO: Bruno Giannetti Chairman: Jaap Blaak Mr. De Vries is joined by Chief Operations Officer Professor Bruno Giannetti, responsible for the company s R&D, manufacturing, non-clinical and clinical development, regulatory affairs, drug safety and medical information. Dr Giannetti was previously CEO of Netherlands-based AM-Pharma BV and President and CEO of German-based Verigen AG. Before this, Dr Giannetti was a senior management consultant for Coopers & Lybrand, was VP Marketing and Medical Information at Immuno and Head of Clinical Research at Madaus AG. He holds a PhD in Chemistry and an MD PhD degree in Medicine from the University of Bonn, and was recently appointed Professor at the Pharmaceutical Faculty of the University of Seville. Chairman Jaap Blaak has held managerial positions with Hoogovens and Indivers NV and Interturbine Holding BV in the Netherlands, USA, Germany and Singapore. In 1986 he was appointed CEO of the MIP Equity Fund, one of the largest venture capital groups in Europe, which he helped to found in 1983 and which has since merged with the ABN-AMRO Venture Capital Group to form AlpInvest. Mr. Blaak was also advisor to the Dutch Ministry of Economic Affairs for the Biopartner and Technopartner Program. He has previously held non-executive directorships in FlexGen Holding BV, to-bbb Holding BV and Centocor BV. He holds an MSc in Physics and Business Economics from the Free University of Amsterdam and followed the Advanced Management Program of the Harvard Business School. Page 5

6 Vice Chairman: Juergen Ernst Vice Chairman Juergen Ernst joined the company in 2009 and has extensive senior level experience in pharmaceutical development and marketing. From 1969 to 1989 Mr. Ernst held several positions at Kali-Chemie AG (a subsidiary of Solvay SA), including Head of Pharmaceutical Marketing and Head of the Pharmaceutical Division. He retired from Solvay SA in 2004 having held several other positions. Mr. Ernst has also been Chairman of the supervisory board of Aeterna Zentaris, a member of the board of Pharmaceutical Division, CEO of Health Divisions, General Manager Pharmaceutical Sector and supervisory director and member of the Executive Committee. He holds an ISMP Degree from Harvard University and an MBA from the University of Cologne. Strategy Pharming s strategy is to maximise value from its lead product Ruconest, whilst leveraging its transgenic rabbit technology platform to build a pipeline of new biological therapies. To build value from Ruconest, Pharming plans to: - Support commercialisation of Ruconest in the US by partner Valeant. - Support commercialisation of Ruconest in parts of EU and RoW countries through partners and distributors - Directly commercialise Ruconest in Austria, Germany and the Netherlands - Achieve regulatory approval for Ruconest in other markets - Expand the approval of Ruconest to other indications, including prophylaxis of HAE through completing Phase II trials Near-term investments: Pharming is investing in the purification of Ruconest from the existing bulk inventory of frozen milk to ensure supply meets growing demand in the US. The company also has a 50/50 cost development collaboration with US partner Valeant for a continuing Phase II trial to allow Ruconest to be approved for prophylactic use. In Europe, the company is investing in the direct commercialisation of Ruconest in Austria, Germany and the Netherlands, having recently regained rights to these territories from SOBI. Pharming is also investing in new pipeline projects, driven by its French research group and Bostonbased New Product Development Group. These teams were both created since the acquisition of new founder rabbit technologies from French company Transgenic Rabbit Models (TRM) in September 2014 for 0.5m and are led by recently-appointed Chief Scientific Officer Dr Perry Calias. Through the acquisition, Pharming has gained access to rabbit founder lines and technology know-how in five new potential therapy areas, which should provide a healthy pipeline to follow Ruconest. Shareholders Pharming has a large shareholder base of primarily retail investors. Figure 2: Pharming top shareholders Name Holding Kingdon Capital Management 3.11% Share price performance Source: Thomson Reuters Since FDA approval of Ruconest in July 2014, Pharming s share price performance has been disappointing due to investor concerns about the US launch of Ruconest, particularly in light of the acquisition of its partner Salix by Valeant in April Contrary to these fears we believe Ruconest has enjoyed a good launch in the US and Valeant has successfully taken ownership of Ruconest s marketing rights. Page 6

7 Figure 3: Pharming 12-month share price performance FDA approval of Ruconest US launch of Ruconest FY14 results 1H15 results /15/ /15/2014 1/15/2015 4/15/2015 7/15/2015 Pipeline Source: Datastream Alongside expanding indications for its lead product Ruconest, Pharming has a number of newly acquired rabbit founder lines (from TRM) that have the potential to be developed in a variety of indications. IP Figure 4: Pharming product pipeline Compound Indication Stage Ruconest Prophylaxis of HAE Phase II Ruconest Paediatric HAE Phase II Ruconest Acute Pancreatitis Phase I/II Ruconest Ischaemia Reperfusion Injury (IRI) Pre-clinical Factor VIII Haemophilia A Pre-clinical alpha-glucosidase Pompe disease Pre-clinical alpha-galactosidase Fabry's disease Pre-clinical beta-glucocerebrosidase Gaucher's disease Pre-clinical Factor IX Haemophilia B Pre-clinical Source: Pharming Pharming owns and has in-licensed a number of patents and global patent applications for the production of recombinant proteins in transgenic animal milk and the methods of creating transgenic animals, which should protect the products until at least For Ruconest in particular, Pharming's IP position covers the compound itself, the methods of production and purification, improved versions of Ruconest and therapeutic use in a large number of medical indications. It also has seven years of market exclusivity through its orphan drug designation, granted at FDA approval, lasting until Pharming s IP portfolio in the field of transgenic technology includes: - Generation and use of transgenic cattle - Milk specific expression in transgenic animals - Animals carrying large transgenes (>50kb) - Purification of biopharmaceuticals from milk - Structure and design of transgenes for high level production - Fusion proteins for high level expression - Generation of animals using nuclear transfer technology - Oocyte activation for nuclear transfer - Transgenic antibody production - Sperm mediated gene transfer Page 7

8 Transgenic Production Technology Platform Recombinant DNA technology is the process of recombining genetic material from different biological sources. The first licensed drug generated using recombinant DNA technology was human insulin, developed by Genentech, licensed by Eli Lilly, and approved by the FDA in Most biological drugs today rely on this recombinant DNA technology. Initially, recombinant proteins were manufactured by fermentation of bacteria containing a portion of human DNA coding the required gene. As the process became more widely used, it was found that complex proteins produced in this way did not have exactly the same modifications (e.g. glycosylation patterns) as human proteins, which impacted both their safety and efficacy. As a consequence mammalian cells were used to produce more complex proteins which more closely matched the natural human equivalents, and many drugs are now produced by fermentation in mammalian cells. The development of the technology has allowed human genes to be accurately recombined into animal models and bred to give specific characteristics (Figure 5). These are known as transgenic animals, and are the basis of Pharming's technology platform. It is believed that proteins produced in transgenic animals will be even closer to the natural human proteins they are being used to replace, allowing for more effective and safer therapies. Figure 5: Production of transgenic animals Source: Therapeutic proteins from milk Pharming s predecessor company GenPharm was specifically founded to commercialise recombinant technology by breeding animals that could produce human-like proteins in their milk. Pharming's technology allows it to produce complex therapeutic proteins in the mammary glands of rabbits or cattle which can then be purified from the milk produced. Manufacturing transferred to Sanofi Having successfully developed the technology that allowed transgenic founder rabbits to deliver stable recombinant proteins in their milk, Pharming then developed large-scale purification methods for separating the human proteins from the other components of the milk, ensuring that the process was compliant with EU and US regulatory requirements. The purification process for Pharming's lead product Ruconest was transferred and up-scaled several times, and is now with partner Sanofi Chimie whose production facilities and processes comply with GMP-guidelines. Not only does this allow for the purification of high volumes of the human therapeutic protein, but also ensures the product is of consistently high quality during the scaling-up process. Page 8

9 Future Use Pharming believes its technology platform could be used as a new way to produce over 900 therapeutic proteins currently in development, which offers significant competitive advantages to current techniques. It has signed a strategic collaboration with the Shanghai Institute of Pharmaceutical Industry (SIPI), a Sinopharm Company, for the development, manufacture and commercialization of new products based on Pharming s technology platform. The collaboration allows SIPI access to the technology and knowhow in the hope that jointly, the companies can develop new product candidates. Page 9

10 Ruconest Ruconest is approved for the treatment of severe swelling attacks in adults and adolescents with a rare genetic disease known as hereditary angioedema (HAE). There are an estimated 15,500 people diagnosed with HAE in the US, the five key EU markets and Japan (Source: BioCryst). Acute therapies for HAE cost between $8-9,000 per treatment, and patient attacks can vary, with some experiencing two to three attacks per week, and some experiencing two to three attacks per year. At present, the market is estimated to be worth around $1.1bn, up 37% from 2014, although the rapid growth of the market in recent years is expected to slow in the medium term. We forecast sales of Ruconest of $335m by 2020 (see Figure 6). Ruconest is a recombinant human protein that inhibits the C1 esterase molecule in the body involved in inflammation pathways. Ruconest is purified from the milk of transgenic rabbits, and is the first recombinant C1 esterase inhibitor to be approved by the FDA (July 2014). Current C1 esterase inhibitors on the market are all derived from blood plasma. Ruconest is currently approved in the US, Israel, all 28 EU countries plus Norway, Iceland and Liechtenstein. It is distributed in the EU by Swedish Orphan Biovitrum (SOBI), except in Austria, Germany and the Netherlands where Pharming recently regained rights to commercialise Ruconest directly. It is partnered with Valeant in the US. We forecast global sales of Ruconest of $360m by 2020, assuming approval for prophylactic use at the end of 2018, and believe there is longer-term upside to be gained from obtaining approval for Ruconest to be used in additional conditions including Acute Pancreatitis (AP) and Ischaemia Reperfusion Injury (IRI). Summary forecast Figure 6: Ruconest sales forecasts Ruconest 2014A 2015E 2016E 2017E 2018E 2019E 2020E Acute sales ($m) Prophylaxis sales ($m) Total ($m) %ch >100% >100% >100% 67% 37% 29% 26% Hereditary Angioedema (HAE) Source: Stifel estimates HAE is a rare genetic deficiency of the C1 esterase inhibitor protein activity, resulting in episodes of swelling in various body parts including the hands, feet, face abdomen and airway that are painful and disfiguring. Attacks in the airways (throat/nose/tongue) occur in about 50% of patients and given the risk of death by asphyxiation, are of particular significance. Swelling in the intestinal wall can also cause excruciating pain, nausea and vomiting. These abdominal attacks can lead to unnecessary exploratory surgery in patients where symptoms have been incorrectly diagnosed; on average it takes around 12 years to correctly diagnose HAE in a patient. C1 esterase inhibitor C1 esterase inhibitor is a naturally occurring protein in the body, involved in the regulation of several inflammatory pathways. It regulates the production of bradykinin, a hormone involved in the widening and permeability of blood vessels in response to injury or infection. Insufficient circulating amounts of active C1 esterase inhibitor can cause inflammation and swelling attacks. Administration of C1 esterase inhibitor protein can normalise the response and relieve the attacks and concurrent symptoms. Figure 7: Types of HAE Type I Type II Type III Description/Characteristics 85% of patients, associated with decreased levels of functional C1 inhibitor protein 15% of patients, associated with dysfunctional C1 inhibitor protein Extremely rare and most often in women, C1 inhibitor protein lab tests are normal but the person has symptoms of HAE. Not entirely understood Source: Page 10

11 Prevalence Estimates of HAE prevalence vary between 1 in 10,000 and 1 in 50,000 and the disease is often not correctly diagnosed for a number of years. There are an estimated 15,500 people diagnosed with HAE in the US, the five key EU markets and Japan (Source: BioCryst). The frequency and severity of attacks also varies between patients, with some suffering several attacks per week, and others less than one attack per year. An estimated average of 8-10 attacks per year are treated per patient. Untreated, attacks can last between 48 and 120 hours. Market The HAE market has enjoyed rapid growth in recent years driven by an increased recognition of the condition and the launch of new treatments. We estimate the market increased by c. 37% in 2014 to $1.1bn. Because the disease is so variable (e.g. some patients can have 2-3 acute attacks a week, whereas others have 2-3 attacks per year), the numbers of patients on therapy is not a clear indication of early sales performance. Shire's prophylactic treatment Cinryze and acute treatment Firazyr, however, are clear market leaders, with a c.76% share of the market. Figure 8: Global HAE market - $1.1bn (2014 product sales) Ruconest $4m Firazyr $364m Cinryze $503m Acute Kalbitor $68m Prophylaxis Berinert $200m Source: Company annual reports / Stifel estimates Acute vs Prophylaxis Although the acute and prophylactic market segments are often separated, there is a degree of overlap between the two. The vast majority of patients have breakthrough acute attacks, regardless of whether they are on prophylactic treatments such as androgens or Shire's Cinryze. Shire s Firazyr is the market leader for acute treatments in the US (2014A sales of $364m), and CSL Behring s Berinert is the market leader in terms of volume in the EU, with 2014 sales of around $200m. An increasing number of companies are developing new treatments or re-formulating their existing acute treatments to compete with Cinryze in the prophylactic segment. Although the most promising of these products are in Phase I/II (see Figure 10), their eventual success may change the acute market if they allow patients to adequately manage their disease. US vs EU The US is a high-priced, dynamic market which has grown rapidly in the last five to six years, primarily through the growth of Shire s Cinryze and Firazyr products. This growth is expected to slow in the next two years, as the market becomes more saturated. According to Shire, of the c.8,000 potential HAE patients in the US, around half are actually diagnosed and treated. Shire believes c.1,600 patients in the US are treated with its prophylactic treatment Cinryze, and this has been increasing by c.200 patients each year. Page 11

12 Lower price in the EU, dominated by Berinert By comparison, the EU market has been slow to grow and has been dominated by CSL Behring's acute treatment Berinert (which was approved there in 2008). Of the 12,000 estimated HAE patients in Europe, around half of these receive a diagnosis, but very few patients use prophylactic treatment as part of their regimen to manage HAE. Berinert s entrenchment has made the EU a relatively unattractive market compared to the US, as well as lowering the price of the market as a whole. Competition Treatments for HAE are generally split into prophylactic and acute treatments. In prophylaxis, androgens (male hormones) can be used, but are rarely appropriate for children or women because of the unfavourable side effects such as the appearance of male sex characteristics. C1 esterase inhibitors are used as both prophylactic and acute treatments (Berinert, Cinryze and Ruconest), but other drugs work by targeting different sites of the same inflammation pathway. Shire's Firazyr is a bradykinin B2 receptor antagonist, and Dyax s Kalbitor is a kallikrein inhibitor. In general, these treatments are delivered by sub-cutaneous or intravenous injection, either by a healthcare professional or self-administered at home. See Figure 10 for full comparison. Ruconest s key advantage over current therapies is that it is a recombinant product rather than one derived from blood plasma, and like Firazyr, Ruconest is licensed for self-administration in the US. Alongside the cost advantages this affords to Pharming in terms of manufacturing the product, it also benefits patients by eliminating the risk of transmitting viruses and pathogens such as Creutzfeldt-Jakob disease (CJD). Below we summarise our forecasts for the HAE market as a whole. Figure 9: HAE market forecasts ($m) Product Company Indication 2014A 2015E 2016E 2017E 2018E 2019E 2020E Cinryze Shire Prophylactic HAE treatment Berinert CSL Behring Acute HAE treatment Kalbitor Dyax Acute HAE treatment Firazyr Shire Acute HAE treatment Ruconest Pharming Acute HAE treatment Ruconest Pharming Prophylactic HAE treatment BCX-4161 BioCryst Prophylactic HAE treatment DX-2930 Dyax Prophylactic HAE treatment Total 1,139 1,418 1,691 1,946 2,213 2,448 2,716 %ch 37% 25% 19% 15% 14% 11% 11% Source: Company data, Stifel estimates Cinryze Shire Cinryze, a plasma-derived C1 esterase inhibitor, is one of Shire s largest products, and can be selfadministered intravenously every three to four days as a prophylactic treatment for HAE. Cinryze has been shown as a safe and efficacious treatment for HAE and we would expect sales growth to continue going forward. We forecast sales of Cinryze reaching $983m in 2020, having recorded 2014 sales of $503m. Shire is developing a sub-cutaneous form of delivery for Cinryze, which is due to report results from Phase III trials in Shire believes that despite being a year behind the development of CSL Behring s sub-cutaneous version of Berinert (see below), its frequency and volume of dosing is superior. Firazyr Firazyr is a synthetic bradykinin B2 receptor antagonist delivered sub-cutaneously for the acute treatment of HAE. Firazyr was the second largest product behind Cinryze on the HAE market in 2014 with sales of $364m. We forecast sales of $448m in 2015E, reaching $835m by 2020E. Despite being the most successful acute treatment on the market in terms of sales, Firazyr is not without its drawbacks. The most common adverse event in clinical studies with Firazyr was recurrence of the swelling attack within 48 hours. This is thought to be due to the mechanism of action of Firazyr, which blocks the bradykinin B2 receptor. Recent studies have suggested that the bradykinin B1 receptor is Page 12

13 also involved in HAE attacks, albeit at a later stage, and may be why patients using Firazyr are prone to the attacks recurring after 48 hours. This is not something seen with acute C1-inhibitors such as Berinert and Ruconest. Injection site reactions such as a burning pain and redness also occur in almost all cases with antibradykinin agents such as Firazyr (as a consequence of their mechanism of action), but are uncommon with C1 inhibitors. Berinert CSL Behring CSL s Berinert is the market leader in Europe for the acute treatment of HAE attacks, having been approved since 2008/09 in the EU and US respectively, with sales of around $200m in Berinert's entrenchment in the EU market has created a relatively high barrier to entry in the EU for new acute treatments, as well as lowering the price of the market as a whole. Berinert is delivered intravenously and its EU approval was expanded in 2011 to include selfadministration once a patient has received the appropriate training. Alongside increasing its selfadministration education, CSL Behring is focusing on geographical expansion for Berinert in Asia, Latin America and Russia, and self-administration education. Unlike Firazyr and Ruconest, Berinert must be stored below 25 degrees centigrade. CSL830 Kalbitor DX-2930 CSL Behring is conducting Phase III trials with a sub-cutaneous formulation for Berinert (CSL830) which it believes can be used for both acute and short-term prophylactic use, although has a large dosage range of c.5 to 20ml. CSL Behring expects to submit an application for approval to the FDA in mid-2016, with approval possible in Dyax Dyax s Kalbitor received FDA approval for acute treatment of HAE in 2009, although is not available in the EU. It is an anti-kallikrein that must be refrigerated, and is delivered by three subcutaneous injections. Kalbitor achieved 2014 sales of $68m but we believe these will be flat or declining over the next four years as Firazyr continues to take market share and Ruconest builds its sales. Up to 4% of patients in clinical trials showed an anaphylactic reaction to Kalbitor, leading to a black box warning on the label. This has restricted Kalbitor to administration by a healthcare professional (to monitor for anaphylaxis) and has hampered its growth. Dyax is also developing one of the potentially most interesting treatments in development for HAE, a long-acting sub-cutaneous anti-kallikrein which would have the potential to be administered once or twice monthly - a significant advantage over current therapies. The product, DX-2930 has received a high level of attention recently following positive Phase Ib results (March 2015), sending Dyax s shares up 50%, and was subsequently awarded breakthrough therapy designation by the FDA. The Phase Ib results showed a significantly reduced average number of weekly HAE attacks in patients treated with DX-2930, compared with placebo, whilst also demonstrating safety and tolerability. Breakthrough designation for DX-2930 is a significant step that allows it an expedited review process. If clinical trials are successful it may be approved by the FDA by 2018 at the earliest, and will be a strong competitor to Cinryze and other prophylactic treatments. BioCryst BioCryst has two oral products in development. BCX4161 is currently in Phase II/III trials, and can be taken orally - five capsules, three times a day. We believe this high pill burden may restrain the product commercially, and believe BioCryst's second generation tablet, BCX7353 which is likely to be a oncedaily pill, is a potentially larger product. It is due to go into clinical studies in mid Page 13

14 Figure 10: HAE treatments Product Company Partner MoA Administration Route Phase Berinert (Intravenous) CSL Behring N/A C1 Inhibitor Cinryze Shire N/A C1 Inhibitor Firazyr Shire N/A Kalbitor Ruconest Dyax Corp (DYAX) Pharming taiba; Novellus; Lee's Pharmaceutical Valeant, SOBI, MegaPharm, Hyupjin, Transmedic, CytoBioteck S.A.S. Anti- Bradykinin Anti-Kallikrein C1 Inhibitor HC Professional - On attack Self - every 3-4 days Approval Date Comment IV Approved Oct-09 ODE expires October 2016 IV Approved Oct-08 ODE expires October 2015 Self - On attack Sub-cut Approved Aug-11 HC Professional - On attack EU - HC Professional/US - Self - On attack Sub-cut x 3 Approved Nov-09 IV Approved Jul-14 Currently largest product on the market. ODE expires Aug 2018 Black box anaphylaxis warning. Not approved in EU. Potential Japanese approval delayed Is the only recombinant product available. Not approved for prophylactic use. ODE expires 2021 Berinert (Subcutaneous) CSL Behring N/A C1 Inhibitor Self 2x weekly Sub-cut III N/A Ph III data expected mid BCX4161 BioCryst Pharmaceuticals, Inc. (BCRX) N/A Anti-Kallikrein Self Oral (3 x 5 capsules) II/III 2018 Potentially large product as given orally, but 15 capsules a day may prove commercially difficult. Ruconest Pharming Valeant C1 Inhibitor Self/1-2x weekly IV II 2018 Prophylaxis of HAE BCX7353 DX-2930 ISIS-PKKRx BEL-0215 ARC-F12 C1 Esterase Inhibitor C1-INH Cyclomimetic Program BioCryst Pharmaceuticals, Inc. (BCRX) Dyax Corp (DYAX) Isis Pharmaceuticals, Inc. (ISIS) Belrose Pharma Inc. Arrowhead Research Corporation (ARWR) N/A Anti-Kallikrein Self Oral tbd I N/A N/A Anti-Kallikrein Self 1x or 2x monthly Sub-cut I N/A N/A Anti-Kallikrein Self Sub-cut I N/A Enzon (ENZN) C1 Inhibitor HC IV IND N/A N/A Coagulation Factors Preclinical N/A ibio, Inc. (IBIO) N/A C1 Inhibitor Preclinical N/A ProMetic Life Sciences Inc. (PLI:CN) Ra Pharmaceuticals, Inc. N/A C1 Inhibitor Preclinical N/A Merck (MRK) Anti-Kallikrein Preclinical N/A Second generation with better selectivity and bioavailability. Once daily pill to go into clinical studies mid-2015 Half-life of ~20 days allows 1x or 2x monthly sub cutaneous administration - obvious advantages but early-stage. Phase II expected to start in 2015 Phase I top-line data released Feb-15 Long-acting C-1 inhibitor. Phase I trials expected to commence 2H15 Source: BioMedTracker Page 14

15 Recombinant versus plasma products The primary risk of using blood-derived products is that they may contain infectious agents such as viruses and Creutzfeldt-Jakob disease (CJD), the human form of mad cow disease. CJD is a neurological illness that causes brain damage, although the risk of transmission is small. Ruconest does not carry the risk of transmission of plasma-related human infectious agents as it is isolated from the milk of transgenic rabbits. Conversely it cannot be used in patients with rabbit allergies, but this is very rare. We believe this gives Ruconest a significant advantage over other products for HAE, both on the market and in development. In clinical practice there is a general preference for using Recombinant over blood-derived products. Ruconest commercialisation Ruconest is marketed by various marketing partners and distributors (see Figure 12 below for overview). Ruconest has had a steady launch in Europe since approval in late 2010, and this has been accelerated by launching in the US in late FY14 revenue from sales of Ruconest increased to 3m, versus 0.9m in 2013 (which included initial sales orders in the US of around 0.3m after launch in November 2014). Pharming also recorded 1H15 revenues of 1.1m from sales of Ruconest in Europe and 3.0m in the US. Figure 11 shows our summary forecast of revenues to Pharming through Ruconest sales and royalties. Figure 11: Ruconest revenue to Pharming Ruconest 2014A 2015E 2016E 2017E 2018E 2019E 2020E Acute sales ($m) Prophylaxis sales Total Royalties (%) 30% 30% 30% 30% 30% 33% 36% Royalty income ($m) Royalty income ( m) US Source: Company data, Stifel estimates Ruconest commercial rights in the US were originally licensed to Santarus as part of a $50m deal in In January 2014, Salix acquired Santarus, retaining the rights to Ruconest whilst the product was under FDA review. Following FDA approval in July 2014, Ruconest was launched by partner Salix in the US in November 2014, triggering a $20m milestone payment to Pharming. Salix was then acquired by Valeant in April Pharming recorded revenues of 0.3m from sales of Ruconest in the US in FY14, which increased to 3.0m in 1H15. Under the terms of its licensing deal, Valeant pays Pharming a tiered supply price (30-40%) based on a percentage of net sales of Ruconest. It will also pay Pharming $45m in sales-related milestones, the details of which have not been disclosed. Figure 12: Santarus/Salix/Valeant milestone payments Amount Condition Date paid $15m Upfront Sep-10 $10m Completion of Phase III trial Nov-12 $5m FDA acceptance of BLA Jun-13 $20m First sale in US Nov-14 $45m Contingent sales-related milestones TBC Source: Pharming Valeant is engaged in regulatory discussions regarding the development path of Ruconest for prophylaxis in HAE, and is funding 50% of the costs. Pharming executes the clinical development programme. As part of the process of the acquisition, Salix and Valeant are also in discussions over whether to develop Ruconest for Acute Pancreatitis, as per the original licensing agreement Pharming signed with Santarus. Page 15

16 Since Ruconest has been launched through the full service patient support platform 'Ruconest Solutions' in the US (RucoVitae in Europe), sales have been reasonably accurate to track. We believe the IMS Health data below fairly represents the launch to date of Ruconest in the US. As of June 2015, Ruconest is selling at a run rate of almost $40m a year and we believe our FY15E forecast of $37m looks very achievable at this stage of the launch. Figure 13: Ruconest sales in the US since launch $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $ Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Source: IMS Health Pharming s original submission to the FDA was refused in February 2011 because the FDA wanted the results from an additional ongoing Phase III study (C1-1310). The eventual acceptance of the submission in June 2013, meant the FDA had access to a wider data set not included for EU regulatory submission. Pharming is in discussion with the EU regulators to expand the EU label to accommodate for this additional data and allow Ruconest to be used for adolescents and be administered by the patient after training (as in the US). Europe Ruconest is distributed in Europe by marketing partner Swedish Orphan Biovitrum (SOBI). Pharming provides Ruconest to SOBI at a fixed transfer price that includes a sales-related tiered royalty component. Pharming s improved balance sheet over the last two years enabled it to regain the rights to market and sell Ruconest directly in Austria, Germany and the Netherlands, which it announced in October To aid this effort, the company hired a small team of HAE commercialisation and medical affairs experts in these countries. During 1Q15, the team developed RucoVitae, a full service support programme for the treatment of acute attacks of HAE with Ruconest for patients in those areas. Directly commercialising Ruconest in Austria, Germany and the Netherlands should enable Pharming to immediately grow profits in Europe, which are currently negligible through the SOBI partnership. Once profitable sales in these territories have been established, Pharming may look to directly commercialise Ruconest in other European countries. Page 16

17 Figure 14: Ruconest commercial partners Austria, Germany, Netherlands Turkey China Canada, US, Mexico Republic of Korea Colombia, Venezuela Albania, Algeria, Andorra, Bahrain, Belgium, Bosnia Herzegovina, Bulgaria, Greece, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Hungary, Iceland, Iran, Iraq, Ireland, Italy, Jordan, Kosovo, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Malta, Macedonia, Morocco, Montenegro, Moldavia, Norway, Oman, Poland, Portugal, Qatar, Romania, Saudi Arabia, Slovakia, Syria, Spain, Sweden, Switzerland, Tunisia, United Arab Emirates, United Kingdom and Yemen. Israel Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand Source: Pharming Other territories and collaborations Figure 15: Pharming commercial partners Distributor Territory Details Hyupjin Transmedic Shanghai Institute of Pharmaceutical Industry (SIPI) MegaPharm Eczacibasi Ilac Pazarlama AS Cytobioteck South Korea Singapore China Israel Deal signed in Seoul-based Korean specialty pharma company Hyupjin is responsible for regulatory approval and Pharming will supply Ruconest to the company at a fixed price Deal signed in Private company Transmedic responsible for commercialisation of Ruconest in parts of South-East Asia including Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand Collaboration signed in 2013 giving SIPI development and commercialisation rights for Ruconest in China. The manufacturing process for Ruconest is also being duplicated at SIPI so it can manufacture Ruconest supplies for China, but may also supply Pharming in the future. SIPI pays 4% royalty to Pharming on sales of Ruconest in China (see below for more detail) Deal signed in January 2014; Ruconest launched in Israel 2H14. Private company MegaPharm purchases its commercial supply of Ruconest from Pharming at a supply price based on a percentage of net sales Turkey Expecting regulatory approval in Turkey during 2015 Colombia & Venezuela Deal signed in May Privately-owned Cytobioteck is responsible for gaining regulatory approval, and Pharming will supply Ruconest to the company at a fixed price Collaboration with the Shanghai Institute of Pharmaceutical Industry (SIPI) Source: Pharming Pharming signed a strategic collaboration with the Shanghai Institute of Pharmaceutical Industry (SIPI) in 2013, giving SIPI commercialisation rights to Ruconest in China and its territories. The deal involved transferring Pharming's technology platform, quality assurance and quality control (QA/QC) processes, and production system to the SIPI Shanghai facilities, allowing SIPI to manufacture its own supply of Ruconest and to obtain a clinical trial permit for China. Pharming has retained Ruconest commercialisation rights ex-china, and SIPI will supply Pharming at a cost-plus basis. SIPI will also pay Pharming 4% royalties on Ruconest sales in China. Future projects Factor VIII The other aim of transferring the technology platform to Shanghai is to develop new compounds from this facility in the future. On any joint project the companies choose to collaborate on, SIPI will be responsible for funding the pre-clinical and manufacturing development, whilst Pharming will be responsible for obtaining regulatory clearance from the EMA and US authorities. Both companies will then undertake their own clinical development pathway. SIPI will have commercialisation rights for China, and will supply Pharming on a 'cost-plus' basis, and both companies will pay each other Page 17

18 reciprocal royalties of 4% of net sales in their respective territories. The first such product to be jointly developed is recombinant human Factor VIII for the treatment of Haemophilia A, a hereditary X- chromosome linked disorder leading to damaging or fatal bleeding episodes (see Other Products section). Clinigen Global Access Programme Pharming and UK-based Clinigen group (CLIN.L, BUY) have entered into an international global access collaboration with HAEi, the international patient organisation for C1-Inhibitor Deficiencies, effective from July The aim of the HAEi GAP programme is to provide access to Ruconest to eligible HAE patients where it is not commercially available and where marketing approval may be pending. Although the partnership is only likely to generate low sales from smaller markets, it is an important strategic step that aligns Ruconest with a patient-driven organisation for HAE. Ruconest supply In contrast to its competitors, which rely on a finite source of blood plasma from plasma donors, Pharming has a virtually unrestricted supply of Ruconest. A summary of the process is shown in Figure 16. Following the launch of Ruconest in the US, Pharming has invested in the purification of sufficient quantities from the existing bulk inventory buffers to ensure demand is met. The company is also working on optimising the manufacturing and distribution of Ruconest, to eventually operate at a COGS below 10% of the US selling price. Figure 16: Ruconest manufacturing process Pharming s facility in the Netherlands Pharming has a current capacity of around 200 breeding rabbits and 200 production rabbits with a life span of around two years. Sanofi s facility in the south of France Frozen milk is transferred to the South of France where Sanofi continues the manufacturing process Merck & Bioconnection fill & finish factory in the Netherlands Skimmed active drug is purified in Netherlands and packaged in vials containing c.0.4g of Ruconest Rabbits are continuously milked Milk is skimmed and frozen The active drug is skimmed from thawed milk Purification step takes place with Merck in Bioconnection fill and finish factory. Can be stored for three years Can be stored for three years Can be stored for four years Stored in Pharming's storage facilities in the Netherlands Source: Pharming / Stifel Breeding rabbits is relatively simple and they are then cheap to house and maintain. Rabbits selected for the production herd will be precisely characterised to ensure the end product is pure. One rabbit can produce 200ml of milk over one day. This is skimmed down to 12ml containing c.2.4g of active recombinant protein. Around 50% is lost in the final purification process, resulting in a total of 1.2g of product; equivalent to almost three vials of Ruconest. A typical treatment for an acute attack of HAE uses two vials of Ruconest, meaning one rabbit is capable of producing c.1.5 treatments per day. Page 18

19 Clinical trials Clinical trials from companies developing treatments for acute HAE have varying endpoints and thus quantitative comparison between each treatment in terms of time to onset of action is difficult. Anecdotally, C1 inhibitors have a faster onset of action than other acute treatments (such as Firazyr which is only targeted at bradykinin), but this has not been directly validated in clinical studies to date. Three pivotal trials Pharming conducted two controlled trials (C & C1-1304) to gain approval in the EU and subsequently an additional larger study (C1-1310) for US approval. All three were randomised, salinecontrolled double-blind studies to evaluate the efficacy and safety of Ruconest in the treatment of acute angioedema attacks in patients with HAE. The first two studies included fewer patients than originally expected because they were stopped after a predefined interim analysis showed they had already met their primary and secondary endpoint. Figure 17: Clinical trial details Name C RCT C RCT C RCT Details Conducted in 26 US and 4 Canadian centres. Patients were randomised equally (1:1:1) to receive 100 or 50 U/kg Ruconest or saline intravenously Conducted in 11 centres in Italy, Spain, Romania, the UK and Israel. Patients were randomised equally (1:1) to receive 100 U/kg Ruconest or saline intravenously Conducted in 10 countries (United States, South Africa, Italy, Israel, Romania, Poland, Hungary, Bulgaria, Macedonia, and Serbia). Patients randomized 3:2 to receive Ruconest 50 U/kg or saline intravenously Source: Pharming Clinical evaluation Efficacy was assessed using a patient-reported outcome - visual analogue scale (VAS). Patients were asked to mark the overall severity of angioedema symptoms on a continuous scale from 0mm (no symptoms) to 100mm (extremely disabling). Assessments were taken on pre-scheduled time points after drug administration: baseline, 15 minutes, 30 minutes, 1 hour, 2 hours, 4 hours, 8 hours, 12 hours, 16 hours and 48 hours. Efficacy in the third, larger study was assessed using both VAS and a Treatment Effect Questionnaire (TEQ) at the request of the regulatory authorities. Primary & secondary endpoints: The primary efficacy endpoint was the time to the beginning of relief of symptoms the interval during which the visual analogue score (VAS) location had decreased by more than or equal to 20mm compared with baseline for two consecutive recordings. The secondary endpoint was the time to minimal symptoms the interval during which the VAS score decreased to <20mm for all anatomical locations of the attack. A change of 20mm on the VAS scale is considered a significant clinical change. Results: Figure 18: Ruconest controlled clinical trials Study C RCT C RCT C RCT Treatment 100 U/kg n=13 50 U/kg n=12 Saline n= U/kg n=16 Saline n=16 50 U/kg n=44 Saline n=31 Median time to beginning of relief (minutes (95% confidence interval)) 68 (62, 132) p = (72, 136) p < Median time to minimal symptoms (minutes (95% confidence interval)) 245 (125, 270) p = (243, 484) p = < (240, 720) 1101 (970, 1494) 62 (40, 75) p = (243, 723) p = (70, 720) 1440 (720, 2885) 75 (60,105) p= (177, 270) p= (81, 720) 362 (240, -) Source: Ruconest summary of product characteristics and Riedl et al., Ann Allergy Asthma Immunol Feb;112(2): Page 19

20 Mean VAS scores (mm) Pharming Group N.V. Ruconest significantly reduced median time to beginning of relief and median time to minimal symptoms at both 100 and 50 U/kg concentrations compared to saline across all three studies (see Figure 16, 17 & 18). It was also demonstrated to be safe - more treatment-related adverse events (TEAEs) occurred in the saline group (33 TEAEs in 14 patients) than the treatment groups (27 TEAEs in 7 patients treated with 100 U/kg and 6 TEAEs in 4 patients of the 50 U/kg group) in studies 1205 and Figure 19: Integrated VAS scores over time from studies 1205 and Time (hours) Treatment: Ruconest (100 IU/kg) Ruconest (50 IU/kg) Placebo Source: Pharming Figure 20: VAS scores over time in study Time (hours) Treatment: Ruconest Placebo Source: Pharming Page 20

21 Ongoing clinical trials Ongoing safety study Pharming recently announced interim data from an ongoing study to investigate the immunogenicity of rabbit related impurities in 26 subjects allergic to cow s milk and/or rabbit dander. Subjects were challenged with increasing doses of Ruconest by skin prick, followed by intra-cutaneous injections, and then sub-cutaneous challenge. None of the subjects has any confirmed clinical and laboratory evidence of hypersensitivity to Ruconest. Prophylactic use In January 2015, Pharming initiated a 30-patient randomised double blind placebo-controlled Phase II clinical trial to investigate Ruconest for the prophylaxis of HAE (having achieved positive results from its exploratory Phase II study, OPERA (see below)). The study is currently recruiting patients at sites in Europe and the US, and is due to complete in early In the US the prophylactic market segment is large, and Shire's Cinryze is the only approved prophylactic treatment (2014A sales of $503m). The study is the first step of a 50/50 shared cost collaboration with US partner Valeant to develop Ruconest for the prophylaxis of HAE. Pharming will receive an undisclosed milestone payment from Valeant at FDA approval for this additional indication, which we expect in late We have assumed the FDA will require a Phase III clinical trial which Pharming may conduct in 2H16, with FDA submission expected in 2H17. Pharming is also entitled to use the data from these trials for regulatory submission elsewhere. We forecast sales of $85m for Ruconest in prophylactic use by Exploratory Phase II study for prophylaxis Phase II OPERA Pharming conducted an open-label exploratory Phase II study of the safety and prophylactic effect of a weekly 50 U/kg Ruconest treatment in patients with hereditary C1 esterase inhibitor deficiency. The 25 HAE patients with a history of frequent attacks received once weekly administrations of 50 U/kg Ruconest for 8 weeks. Patients had reported a median of 60 HAE attacks over the previous two years, averaging at 0.6 attacks per week. This was reduced to an average of 0.25 attacks per week (median of 2 attacks over the 8 week study period) with Ruconest treatment, which suggested Ruconest could be used as a prophylactic treatment for HAE in patients with frequent attacks. Ruconest was also well tolerated and generally safe. Paediatric indication Pharming recently presented interim data (June 2015) from an ongoing open-label Phase II clinical trial assessing safety, immunogenicity and efficacy of Ruconest in 20 children aged 2-13 years with C1 inhibitor protein deficiency. The study, if successful, will expand the current label, but will also afford Pharming an extension to the regulatory exclusivity period in the EU. It currently has regulatory exclusivity in Europe until late 2025, and paediatric exclusivity will add another six months. Phase II trial Eight children were treated for 28 acute HAE attacks, and monitored for time to onset of relief and to minimal symptoms, as assessed by the patient and parent. Median time to beginning of relief was 60 minutes. Using a visual analogue scale, 93% of patients had onset of relief within two hours. No related serious adverse events were recorded, including hypersensitivity reactions. Pharming is also reviewing regulatory options to expand the Ruconest label in the EU to include adolescents on the basis of data in 17 adolescents treated for 52 HAE attacks. This data was included in the submission to the FDA for US approval and as such the US label for Ruconest already includes the treatment of adolescents. Page 21

22 Expanding Indications for Ruconest Acute Pancreatitis Acute Pancreatitis (AP) is an acute inflammatory disorder resulting in systemic activation of various inflammatory cascades, leading to organ failure and death in severely affected patients. There is currently no approved therapy for AP, which is the single most frequent gastrointestinal cause of hospital admissions, with approximately 300,000 hospitalisations a year in the US. Given the anti-inflammatory properties of C1 esterase inhibitor, it has been studied in variety of animal models including pancreatitis, sepsis and thermal injury, and it is plausible that Ruconest would be a suitable agent to decrease the systemic inflammatory response in AP. Santarus began exploring clinical and regulatory strategies for Ruconest in AP as part of its original deal in 2010, involving discussions with the FDA on a pre-ind briefing package for a Phase II clinical study. Going forward, Valeant and Salix are evaluating the next steps in development as part of the prioritisation process of the takeover. If Valeant decides to go ahead with developing Ruconest for Acute Pancreatitis Pharming has two options; 1) Enter into a 50/50 cost collaboration for the clinical development which would allow Pharming to use the data in other markets, as well as undisclosed milestones; or 2) not to participate in a collaboration, but will supply Ruconest to Valeant on the same terms (30% - 40% stepped tiered net of sales). Ischaemia-Reperfusion Injury Ischaemia-Reperfusion Injury (IRI) arises from the lack of oxygen due to an interruption of the blood supply (ischaemia) and subsequent resolution (reperfusion) resulting in tissue damage. This will often happen after an organ transplant, stroke or heart attack. Pharming has had an ongoing collaboration with the US Army Institute of Surgical Research for a number of years to determine the potential of Ruconest in treating IRI in haemorrhagic shock, a condition experienced in civilian and military traumatic injuries. Positive findings in a porcine model were published in Shock in 2012 which showed Ruconest significantly reduced tissue damage after haemorrhage. Pharming continues to supply the US army with Ruconest for its investigations into the drug as a therapeutic agent for injured soldiers. Page 22

23 Other products Human Recombinant Factor VIII (FVIII) In its first collaboration with SIPI, Pharming is developing a recombinant human FVIII as a replacement therapy for Haemophilia A, an X chromosome-linked recessive hereditary disorder caused by defects in the Factor VIII gene responsible for blood clotting. A lower level of functional Factor VIII prevents the blood s clotting ability, leading to damaging or fatal bleeding episodes. According to Pharming, the global Factor VIII market is worth over $4bn, with 90% of the sales in the developed markets and high unmet medical needs in the developing markets such as China. Additionally, Pharming estimates only 50% of the global Haemophilia A market can currently be supplied with appropriate Factor VIII therapy, hence there is a large unmet medical need, and the market is estimated to grow to $6.5bn by With its recently expanded rabbit founder line from TRM (see below), Pharming now has the technology to manufacture recombinant human Factor VIII, and will look to enter preclinical trials at the end of Enzyme Replacement Therapies from Transgenic Rabbit Models In September 2014, Pharming acquired products from a private French company in liquidation, Transgenic Rabbit Models (TRM SASU) for 0.5m in cash. The acquisition bought with it five potential new product leads in the form of founder rabbits that could lead to alternative enzyme replacement therapies (ERT), as well as the technology and know-how behind these lines. Figure 21 shows the five potential recombinant human proteins that could be produced from TRM s rabbit founder lines. Figure 21: TRM rabbit founder lines Recombinant human protein Factor VIII alpha-glucosidase alpha-galactosidase beta-glucocerebrosidase Factor IX Potential therapy area Haemophilia A Pompe disease Fabry's disease Gaucher's disease Haemophilia B Source: Pharming Following the acquisitions of these assets from TRM, Pharming set up a Paris-based research group to identify new products that the company could develop and commercialise. These ERT programmes will be overseen by recently appointed Chief Scientific Officer Dr Perry Calias, based in Boston with Pharming's New Product Development group (NPD), which was set up at the beginning of Pharming s NPD will develop these programmes either in-house, or through strategic collaboration with SIPI for products of joint interest such as Factor VIII for Haemophilia A. In the future these should be able to broaden Pharming's pipeline beyond Ruconest. Page 23

24 Forecasts Our forecasts for Pharming include the periods from 2014A to 2020E. We have assumed sales of Ruconest in both acute and prophylactic treatment of hereditary angioedema. This is based on the assumption that Ruconest will be approved for prophylactic use in 2018; clinical trials in this indication are ongoing. Figure 22: Pharming income statement ( m) Year to 31 December 2014A 2015E 2016E 2017E 2018E 2019E 2020E Licence fees Milestones Product sales and royalties Total sales %ch -98% -29% 97% 56% 34% 42% 37% COGS % 16.5% 36.6% 32.0% 29.0% 28.0% 27.0% 26.0% COGS (3.5) (5.5) (9.5) (13.3) (17.3) (23.6) (31.1) Gross profit SG&A (3.3) (5.0) (5.5) (6.1) (6.7) (7.3) (8.1) R&D (11.7) (13.5) (14.9) (16.3) (18.0) (19.8) (21.7) Other Operating profit Operating margins 13.2% -59.8% -0.8% 22.4% 32.0% 42.1% 49.1% Net interest (8.6) 2.1 (1.1) (1.1) (1.1) (1.1) (1.1) Exceptionals PBT (5.8) (6.9) (1.3) Tax rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Taxation Profit after tax (5.8) (6.9) (1.3) Ratios Adjusted pre-tax profit GP 83.5% 63.4% 68.0% 71.0% 72.0% 73.0% 74.0% SG&A 15.6% 33.3% 18.6% 13.1% 10.8% 8.4% 6.7% R&D 55.2% 89.9% 50.2% 35.5% 29.2% 22.6% 18.2% Operating profit 13.2% -59.8% -0.8% 22.4% 32.0% 42.1% 49.1% Shares EPS (cents) Adj. EPS (pre-amortisation) DPS (cents) Source: Company data, Stifel estimates Page 24

25 Figure 23: Balance sheet ( m) Year to 31 December 2014A 2015E 2016E 2017E 2018E 2019E 2020E Intangible assets Tangible assets Deferred tax assets Restricted cash Fixed assets Inventories Debtors Cash Current assets Creditors-< 1 year (14.9) (13.2) (9) (11) (13) (15) (18) of which borrowings (0.6) (0.2) (0.2) (0.2) (0.1) (0.1) (0.1) Creditors- >1 year (11.0) (23.0) (23.0) (23.0) (23.0) (23.0) (23.0) of which borrowings (1.0) (15.6) (15.6) (15.6) (15.6) (15.6) (15.6) Provisions 0.0 (0.8) (1.7) (2.8) (3.9) (5.0) (6.1) Net assets Capital and reserves Share capital Share premium Other reserves Profit & loss account (256.5) (263.4) (264.7) (255.5) (236.9) (201.1) (143.4) Shareholders funds Source: Company data, Stifel estimates Figure 24: Cash flow statement ( m) Year to 31 December 2014A 2015E 2016E 2017E 2018E 2019E 2020E Operating income 2.8 (9.0) (0.2) add: depreciation add: amortisation Provisions for liabilities & charges less: increase in w.capital (1.4) (5.6) (6.2) (1.8) (1.9) (2.5) (2.9) Tax paid Capex/intangibles Interest (net) Free cash flow 1.6 (14.6) (6.4) Other (0.2) Acquisitions Dividends Financing Cash flow 22.5 (14.6) (6.4) Net cash/debt Source: Company data, Stifel estimates Page 25

26 Important Disclosures and Certifications We, Olivia Manser and Max Herrmann, certify that our respective views expressed in this research report accurately reflect our respective personal views about the subject securities or issuers; and we, Olivia Manser and Max Herrmann, certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Our European Policy for Managing Research Conflicts of Interest is available at Rating and Price Target History for: Pharming Group N.V. (PHARM/NA) as of Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Rating Key B - Buy UR - Under Review H - Hold NR - No Rating S - Sell NA - Not Applicable I - Initiation SU - Rating Suspended D - Discontinued Created by BlueMatrix For a price chart with our ratings and any applicable target price changes for PHARM.NA go to Stifel or an affiliate is a corporate broker and/or advisor to Pharming Group N.V.. Pharming Group N.V. is provided with investment banking services by Stifel or was provided with investment banking services by Stifel or an affiliate within the past 12 months. Pharming Group N.V. is a client of Stifel or an affiliate or was a client of Stifel or an affiliate within the past 12 months. Stifel or an affiliate expects to receive or intends to seek compensation for investment banking services from Pharming Group N.V. in the next 3 months. Stifel or an affiliate has received compensation for investment banking services from Pharming Group N.V. in the past 12 months. The equity research analyst(s) responsible for the preparation of this report receive(s) compensation based on various factors, including Stifel s overall revenue, which includes investment banking revenue. Our investment rating system is three tiered, defined as follows: BUY -We expect a total return of greater than 10% over the next 12 months with total return equal to the percentage price change plus dividend yield. HOLD -We expect a total return between -5% and 10% over the next 12 months with total return equal to the percentage price change plus dividend yield. SELL -We expect a total return below -5% over the next 12 months with total return equal to the percentage price change plus dividend yield. Occasionally, we use the ancillary rating of SUSPENDED (SU) to indicate a long-term suspension in rating and/or target price, and/or coverage due to applicable regulations or Stifel policies. SUSPENDED indicates the analyst is unable to determine a reasonable basis for rating/target price or estimates due to lack of publicly available information or the inability to quantify the publicly available information provided by the company and it is unknown when the outlook will be clarified. SUSPENDED may also be used when an analyst has left the firm. Of the securities we rate, 53% are rated Buy, 44% are rated Hold, 2% are rated Sell and 1% are rated Suspended. Within the last 12 months, Stifel or an affiliate has provided investment banking services for 20%, 8%, 0% and 6%of the companies whose shares are rated Buy, Hold, Sell and Suspended, respectively. Page 26

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