Today’s first-quarter report from Circassia makes much of the UK company’s “transformation” from an R&D-based to a commercial entity that now boasts two approved chronic obstructive pulmonary disease drugs, Tudorza Pressair and Duaklir.
The most important part, however, is that Circassia has taken on a five-year loan with its partner Astrazeneca, thus averting the threat of a cash crunch that had hung over it since Duaklir secured a US green light on April 1. How easy Circassia will find this loan to service, and how such heavy indebtedness will affect it, are new questions for investors to ponder.
Circassia’s theoretical cash crunch had stemmed from the fact that the terms of the group’s licensing deal with Astra covering Duaklir called for an immediate $100m milestone on US approval. Another $20m was tacked on to this with the December exercise of an option to take on full US rights to Tudorza.
Crucially, this $120m was money that Circassia, which ended 2018 with £40.7m ($53.2m) in the bank, did not have (Circassia finds a second way to put investors’ money under threat, March 19, 2019). The group had argued that it had agreed in principle a loan with Astra should it have been unable to raise the necessary funds in equity, but until such a loan was in place the issue was a major overhang.
Worst case averted
At least investors now know that the nuclear scenario has been avoided, and the loan, presumed to be at least for $143.3m, gives Circassia five years’ breathing space.
However, Circassia has not revealed the loan’s interest rate, covenants or potential immediate repayment triggers. Without knowing such vital details it is impossible to gauge Circassia's ability to pay the loan’s interest and principal amounts, and thus make out the group’s investment case.
Moreover, Circassia being a loss-making entity, the point at which the company can service the loan using internal cash flows remains a distant prospect.
|Circassia: the state of play|
|Estimated total loan amount ($m)||143.3|
|Balance of Astra R&D payment ($m)||18.3|
|Tudorza up-front ($m)||5.0|
|Tudorza option ($m)||20.0|
|Duaklir approval milestone ($m)||100.0|
|Total loan amount (£m)||110.0|
|Circassia's pro forma gross cash (£m)||35.0*|
|Circassia's market cap (£m)||120.0|
|Circassia's enterprise value (£m)||195.0|
|*Estimate based on £40.7m cash at end 2018. Source: financial reports.|
One illustration of Circassia’s dire straits is that the group last year spent £55m in sales and marketing to generate revenues of just £48m, including a disappointing performance from Tudorza. It is not clear how much Circassia needs to sell before it might become profitable, especially as Tudorza prescriptions are falling.
The prospects for the LAMA/LABA combo Duaklir, an asset that, like Tudorza, Astra had effectively given up on, do not seem much better. EvaluatePharma sellside consensus data show Circassia recording $82m of Duaklir revenue in 2024.
The problem is severalfold: the respiratory market is being genericised in Europe, while in the US Glaxosmithkline has been successful in getting patients onto Trelegy Ellipta, its triple combination, for instance. Two other dual COPD combos, Astra’s Pearl Therapeutics-derived Bevespi Aerosphere and Sumitomo Dainippon’s Ultibron Neohaler, have had disappointing US launches – and that was in spite of being promoted by full primary care sales forces.
In contrast, Circassia hopes to penetrate the US market with a mere 200 reps, a strategy that Stifel analysts witheringly call a “speciality pharma approach to promoting primary care products in a highly competitive market”.
In the meantime, Circassia is now heavily geared, and carries debt nearly equivalent to the size of its market cap. Investors must realise that its $143m can has merely been kicked down the road.