REDHILL BIOPHARMA

NASDAQ: RDHL

Joseph Krug

THESIS• Crohn’s caused by a bacterium

• RDHL has patent license to use the only known test to detect said bacterium in humans

• RDHL also has RHB-104, a treatment to eradicate this bacterium

• Almost no coverage of this, therefore RDHL is undervalued

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• Israeli biotech firm • Trades on TASE and NASDAQ as ADS • 1 ADS == 10 shares • Small cap - $101.7M • No analyst coverage (at least none public) • Only Institutional owner is GS with .45% stake

in the company

PIPELINE

Importance of RHB-104 Others — Rehashings - 50-50 approval

MANAGEMENT• Dan Suesskind (Board) - Fmr CFO of Teva Pharma — grew

the company through acquisitions from market cap of $37M to $34B

• Dror Ben-Asher (CEO) — Fmr manager at ProSeed Capital, Fulbright at Harvard who studied pharma & markets

• Management good because it’s not mainly doctors, yet has a few doctors on the board.

• E.g. Thomas Borody — Developed 3x therapy for H Pylori

BALANCE SHEET As of December 31

2012 2011 2010 2009

(U.S. dollars in thousands)

(audited)

Balance Sheet Data:

Cash and short term investments 18,365 18,647 9,152 782

Working capital 17,485 18,223 9,161 770

Total assets 20,096 20,186 10,510 891

Total liabilities 1,078 1,399 12,104 21

Accumulated deficit (23,887 ) (15,209 ) (2,569 ) (105 )

Equity 19,018 18,787 (1,594 ) 870

$3M spent on R&D for RHB-104, more than double any other drug

COMPETITORSCoronado Biosciences - Helminths

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• Only direct competitor • Similar market cap (98.1M) • But treatment not effective in other studies • And in studies where it was shown effective, it

wasn’t significantly more effective than current treatments

CROHNS

• 500,000 Americans have Crohn’s

• Main theory: Immune system attacks lining of intestines and causes inflammation. Causes pain, diarrhea, nausea, vomiting, fevers. Can cause ulcers, fistulas, perforations, strictures.

• Discovered by Scottish surgeon Kennedy Dalziel in 1913.

• 1895 H.A. Johne - similar disease in cattle - MAP

• Dalziel: “So similar as to justify a proposition that the diseases may be the same”

• MAP also causes disease in other primates (e.g. baboons)

• Problem.. in Johne’s it’s easy to see MAP with a microscope

• Most mycobacteriums’ cell walls retain acid stains…

• Rodrick Chiodini - microbiologist at Brown cultured live MAP from children with Crohn’s disease

• MAP spheroblast. Implications of shedding cell wall

• Can reform cell wall up to years later, which is how Chiodini cultured it in his lab.

DNA

• New way to culture by detecting presence of MAP DNA. Anywhere from 65% to 100% of crohn’s patients have MAP vs. 4% of those with UC (e.g. probably not an opportunistic infection).

• Due to the fact that 20% of patients w/ crohn’s are misdiagnosed, the actual numbers could be higher.

TRIALS• 1997 London — Rifabutin + clarithromycin — 94% remission rate

• Done 5 more times in U.S. and Australia — similar findings

• Not large studies, no control groups

• Hard to do studies on treatment ideas like this (same w/ H Pylori in the 80s)

• (Many of these antibiotics are generic now & if successful would eliminate the multibillion dollar industry of maintaining Crohn’s with anti-TNF inhibitors.)

• Market cap Crohn’s treatment $1.4 billion 2008, $2.1 billion 2015 estimate

• RDHL first real large phase III trial

RHB-104• Patent protected combo of 3 antibiotics

• Clarithromycin, clofazimine, and rifabutin — only drug to treat cause not symptoms

• Few side effects

• Current drugs don’t work well, e.g. infliximab (Remicade) 28% in remission @ 54 wks.

• Expensive (18-30K)/year vs antibiotics (e.g. RHB-104) <$5000 per year

• Too low dosages ~60% of required — issue of synergies not working out, prior trials didn’t do this

• 52 wks 40% remission (2007 myoconda/giaconda phase 3)

MORE RHB-104• Already has orphan drug status from FDA (easier approval process, R&D tax breaks)

• New trial has appropriate dosages of antibiotics — Phase III set to end March 2015 in US + Israel.

• Phase III will begin mid 2014 for Europe — 52 week study, double blind w/ placebo controls

• No safety issues (already existing drugs)

• Lead investigator — David Graham, MD - fmr Pres. of American College of Gastroenterology

• “I believe that RHB-104 holds the potential to change the current treatment paradigm and offer patients suffering from Crohn's disease a new and safe therapeutic alternative, targeting the potential cause of the disease rather than the symptoms alone.”

MAIN CATALYST

• Feb 3 Migraine PDUFA (not important to thesis)

• March 2015 — Study results

• Great theory — doesn’t always work out in practice

• Estimate: 50-50 odds

DOWNSIDE

• RHB-104 could have bad trial results

• Estimate: stock could drop anywhere from 20-50%

• Probably lower end of this scale, 5 other drugs in pipeline

• Feb 3. Issue (will discuss in conclusions)

CONCLUSIONS• Crohn’s likely caused by MAP

• Drug combo already known to be more effective than current standard of care in Phase III trials before acquisition (likely positive result from FDA)

• Company has only patent for MAP detection in humans

• RDHL undervalued due to revolutionary unorthodox ideas, slowness of medicine, no analyst coverage, superior management compared to most biotech firms (both on the R&D and financial sides), and its relative obscureness in the U.S.

• Recommendation: Buy 2298 shares RDHL now to avoid paying a premium after likely price jump on Feb. 3 if FDA approves RHB-103* Reevaluate around March 2015 (expected results of Phase III RHB-104 trial)

*”The trial met its specified endpoints and FDA's criteria, in all parameters for bioequivalence, between RedHill's RHB-103 oral thin-film, and Merck & Co.'s Maxalt-MLTR, a leading, approved, migraine treatment, based on Rizatriptan, a 5-HT1 receptor agonist drug.”

FAQ

• Why doesn’t everyone get Crohn’s?

• Criteria for causality of a disease by an infection — Koch’s postulates - studies w/ chickens + goats

! ! 1. The microorganism must be found in abundance in all organisms suffering from the disease, but should

not be found in healthy organisms.!! 2.!The microorganism must be isolated from a diseased organism and grown in pure culture ! ! 3.!The cultured microorganism should cause disease when introduced into a healthy organism.! ! 4.!The microorganism must be reisolated from the inoculated, diseased experimental host and identified as

being identical to the original specific causative agent.

ANTIBIOTICS

• Tried before in Crohn’s & didn’t work — why should RDHL’s work then?

• Prior studies used monotherapy, however mycobacteria develop resistance easily and take months or even years to completely get rid of.

• 1992 - Clarithromycin very effective in vitro along with rifabutin. — block protein synthesis

• Most antibiotics don’t work — block cell wall synthesis (MAP = no cell wall)

WHY IMMUNOSUPPRESSANTS WORK

NOD2 & Crohn’s !

NOD2 & Johne’s + MAP

• 6MP and Azathioprine —- mechanisms unknown, kill MAP in vitro

• Immunosuppressants issue (6mp/remicade) & anti-MAP activity

SPREAD OF MAP• Spreads through milk and meat, primarily from cattle.

• May explain why Crohn’s is only seen in milk drinking places (e.g. Europe, U.S., Canada, etc.), but not in India (where milk is usually boiled first) or in Japan

• Japanese farmers/gov’t rewards

• English milk — 25% contains MAP

• USDA claims pasteurization kills all bacteria in milk, so researchers decided to take milk off the shelves and try to culture MAP. Success in ~20% of milk jugs.

• MAP takes 10 min. of pasteurization or boiling temp to kill, US milk 15s/161F.

SOURCES

Thompson DE. "The Role of Mycobacteria in Crohn's Disease." Journal of Medical Microbiology 41(1994):74-94.

Hermon-Taylor, J. "The Causation of Crohn's Disease and Treatment with Antimicrobial Drugs." Italian Journal of Gastroenterology-Hepatology. 1998 Dec;30(6):607-10.

NAID. "Crohn's Disease - Is There a Microbial Etiology? Recommendations for a Research Agenda." Conference was held in the Natcher Conference Center on the NIH campus in Bethesda, Maryland on December 14th, 1998.

Paratuberculosis And Crohn's Disease by Michael Greger, MD