5/27/20 was the worst day for our team since March 13th when almost every stock on the market was halted due to volatility. Our two largest positions, La Jolla Pharmaceuticals (Nasdaq: LJPC) and BioCryst Pharmaceuticals (Nasdaq: BCRX) waded in a sea of red, especially LJPC which closed down 26% at $5.03. In the rest of this article I will discuss the events that triggered the declines and share our analysis of the situation.
The sell-off was triggered by news that the FDA had approved Artesunate injection for the treatment of Severe Malaria for Amivas LLC, a small private biotech company that was virtually unknown until yesterday. As many of you know, in November 2019 LJPC submitted a New Drug Application (NDA) to the FDA for its own treatment for Severe Malaria (LJPC-0118) in which Artesunate is the active pharmaceutical ingredient. The FDA had awarded LJPC both Orphan Drug Designation and Breakthrough Therapy Designation based on clinical data showing LJPC-0118 was superior to the standard of care. Considering that peak sales for Artesunate would have been around $45M, sales revenue was not what had investors excited. Rather, if LJPC had been awarded approval over Amivas they would have likely received a transferrable ‘Priority Review Voucher (PRV)’ worth upwards of $100M. So, who is Amivas and why can’t both drugs be approved?
Amivas is a joint-venture between Australia, the U.S, and Canada created in 2016 with the purpose of developing, manufacturing, and commercializing treatments for infectious diseases, in particular, Artesunate. And while it’s Amivas that is bringing Artesunate to market the foundational clinical data that lead to its approval was carried out within the US Army Medical Research and Development Command (USAMRDC). A cooperative research and development agreement was struck between USAMRDC and Amivas leading to the modernization, and ultimately FDA approval of Artesunate yesterday. Because Severe Malaria is characterized as a rare disease, and Amivas also had Orphan Drug Designation, upon approval it secured 7-years of marketing exclusivity. Unfortunately for LJPC shareholders that meant LJPC-0118 could not be approved, nor would the company receive a PRV. Hence, the stock sold off 26% today. In our view, the prospect of FDA approval of LJPC-0118 and the receipt of a PRV was ‘icing on the cake’ and did not warrant a 26% reduction in market cap. The true value and the core of our investment thesis for LJPC is its commercial asset Giapreza.
Giapreza’s commercial launch in the U.S in 2018 got off to a rocky start. First year Giapreza sales were extremely disappointing netting under $1M. This is reflected by the stock price deteriorating from $31.09 on 8/7/18 to a low of $2.3 on 11/26/19. However, as I argue in my 1Q20 update on LJPC, the tides have turned for Giapreza as it has gained significant commercial traction with Net Sales increasing +73% year-over-year (YoY) from $4.4M in 1Q19 to $7.6M in 1Q20. Also of note is LJPCs efficient capitalization structure following the elimination of its R&D arm. As of 3/31/20 the company had $77.2M in cash, $0 debt, and 27.3M shares outstanding. Earnings per share (EPS) improved dramatically not only YoY from ($1.17) in 1Q19 to ($.32) in 1Q20, but 191% QoQ from ($.93) in 4Q19. Following the liquidation of LJPC’s lab equipment and the addition of Clinical Specialists to the sales force the company is nearing completion of its transformation into a sleek commercial machine. Net Sales for 2Q20 are estimated to be between $8M and $9.5M. Considering the utility of Giapreza in the COVID-19 treatment paradigm as supported by its expanded access use at several Hospitals across Europe, and the recent revenue trend, we feel these figures are well within reach. Furthermore, with low expenses and rising revenue EPS should continue to increase rapidly making the company profitable within the next 24 months conservatively. Our price target is $10-15+
The decline from BCRX’s opening price of $5.10 to its intraday low of $4.33 was largely driven by a sector-wide sell-off. Healthcare has been hot since hitting its March lows. The XBI for instance gained steadily from $64 on 5/13/20 to an all-time-high of $108.05 on 5/26/20. After hours, however, BCRX announced a $100M public offering of common stock and pre funded warrants priced at $4.50 and $4.49, respectively. Given that the company filed a mixed-shelf registration of up to $500M in stock and warrants on 4/24/20 investors should not be all too surprised. Although, many of us believed that that would happen at a significantly higher share price ($8-12). In the press release the company stated that the funds would be used for:
“General corporate purposes, which may include, but are not limited to, worldwide development, manufacturing, regulatory, pre-launch and commercial activities for the prophylactic berotralstat (BCX7353) program in the United States and European Union; advancement of the worldwide development, manufacturing, regulatory and clinical activities for BCX9930 for complement-mediated diseases; post-approval commitments for RAPIVABTM/ALPIVABTM; and capital expenditures and other general working capital needs”: Source
Notice that quote does not mention plans to use the funds for developing Galidesivir, BCRX’s broad-spectrum antiviral currently in a COVID-19 clinical trial in Brazil. This aligns with statements made by management previously that they do not intend to spend BCRX’s capital resource on Galidesivir. Rather, a contract has been in place since 2013 between BCRX and its government partners (NIAID/BARDA) for up to $43M for the purpose of developing Galidesivir to combat biomedical threats to national security, such as COVID-19. While initially the study in Brazil was intended for Yellow-Fever, the trial design was adapted to incorporate an arm for COVID-19. We anticipate that BCRX will announce additional funding from NIAID/BARDA to fund Galidesivir should it prove effective in humans. BCRX has a track record of doing this sort of thing.
In 2009 the FDA granted BCRX’s antiviral Rapivab emergency use authorization for the treatment of H1N1 (i.e. Swine Flu). Moreover, the company received an additional $77M in government funding to develop Rapivab on top of the $106M already awarded in 2007 for seasonal and pandemic Influenza , bringing the total to $180M. Mind you this was influenza, not COVID-19 the RNA virus that is causing a global recession and is responsible for over 100K deaths in the U.S alone in under 4-months. Considering that Ridgeback Pharmaceutical stood to receive up to $300M for its antiviral, had it lacked significant safety concerns, we feel this is a reasonable figure for BCRX to be awarded. Not to mention the other positives for BCRX including the potential commercial launch of berotralstat for the treatment of HAE in the U.S, Japan, and Europe. Next week the company is presenting new data at berotralstat the EAACI conference. Our price target is $10+
I am/we are long LJPC and BCRX