- Initially, we accumulated LJPC between $2.30 and $2.50 in November of 2019. The buying opportunity came after LJPC announced the discontinuation of its research and development program and the departure of its CEO.
- In the press release board, chairman and LJPC’s largest shareholder Kevin Tang (“Tang”) explained that LJPC would focus its resources on growing the sales revenue of Giapreza (angiotensin-2) which was approved in December of 2017 for the treatment of catecholamine resistant shock. To this end, LJPC cut its overhead and payroll expenses significantly and instead invested in building a team of critical care specialists strategically located across the country.
- Three central parts of our investment thesis at the time were: A) Giapreza is a differentiated vasopressor with growing popularity among heart surgeons and ICU specialists. B) The company was trading a discount from a fair value (LJPC’s market cap<$80M at $2.50/share) and C) Tang’s interest was aligned with ours as evident by aggressive buying on the open market and his ownership of 35-40% (~9-10M shares out of 27M shares outstanding).
- LJPC proceeded to run from a low of $2.30 on 11/26/19 to a high of $9.38 on 2/12/20 (308% gain) fueled by improving Giapreza sales revenue and insider buying by Tang. The mistake on our part was not cashing out completely and moving onto a new core position.
- We maintained that further upside would be driven by Giapreza sales growth; then the pandemic hit and LJPC sold-off with the rest of the market reaching a low of $3.36 on 3/16/20.
- As press releases began to flow that Giapreza was being used for named patient use for septic shock in patients with COVID-19 interest in LJPC was reignited and the stock recovered hitting a high of $8.10 on 5/7/20.
- At the time (April-May 2020), we anticipated that LJPC would receive a priority review vouch (PRV) upon FDA approval of LJPC-0118 (artesunate) for severe malaria. PRVs are redeemable by the FDA for an expedited review schedule of a new drug application (NDA). PRVs are further transferrable meaning LJPC could have sold it for between ~$80-120M+.
- Unexpectedly on 5/26/20, the FDA approved Artesunate injection for the treatment of Severe Malaria for Amivas LLC, a small private biotech company that was virtually unknown until the news dropped. Consequently, LJPC was no longer eligible to receive the PRV.
- We discovered Amivas to be a joint-venture between Australia, the U.S, and Canada created in 2016 for 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).
- At this juncture, we decided to hold our positions due to our bullish outlook on Giapreza sales growth. We extrapolated from the fact that Giapreza was requested for named patient use at several hospitals/medical institutions across Europe and the U.K. that second quarter U.S sales revenue would benefit.
- Additionally, we speculated that Tang had plans to sell the company based on fact that he left it without a CEO since November, cut the R&D programs, liquidated all lab equipment, and had neither launched Giapreza solo nor partnered in Europe despite Giapreza being approved in the EU since August of 2019 (partnerships make a company less attractive for acquisition).
- Unexpectedly, Tang submitted an offer to acquire Tetraphase Pharmaceuticals (Nasdaq: TTPH) for $22.3M plus $12M in CRV. At the time TTPH was preparing for a merger with AcelRx (Nasdaq: ACRX) via an all-stock-transaction. Soon thereafter Melinta Therapeutics entered the scene with its own offer for $39M upfront and $16M in CRV.
- In the end, Tang won the bidding war and officially acquired TTPH on 7/28/20 for $43M cash plus $16M in CRV. Moreover, Larry Edwards (CEO from TTPH) was appointed as the CEO of LJPC. We are a little critical of this decision due to the fact that TTPH was floundering under his leadership.
- The market did not respond positively to these developments. From May 26th to Sept 1st LJPC’s share price declined from $6.83 to $4.24 (-38%). It didn’t help that 2Q20 earnings reported on 8/6/20 showed muted sales growth for Giaperza
- Evidently, the decrease in elective surgeries and open heart surgeries due to the pandemic stifled Giapreza’s market penetration momentum. This was not sufficiently offset (if at all) by use in treating critically ill COVID-19 patients.
- Net sales revenue during 2Q20 came in at $5.8M compared to $5.7M in 2Q19 (+2% YoY) but down from $7.3M in the previous quarter (-20% QoQ). Nonetheless, Tang has continued to show his support for the company by purchasing stock on the open market.
- Between June and September 2020, he purchased 893.4K shares as with buys as low as $3.82 and as high as $4.94 (and even $6.80 in January). In total this year Tang has bought ~$4M shares (14% of the shares outstanding). His total stake is likely to close to 40-50%.
- So what now?
- With the acquisition of TTPH in July LJPC added a second commercial asset to its product portfolio, Xerava (eravacycline). Xerava was approved by the FDA on 8/27/2018 for treating complicated intra-abdominal infections (cIAI).
- cIAI is the second most prevalent infection site in the ICU and the leading cause of infection-related mortality. The clinical rationale for developing Xerava is similar to that of Giapreza; both drugs were developed for scenarios where patients don’t respond to first-line treatments.
- In general, antibiotic development has faced headwinds in recent years due to a lack of financial incentive. In an effort to avoid bacterial resistance, many are used sparingly which translates to inconsistent revenues.
- A bill proposed in 2018 called the DISARM Act could change and if signed into law would benefit Xerava and thus LJPC. With the election of Joe Biden as the 46th President of the United States and the national attention on the issue of preparedness for pandemics, this bill may become revived.
- Additionally, President Obama established the President’s Council of Advisors on Science and Technology (PCAST) in 2014 which was tasked with combatting antibiotic resistance. As the Vice President during that time Biden is definitely aware of the issue and council.
- Since 2019 Xerava has generated ~$7M in revenue. During 1Q20 Xerava brought it $1.76M in sales revenue
- We estimate that the current earning power of Giapreza and Xerava is between $5-8M and $1.5-2M per quarter, respectively. This would translate to between $26M and $36M in full-year 2020 revenue.
- Over the past year, net loss and EPS have improved markedly. For the three months and six months ending 6/30/20, LJPC had a net loss of $15.6M and $24.2M, or ($0.57) and ($0.89) per share, respectively, compared to $30.4M and $62.1M, or ($1.12 ) and ($2.29)) per share in the same period in 2019.
- In 2Q20 total operating expenses were $18.3M (not including the $44M used to purchase TTPH). We estimate that as of 9/30/20 LJPC had a cash position of ~$15-25M and similar operational expenses moving.
- Total operating expenses following the TTPH acquisition appear unchanged per the third quarter, 2020 financial report released 11/9/20. Furthermore, net product sales during this period (July 1st-Sept 31st) was $9.0M (~$7M gia and ~$2M Xerava is our guess) and LJPC finished with over $27M in cash and cash equivalents. The net loss for the quarter came down ~25% to ($0.43/share ) compared to ($0.57/share) in 2Q20 beating analysts expectations.
- In short, the three pillars of our original investment thesis remain intact at LJPC’s current market cap of $111M. Those being; A) Giapreza is a differentiated vasopressor with growing popularity among heart surgeons and ICU specialists. B) The company was trading a discount from a fair value and C) Tang’s interest was aligned with ours as evident by aggressive buying on the open market and his ownership of 35-40% (~9-10M shares out of 27M shares outstanding).
- In light of 3Q20 earnings reported today 11/9/20 we feel that LJPC is a strong buy under $4 and have a 6-month price target of $6-8
I have no position in LJPC. I may or may not go long again on LJPC in the next 72-hours.
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