This is big.
Since presenting our initial research on BioCryst Pharmaceuticals (Nasdaq: BCRX) and its embarrassment of riches on 8/4/20, the company has delivered on their promise to patients living with hereditary angioedema (HAE) as well as shareholders. On December 3rd, 2020 the FDA approved Orladeyo (berotralstat) as the first and only once-daily oral therapy to prevent attacks of HAE in patients 12 years and older. The market responded enthusiastically to the news sending the stock price up +75% in two weeks. After a brief pullback elicited by Galidesivir being benched by the National Institute of Health (NIH) in the race to develop effective COVID-19 therapeutics, BCRX has set new 52-week highs, secured $325M in royalty/debt financing, seen its partner Tori Pharmaceuticals win regulatory approval in Japan, received a label extension of Rapivab to patients 6 months and older from 2 years old, and appears to be executing on a robust commercial rollout of Orladeyo.
Our healthcare-focused investing team has not sold any shares of BCRX despite their value rallying over 400% from our sub $2 entry in March 2020. In fact, our positions have doubled on average during this period thanks to steadfast short-sellers. The reason we have not sold is that we see significant untapped and underappreciated value in BCRX’s pipeline and its proprietary structure-guided drug design engine that discovered them.
This article will focus on BCRX’s factor D inhibitor BCX-9930 which is truly a pipeline within a molecule. Factor D is an enzyme that plays a crucial role in the proximal activation of the alternative pathway of complement (APC), an innate part of our body’s immune system that protects us from invading pathogens. Before talking about the paradigm-shifting potential of BCX-9930, it’s essential to understand the role that the APC plays in Paroxysmal Nocturnal Hemoglobinuria (PNH) and how it extends to a host of other rare diseases.
For those that may not know PNH is a potentially life-threatening rare disease affecting men and women of any age group. The prevalence of the disease in the U.S is estimated to be around 5-6K patients. If left untreated the 10-year mortality rate for PNH is 29% with the most common cause of death being blood clots. The only commercial treatments available today are frequent intravenous and/or subcutaneous injections of C5 inhibitors (and soon C3 inhibitors) supplemented by blood transfusions as needed.
Over the past 13 years the PNH market which was valued at $2.7B in 2019 has been dominated by Alexion Pharmaceuticals (Nasdaq: ALXN) and its C5 inhibitor Soliris (approved for PNH in 2007) and now Ultomiris (approved for PNH in Oct. 2020). To get an idea of the type of earning potential exists for a safe and effective complement inhibitor consider ALXN’s 3Q20 earnings report. During 3Q20 Solaris generated $1.6B for the 9-months ending on 9/30/20 ($563M of which was from U.S. sales). Ultomiris which had only been on the market since October had generated $290M ($170M of which was from U.S. sales).
While these C5 inhibitors offer significant therapeutic value for patients who previously had nothing, the next generation small-molecule Factor D, Factor B, and C3 inhibitors will likely become preferred treatments due to superior efficacy as evident by a growing body of research and the mechanics of the complement system.
The Alternative Ptwy of Complement and Its Role in PNH
The complement system plays a central role in mounting an immune response against invading pathogens. It’s activated via three pathways (Classical, Lectin, and Alternative) resulting in a biological cascade leading to the formation of a protein complex on the surface of cells identified as non-self tagging them for destruction. In the APC Factor D plays a critical role in the upstream activation of the complement system. Without it, the cascade cannot unfold. Specifically, Factor D cleaves Factor B which goes on to react with C3 convertase. After a number of subsequent chemical reactions, C3b interacts with C5 convertase at the terminal end of the complement system. The cascade concludes with the formation of the membrane attack complex (MAC) on the surface of cells determined to be non-self.
While this is an advantageous product of human evolution for warding off diseases it also drives a number of rare conditions where mutated host cells are mistaken as foreign invaders. Patients with PNH have mutations in bone marrow cells that result in the production of red blood cells (RBCs) lacking a functional GPI-anchor surface protein.
Under normal circumstances, the GPI-anchor binds regulatory proteins CD55 and CD59 providing a protective shield against the complement system. In PNH, however, activation of the APC triggers the destruction of mutant/PNH RBCs via hemolysis. This process of hemolysis occurs both intravascularly (in the bloodstream) and extravascular hemolysis (outside the bloodstream) with the former being most characteristic of PNH and complement-mediated RBC destruction. When evaluating PNH patients responses to treatment the main data points clinicians look at based on the data we have analyzed are: 1) mean LDH, 2) Δ LDH, 3) Δ RBC clone size, 4) Δ hemoglobulin, and 5) # of transfusions.
Factor D Is Ideal for Complement Mediated Diseases
As Dr. Bill Sheridan has told us on numerous conference calls (most recently at JPM), because cleavage of Factor B by Factor D is the first step in the complement cascade, a requisite for downstream hemolysis, and thus the ideal target for treating complement mediated diseases. Clinical research over the past decade has increasingly reaffirmed this concept that the more precisely and completely the complement system can be inhibited the better the clinical outcomes and quality of life are for patients. To give an idea of where BCX-9930 stands relative to the competition here is a table showing Phase 1/2 data for BCX-9930 and its top peers/competitors [Alexion’s eculizumab a C5 inhibitor (data not shown), Achillion’s ACH-4471 a Factor D inhibitor, Novartis’s LPN023 a Factor B inhibitor,, and Appelis’s APL-2 a C3 inhibitor)]
As we can see in the high-level comparison of Phase 1 data for BCX-9930 and its peers in patients with PNH, BCX-9930 has a competitive efficacy profile. Considering that its safety profile is just as good (if not better than its peers), being the only oral twice daily drug, and the role of Factor D in initiating the APC, we see that these critical data points converge on the same conclusion that a potent and specific oral Factor D inhibitor (such as BCX-9930) is the ideal therapeutic approach to treating PNH. Don’t take our word for it though. A little digging into the R&D and M&A activity over the past two years reaffirms this bull thesis for BCX-9930 for PNH and other rare diseases including Lupus Nephritis, aHUS, IgAN, PMN, ANCA Vasculitis, and Geographic Atrophy (GA) to name a few (Figure 2)
Big Pharma Has Tried For Decades to Develop a Potent and Specific Factor D Inhibitor; Recent M&A Activity Reflects Significant Interest By BP in Rare Diseases
In this 2017 publication titled “Discovery of Highly Potent and Selective Small-Molecule Reversible Factor D Inhibitors Demonstrating Alternative Complement Pathway Inhibition in Vivo,” Novartis (NYSE: NVS) researchers discuss how through structure-based drug design they discovered selective and orally available Factor D inhibitors for further development in PNH. Interestingly, the article references BCX-1470 BioCryst’s first generation Factor-D inhibitor as the only nonselective covalent-irreversible Factor D inhibitor in development at the time . Without digressing too much we want to point out that BCRX did not nail HAE on its first try either with Orladeyo being their second (or possibly third-gen) kallikrein inhibitor.
Despite NVS identifying several potential potent and selective Factor D inhibitors to advance into human studies over 3 three years later it does not have a single one in clinical development. In 2019 it seems NVS decided that while Factor D was an attractive target the company had a better chance of success pursuing a Factor B inhibitor (LNP023). NVS is not the only big pharma player to show significant interest in obtaining a Factor D inhibitor.
Genentech endeavored to develop one (lampalizumab) for complement-mediated diseases. Unfortunately, lampalizumab failed in a Phase 3 study in Geographic Atrophy in Sept. 2019. Achillion Pharmaceuticals (Nasdaq: ACHN) was the first to our knowledge to advance an oral Factor D inhibitor (ACH-4471/5228) into Phase 1/2 trials for PNH. Due to dose limiting toxicities ACHN was never able to get adequate drug exposure levels to pursue monotherapy treatment, but did in combo with ALXN’s Soliris. Merely 3-months after ACHN announced positive Phase 1 data for ACH-5528 in PNH it was acquired by ALXN for $930M. Then late last year on 12/12/20 AZN announced that it would be buying ALXN for $39B giving AZN access to the company’s complement-mediated technology and pipeline.
The take away here is that big-pharma sees immense value in drugs that can potently and specifically inhibit the complement system. BCX-9930 stacks up very well compared its past and present peers making BCRX an attractive takeout target.
The ALXN-BCRX Connection
Alex Denner of Sarissa Capital took a 10%+ position in ALXN, leading to about 5 quarters until the $39B buy out was inked (Bloomberg Terminal evidence). An interesting point many bulls have come across is Denner’s relationship with Biogen, where he currently sits as Director and Chair, Corporate Governance Committee. There is no way to know if these connections will amount to a buy out or not for certain but it definitely implies the possibility.
Orladeyo Launch and Payer Wins
Since gaining FDA approval on December 3rd, Biocryst has been hard at work solidifying the success of Orladeyo’s launch. While the street appears to be under the impression that patients will be unlikely to make the switch from needle options to a pill format, the data strongly suggests that this assumption is wrong. Many pessimists are basing this assumption on outdated data which has been addressed and updated with 48 week data as shown in our previous research. Takeda would like us to believe that 80-90% of patients on Takhzyro are attack free, but the data suggests otherwise. BCRX market research shows patients on TAK have an avg of 1.8 attacks a month as per January’s corporate presentation, slide 15. Adding fuel to some investors’ optimism, it was revealed that competitors such as Haegarda are shelling out marketing dollars to direct traffic from Orladeyo searches to their platforms.
Supporting evidence of patients switching from existing needle options to BioCryst’s pill option has come from insurance companies who are increasingly adding Orladeyo to their formularies as seen here, here and numerous other places. From patient discussions and posts regarding Orladeyo, Liisa Bayko’s survey and due diligence appears sound. This survey concluded “physicians are excited about Orladeyo because it is oral and plan to adopt it in over one third of their patients next year.” BioCryst’s reaffirmed these statistics in their January corporate presentation, highlighting that “physicians expect to prescribe Orladeyo to over 40% of HAE patients and eventually expect 80% of patients are expected to be on some form of prophylaxis (slide 16). The US market currently sits at 7,500 patients treated and formerly diagnosed and roughly 10,000 patients present. With global launch underway, the data strongly suggests Orladeyo is positioned for sales of >$500M and has seen supporting evidence via recent royalty financing and chatter in patient groups.
Orladeyo was approved in Japan on January 22nd 2021, making it the only available treatment to the estimated 2,000-3,000 patients in the country, of which 450 have been formally diagnosed as per “ScienceDirect” report on January 21 2021. While the approval is exciting for patients who have until now had no treatment options, it is also exciting for shareholders. This approval initiated $15 million in upfront cash payment from BioCryst’s partner “Torii” and unlocked royalties from the mid teens up to potentially 40% (slide 15). Orladeyo is anticipated to be launched in Japan in Q2.
Orladeyo is also up for approval in Europe and holds orphan drug designation which essentially provides protection and exclusivity. The company is anticipating an approval decision in Europe this quarter and has plans to launch starting in Q2 with Germany (slide 41). The company has been hard at work recruiting and building out their team to fulfill direct sales in Europe.
Significant Pressure By Short Sellers
We don’t know how much of the 30.9M shares short (as of 1/15/21) is hedging by long institutions and how much is funds betting against the company. What we do know is that there is some presence of the latter given the aggressive and persistent short selling pressure. The shorts have been relentless, betting at times over 41 million shares against Biocryst prior to the recent approval of Orladeyo on December 3rd. The shorts have remained steadfast in their positions even after BCRX’s share price doubled in the weeks proceeding Orladeyo’s approval on unprecedented volume for BCRX (over $40M shares traded the day after approval). Despite this aggressive and sustained move to the upside shorts have maintained their foothold with no signs of letting up.
As we discussed in the first article (Embarrassment of Riches) there is a good possibility that Takeda, CSL Behring, and maybe even Alexion are involved in apply the pressure (directly or indirectly). Intuitively this notion makes sense. BCRX is encroaching on high-value territory that the respective company’s have enjoyed to themselves for 10+ years. Naturally these companies will do whatever they can to hinder external threats like BCRX from taking away market share.
Financial Overhang Addressed
Biocryst went on a hiring frenzy heading into FDA approval, head hunting established sales teams from competitors to help ensure the success of Orladeyo launch. BioCryst appears to have 10 previous Takeda employees onboarded and has added 54 people to their team focused on rare disease as per LinkedIn data. It’s likely some of these individuals decided to make the move over from competitors after seeing Orladeyo’s potential and growth opportunity with Biocryst. Certainly, they see the difference in commission potential based on sales potential. Additionally, employees noted a solid company culture and overall excitement within the company.
After approval of Orladeyo on December 3rd, the primary bear argument became the possibility for dilution. With an expanded and well seasoned sales team beginning to ramp up in the US and abroad, some began to question the health of BCRX’s runway with $96.49 million as of September 30th, reported on November 6th 2020. CEO Stonehouse addressed the concerns over dilution, expressing the low possibility of dilution on conference calls and remained true to his word. Biocryst surprised the pessimists, inking a $325 million royalty financing deal on December 7th, just 4 days after receiving FDA approval and erased many of the concerns for dilution for the foreseeable future. This deal through Royalty Pharma plc and Athyrium Capital Management provided:
- $125 million in the form of an upfront cash payment
- Royalties of 8.75% on direct annual net sales up to $350 million
- Royalties of 2.75% on sales of Orladeyo between $350-550 million
- No royalties on sales over $550 million
- Tiered percentage on sublicense revenue of Orladeyo in certain territories
- Royalty Pharma will receive 1% of global sales of BCX9930 if approved
Athyrium will manage a $200 million credit facility which Biocryst drew $125 million from at closing of the deal. The remaining capital is available to Biocryst at their option in two tranches upon execution of defined revenue milestones. This credit facility carries LIBOR + 8.25% (with a LIBOR floor of 1.75%) and is interest-only for the entire five year term with the outstanding principle due at maturity. Biocryst received the option to pay interest in-kind for the first eight quarters of the term, which allows the company to defer cash interest payments until after this period. The minimum liquidity covenant is $15 million.
Royalty Pharma PLC & Athyrium Capital Management
Founded in 1966, Royalty Pharma is the largest buyer of biopharmaceutical royalties and has amassed an impressive portfolio. Royalty Pharma has an extensive history of supporting drugs through royalty financing and other financial vehicles, leading to success to the tune of multi billion dollar revenue annually. A prime example of this was their 2013 deal with Quest Diagnostics for $485 million for royalty rights on Imbruvica. Fast forward to 2020 and Imbruvica produced $3.89B in global sales by Q3 for year 2020. Royalty Pharma receives payments related directly to topline sales on similar successful therapies like Imbruvica. Therapies such as , Januvia (produced $2.4B in revenue by Q3 2020), Kalydeco, Trikafta, Truvada, Tysabri and Xtandi are among Royalty Pharma’s success stories and display a unique degree of confidence in Orladeyo’s future potential in our opinion.
Athyrium Capital Management is a “specialized asset management company which advises funds with over $3.7 billion in committed capital.” Athyrium invests in a multitude of financial instruments, specifically royalties, structured credit, and equities. Athyrium amplifies Royalty Pharma’s impressive history and portfolio. For an overview of their investments click here. Biocryst royalty financing deal was amongst some of the highest dollar value deals Athyrium did in 2020 and towards the top of their list for royalty deals for fiscal year 2020. Typically royalty financing deals occur for high revenue, high margin products and highlight the thesis of Biocryst making progress on transitioning from small cap to midcap through sound fundamentals and outstanding execution benefiting patients and shareholders.
While we are bullish on Biocryst and believe the likelihood of realizing unforeseen risks is low, it is important to review. Since Biocryst has a reduced financial overhang risk, the primary risk present to our thesis is in the adoption of Orladeyo. While the data strongly suggests the one third figure of patients switching is highly accurate, adoption lower than the streets assumptions may yield a significant pullback. Another factor which may cause additional pullback on share price is underwhelming Factor D data this quarter.
Although Biocryst has appreciated more than 400% since we started to buy the stock, we believe the company remains significantly undervalued. With a catalyst packed year on the horizon and the stock still trading at depressed levels ahead of a highly anticipated update on BCX-9930 now is the time to be adding BCRX. In addition to the maturity of BCX-9930 for PNH and other complement-mediated diseases we are looking forward to following the launch of Orladeyo. If all goes well its very possible for BCRX to capture 30-40% of patients in its first 12 on the market. Considering BCRX’s market cap of $1.5B and that Orladeyo would generate $1.4B annually with 33% of the HAE market Wall Street is clearly overlooking the drugs potential.
I am / we are long BCRX.