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Aurinia Pharmaceutical AUPH Is Severely Undervalued!
Aurinia Pharmaceutical AUPH Is Severely Undervalued!
Candidate. Ex-Morgan Stanley & Merrill Lynch portfolio manager and analyst
covering bio-tech and tech in the Silicon Valley.
On March 1, 2017, when the company announced 48-week top-line data, Dr.
Glickman described patient recruitment as firing in all cylinder. Moreover, during
the National Kidney Foundation on April 20, 2017, he addressed the enrollment
concerns of billionaire investor, Robert Duggan. Mr. Duggan said, Prior to
commencement of AURA study, data was lousy, so patients had no real reason to be
excited to enroll. Dr. Glickman cheerfully responded that with the superb AURA
study data, he expects patients, physicians, and even advocacy groups to be excited.
It should be noted that Phase 2 took 16 months to recruit 265 patients. Target
estimate of Phase 3 is 12-16 months to recruit 320 patients.
Management noted that Phase 2 patients were the sickest group of LN patients ever
studied to date. Phase 3 has high probability of success due to healthier patients
recruitment. Also, 11 of the 13 deaths in Phase 2 occurred in third world countries
such as Bangladesh and Malaysia, where access of healthcare was compromised.
This will not be allowed to happen in Phase 3. In conclusion, patient care and
monitoring will be closely followed.
Many may see this as an adverse sign and is evident in the drop in share price. The
true value is not reflected at todays current price. I believe that the stock price will
eventually move towards my 12-Month Price target of $12. Current institutional
ownership is well over 65% including 7% owned by Robert Duggan. Former Street
writer, Adam Feuerstein, acknowledged management for their offering execution.
On Benzinga, Adam gave his approval of AUPHs management. Overall, this is a
sound decision by management to increase shareholders value in the long run and
provide leverage in any takeover scenario.
Management has highlighted that $200M cash (as of 3/31/17) is enough to fund the
company towards bringing voclosporin to the market in 2020. Also, the company
may raise additional capital through licensing voclosporin to Japan, which will also
help serve as a mid-term catalyst. In other words, AUPH is fully sufficient on cash,
and a future dilution is unlikely.
Below is a chart of AUPH compared to past acquisition of CPXX, TBRA, and RLYP.
Other Factors:
Low interest rates make acquisition very favorable; you can ask Warren
Buffett why he is so bullish in todays low interest rate market. Interest rate
is a vital factor of the economy. Inflation and cheap money drives
investments.
It takes ~10 years to get a drug approved and can range from $100M to
$200M to conduct Phase I to Phase III clinical trials. Research &
Development for big pharmaceutical is a huge expense with high risk of
failure.
Historically most acquisitions occur upon NDA approval or right after P2
results.
Ernst & Young reports biopharmaceutical M&A expected to sore in 2017.
Autoimmune Disease is the 4th largest therapy market and growing since
2015.
With clinical results of p-value<.001, risk is mitigated dramatically. Any acquirer
listed below will reap the benefits of saving time and money through benefits of
synergies, and huge revenue potential while borrowing money is cheap.
Below are the four big pharmaceuticals that could be potential acquirers:
1. Galencia/Vifor- Their goal is to be the leader in nephrology. They acquired
Aspreva in 2007. With the recent acquisition of RLYP it might be too soon to acquire
AUPH but the synergy is there.
3. Merck- Already partnered for canine dry eye indications, one of Mercks big
revenue component derive from drug for animals. Optimmune is one such drug.
4. Allergen- Allergens 2nd highest revenue generating drug is Restasis at $1.4B and
continues to grow. AGN should be concerned if Merck & AUPH partnership leads to
an approved product for canine and ultimately human use. AGN also sold their
generic drug unit to TEVA for $40B. The cash was used for dividends, share
repurchase, and acquisition TBRA and VTAE.
5. Other big pharmaceuticals with high cash position & low debt to equity ratio-
Companies such as Gilead might be interested in acquiring during approval to
generate more revenue. Gilead recently repurchased their shares because they
simply had too much cash and dont seem to have any other better idea to use it for.
With all these potential acquirers, I do see competitive bids for AUPH once the first
bid has been placed.
One major mindset about big pharmaceutical companies is that they normally invest
in companies that are stable. AUPH will be considered a stable investment once
voclosporin gets approved in late 2019. Of course AUPH will be priced at a much
higher premium compared to a takeover now. CEOs that are non-founders can
hinder growth as they are more risk averse and lack vision. These types of CEOs act
like an employee that only works for a paycheck in this case a big one. As long as
they commit to low risk stable investments they do not put their job in jeopardy.
That is why companies ran by founders tends to perform much better than the
industry because of their sacrifice and willingness to go above and beyond.
Founders normally work for more than a paycheck and ultimately a much grander
vision.
VALUATION
Price Target (12-Month Price Target) As Of June 13, 2017 - $12 Price Target.
My price target is calculated based on weighted averages of the following methods:
comparable transactions and DCF FCFE using an annual discount rate of 30%
accounting for failure rate, cost of capital, and time.
Im a numbers guy. The success rate for Phase III is exceptionally high and NDA
approval is ~80%. Im confident they will achieve Phase III primary and secondary
endpoints. The only difference between Phase II and Phase III is the change in
UPCR<.7 within 48 weeks to UPCR<.5 within 52 weeks.
With a potential sale of $1.3B peak sale per year intrinsic value and future
development of organ transplant ($1B) and dry eye ($1-2B) investment/synergistic
value, my price target calculated to be $36.
Expected annual LN patients is 50,000, while expected voclosporin cost per patient
is $50,000 (per LN Expert Breakfast Meeting 7/28/16).
With the above price target of $36, a takeover offer of $18 to $24 is plausible as of
today.
Working as an analyst and portfolio manager at Morgan Stanley & Merrill Lynch in
the past, I would like to challenge any Goldman Sachs Morgan Stanley, Merrill Lynch,
or other large asset investment firms the accuracy or valuation of this report.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any company whose stock
is mentioned in this article.