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Aurinia Is Severely Undervalued!
Aurinia 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 cylinders. 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 II took 16 months to recruit 265 patients. Target
estimate of Phase III is ~12-16 months to recruit 320 patients.
Management noted that Phase II patients were the sickest group of lupus nephritis
patients ever studied to date. Phase III has high probability of success due to
healthier patients recruitment. Also, 11 of the 13 deaths in Phase II 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 III. 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 Aurinias 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, Aurinia is fully sufficient on cash,
and a future dilution is unlikely.
3. Merck- Already partnered for canine dry eye indications, one of Mercks big
revenue component derive from drugs for animals. Optimmune is one such drug.
5. Other big pharmaceuticals with high cash position & low debt to equity ratio- Big
pharmaceuticals 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.
One major mindset about big pharmaceutical companies is that they tend to be risk
averse and invest in stable companies. Aurinia will be considered a stable
investment once voclosporin gets approved in late 2019. If big pharmaceuticals are
not willing to acquirer Aurinia earlier, they will be paying for a much higher
premium in the future. One reason why big pharmaceuticals are risk averse is
because they are controlled by non-founding CEOs. Non-founding CEOs can hinder
growth as they tend to act like an employees that only works for a big paycheck and
go home back home to enjoy their life. They would not take unnecessary risk to
jeopardize their pay or their current lifestyle. Most non-founding CEOs would not
create stress for themselves and most likely depend on the expertise of their
subordinates. As long as they commit to low risk stable investments there is a low
chance the company will underperform industry average that could upset
shareholders. On the other hand, founding CEO 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. That is why it is important to invest in a company with founding CEOs and a
product that has a monopoly. Aurinia is one such company that has these attributes
and more. From my experience, it is extremely rare to find a company with such
huge reward potential and mitigated risk.
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.
SOURCES
1.https://www.sec.gov/Archives/edgar/data/1600620/000119312517169703/d350841d
ex991.htm
2.http://ir.tobiratx.com/releasedetail.cfm?releaseid=994666
3.http://www.aomarkets.com/tobira-therapeutics-tbra-stock-soars-700-buyout-
allergan/
4. https://globenewswire.com/news-release/2017/04/19/962366/0/en/Relypsa-
Presents-Veltassa-Phase-4-Data-Showing-Consistent-Efficacy-and-Safety-Whether-
Taken-With-or-Without-Food-in-Patients-with-Hyperkalemia.html
5.https://www.streetinsider.com/Corporate+News/Relypsa+(RLYP)+Announces+Signific
ant+Data+from+Veltassa+Phase+3+OPAL-HK+for+Oral+Suspension/11046206.html
6.http://www.biospace.com/news_story.aspx?StoryID=398447
7.http://www.fdareview.org/03_drug_development.php
8.https://biopharmadealmakers.nature.com/users/9880-biopharma-
dealmakers/posts/13880-trends-in-pharmaceutical-mergers-and-acquisitions
9.http://www.ey.com/us/en/newsroom/news-releases/news-ey-biopharmaceutical-ma-
expected-to-soar-in-2017-pricing-pressures-dim-global-revenue
10.https://pubchem.ncbi.nlm.nih.gov/compound/Voclosporin#section=Top
11.https://igeahub.com/2017/03/14/top-10-pharmaceutical-companies-2017/