RARE - A Deeper Look At Ultragenyx Pharmaceutical

2023-12-24 09:48:14 ET

Summary

• Ultragenyx Pharmaceuticals' shares are trading 60% higher after pricing a secondary offering, reflecting optimism about its pipeline of rare disease treatments.
• The company has four commercial products, with Crysvita generating the majority of its revenue. Crysvita is the only approved therapy for X-linked hypophosphatemia.
• Ultragenyx has several promising candidates in its pipeline, including UX143 for osteogenesis imperfecta and GT-102 for Angelman syndrome.
• Can the rally continue?  An investment analysis follows in the paragraphs below.

Repetition of an argument proves your determination, not truth. ”? Raheel Farooq

Shares of rare disease concern Ultragenyx Pharmaceutical Inc. ( RARE ) are trading some 60% higher after pricing a secondary in October 2023 at $30, owing to optimism regarding its pipeline. The company has seven rare disease assets in the clinic that could treat a patient population of ~200,000, six of which have encouraging early returns. With a substantial cash bleed despite revenue from four commercial products but with enough cash post-secondary to operate into FY26, Ultragenyx merited a deeper dive. An analysis follows below.

Company Overview:

Ultragenyx Pharmaceutical Inc. ((RARE)) is a Novato, California based commercial-stage biotechnology concern focused on the in-licensing, development, and commercialization of therapies for the treatment of rare and ultrarare diseases. The company has four commercial products treating five indications and seven clinical programs, five of which are in registrational trials. Ultragenyx was founded in 2010 and went public in 2014, raising net proceeds of $121.7 million at $21 per share. The stock trades near $47.50 per share, translating to a market cap of just over $4 billion, after giving effect to 1.67 million pre-funded warrants.

Commercial Products

Although the company markets four products, it generates the preponderance of its top line from three: Crysvita (burosumab); Dojolvi; and Mepsevii.

Crysvita is a subcutaneously injected antibody targeting fibroblast growth factor 23 (FGF23) employed to combat X-linked hypophosphatemia (XLH), a rare, hereditary, musculoskeletal disorder (a.k.a. rickets) characterized by low levels of serum phosphorus brought on by excess FGF23. Unlike normal rickets, XLH patients do not respond to vitamin D therapy. Its prevalence is ~48,000 in the developed world (~15,000 in the U.S.), comprising ~36,000 adults and ~12,000 children. It is the only approved therapy for XLH and is also green-lighted in the U.S. and other territories for the treatment of FGF23-related hypophosphatemia in tumor-induced osteomalacia, which afflicts ~2,000 to ~4,000 worldwide.

First approved by the FDA in 2018, Crysvita is sold globally in collaboration with Kyowa Kirin ( KYKOF ). Its sales are subject to payments to Royalty Pharma ( RPRX ) and the Ontario Municipal Employees Retirement System (OMERS). Total revenue generated from Crysvita to Ultragenyx was $233.9 million in the first nine months of 2023 (YTD23), representing an 18% increase over YTD22.

Dojolvi is a synthetic, 7-carbon fatty acid triglyceride employed as a metabolite replacement for individuals with long-chain fatty acid oxidation disorders (LC-FAOD), which are a battery of metabolic diseases marked by the body’s inability to convert fat into energy that can lead to low blood sugar, muscle rupture, as well as heart and liver disease. Approximately 8,000 to 14,000 people suffer from LC-FAOD in the developed world. Approved in 2020, Dojolvi generated YTD23 sales of $47.3 million, up 21% from the prior year period.

Mepsevii is an intravenously administered enzyme replacement therapy used to treat ultrarare disease mucopolysaccharidosis VII (Sly syndrome), which afflicts ~200 individuals globally. Approved in 2018, it accounted for YTD23 sales of $22.6 million, representing an increase of 42% over YTD22.

Ultragenyx also markets Evkeeza, a monoclonal antibody designed to reduce cholesterol in patients with homozygous familial hypercholesterolemia (HoFH), outside the U.S. as part of a collaboration with Regeneron ( REGN ). In return for $30.0 million upfront and potential milestones of $63.0 million, Ultragenyx receives a patient population of ~3,000 to ~5,000 to which to market. Inked in January 2022, the deal only generated YTD23 sales of $1.5 million.

Pipeline

In addition to its protein biologic and small molecule commercial portfolio, Ultragenyx is advancing one other monoclonal antibody, an antisense oligonucleotide ((ASO)), a lipo-nanoparticle mRNA oligonucleotide, and several gene therapy programs through the clinic. All have orphan designations from the FDA. Below is a brief description of the most relevant six.

UX143 (setrusumab) . The most promising of these candidates is UX143, an anti-sclerostin monoclonal antibody undergoing evaluation in a Phase 2/3 trial for the treatment of osteogenesis imperfecta ((OI)), a disease characterized by brittle bones and no approved therapies that afflicts ~60,000 worldwide. The Phase 2 portion is fully enrolled and early returns are encouraging. Of patients with at least six months of treatment, the annualized fracture rate – which excludes fractures of the fingers, toes, skull, and face – across 24 patients was reduced by 67% while the median annualized fracture rate was reduced to 0.00 versus 0.72 in the two years prior to treatment (p=0.042) with only one fragility fracture (e.g., while getting out of bed) observed. This news sent shares of RARE 10% higher in the subsequent trading session (October 16, 2023), setting the stage for a secondary offering.

The Phase 3 portion is expected to enroll ~195 patients, while another 65-patient Phase 3 study will compare UX143 to intravenous bisphosphonate therapy. Both Phase 3 studies should be fully enrolled by 1Q24, while additional data from the Phase 2 portion are anticipated in 2024.

The development and commercial rights, which exclude Europe, were in-licensed from Mereo ( MREO ) for an upfront consideration of $50 million, with Ultragenyx potential obligated on milestone payments up to $254 million, as well as double digit royalties.

GT-102 . Another Ultragenyx therapy targeting a worldwide patient population of ~60,000 is GT-102. It is an ASO under assessment for the treatment of Angelman syndrome, a rare and debilitating neurogenetic disorder characterized by problems with speech and balance, intellectual disability, (in some instances) seizures, and happy excitable personalities. It is caused by a loss-of-function of the maternally inherited allele of the UBE3A gene and currently has no approved treatments. GT-102 is undergoing assessment in a multi-cohort Phase 1/2 trial and has exhibited some promise to date. Of 11 patients eligible for evaluation at Day 338, all demonstrated improvement in at least one of five functional categories (sleep, behavior, cognition, communication, and motor skills), with median total net responses at +2 (p=0.001). Another update is expected in 1H24, which should set the stage for a pivotal Phase 3 study.

DTX401 . Ultragenyx has four gene therapy programs, including DTX401, which is being assessed in a Phase 3 study for the treatment of Glycogen Storage Disease Type 1a (GSDIA), an inherited disorder that prevents the liver from breaking down glycogen due to a deficiency of enzyme glucose-6-phoshatase. The only known cure for the ~6,000 afflicted is liver transplantation. The primary endpoint of the 48-week, 50-patient trial is the reduction in oral glucose replacement with cornstarch while maintaining glucose control versus placebo. Data are anticipated in 1H24.

UX111 . Another member of the gene therapy franchise is UX111, an intravenous adeno-associated virus 9 (AAV9) gene therapy that provides a cross-correcting enzyme to treat Sanfilippo syndrome type A (MPS IIIA). It is a rare lysosomal storage disorder affecting the brain and spinal cord and is caused by a buildup of large sugar molecules in the body’s lysosomes. The ~3,000 to ~5,000 afflicted (globally) present progressive intellectual disability, hyperactivity, dementia, and loss of mobility. There are currently no approved therapies, which Ultragenyx aims to change as it continues to huddle with the FDA regarding an accelerated review pathway after a successful pivotal study in which patients tracked on a normal developmental range. That said, UX111 is lower on the priority scale for management.

DTX301 . Another late-stage gene therapy candidate is DTX301, an intravenous AAV8 treatment for urea cycle disorder ornithine transcarbamylase deficiency (OTC). Owing to the defective enzyme, the body cannot properly detoxify ammonia, which can lead to a host of issues, including ataxia, lethargy, and death without rapid intervention. OTC affects ~10,000 globally, of which 80% are late onset. A Phase 3 trial is anticipated to be fully enrolled by 1H24. Expectations are high after seven of eleven patients in a Phase 1/2 study demonstrated durable metabolic control with sustained responses up to 5.5 years.

UTX701 . The last of the pivotal stage assets is UTX701, which is an AAV9 gene therapy for the treatment of Wilson disease, a disorder caused by a buildup of copper in the liver, brain, and other organs that afflicts over 50,000 worldwide. A Phase 1/2/3 trial was initiated in 2021 with primary efficacy endpoints the change in 24-hour urinary copper concentration and percent reduction in standard of care medication (chelation therapy) by week 52. Stage 1 data on three cohorts are expected in 1H24. Expectations are high as two of the first five patients in cohort 1 have already discontinued chelation therapy.

It should also be noted that the company is endeavoring to spin out a separate entity to pursue the Alzheimer's disease [AD] indication based on encouraging preclinical observations, where an enzyme dubbed protective protein/cathepsin A (PPCA) broke up a form of amyloid beta – the speculated protein responsible for the malady’s debilitating effects – in murine models. Since the AD indication isn’t rare, management thought it appropriate to keep it separate, although it plans to own a majority stake in the new concern once public.

3Q23 and YTD23 Financials

Due to the large number of clinical trials, the upfront costs of in-licensing deals, and the fact that some of its revenue has been sold off to royalty concerns, Ultragenyx is a cash burning machine. In 3Q23, it lost $2.23 per share (GAAP) on revenue of $98.1 million versus a loss of $3.50 per share (GAAP) on revenue of $90.7 million in 3Q23. For YTD23, the company has lost $6.81 per share on revenue of $306.9 million versus a loss of $7.96 a share on revenue of $260.0 million in YTD22.

Balance Sheet & Analyst Commentary:

With a cash bleed from operations of $390.9 million through September 30, 2023, management concluded that the cash and investments of $524.2 million remaining on its balance sheet was not sufficient and elected to raise net proceeds of $326.4 million through the sale of stock and pre-funded warrants at $30.00 per share (warrants $29.99) in October 2023, providing it with enough funding to operate into FY26. Except for royalty obligations totaling $876.0 million, Ultragenyx has no debt.

Owing to the promise of its gene therapy franchise and other clinical candidates, Street analysts are largely constructive on the company, with nine analyst firms including JP Morgan and Morgan Stanley reissuing/assigning Buy/Outperform ratings on the stock. Price targets proffered range from $57 to $140 a share. On average, they expect Ultragenyx to lose $8.34 a share (GAAP) on revenue of $436 million in FY23, followed by a loss of $6.11 a share on revenue of $524 million in FY24.

Verdict:

The company’s pipeline is extremely promising. And with data forthcoming on GTX-102, DTX401, and UTX701 in 1H24 and UTX143 sometime in 2024 – not to mention an update on progress towards an accelerated review for UX111 and an AD treatment spin – there are plenty of catalysts to propel shares of RARE higher. Furthermore, shares of RARE are down 79% since reaching an all-time high of $179.65 in December 2020 on the back of a positive election outcome (Republican House majority) and speculation that they might be acquired. The downward move is a broadly a function of the market moving its focus to the bottom line of income statements and specifically in response to issues surrounding GT-102 – namely, a delay in data caused by a trial suspension in 2020 and what the market interpreted as tepid interim results released in July 2022.

That said, despite Ultragenyx owning a solid pipeline targeting higher patient populations, on its current trajectory, it will not be profitable until FY27. A typical 3.5 times peak revenue valuation places its projected peak sales at ~$900 million – assuming that balance sheet cash and royalty obligations essentially cancel each other out – which seems more than fair at this juncture. Given no outlook-altering data, Ultragenyx becomes attractive at $30 a share (peak sales estimate of $700 million) or a tad over that level. Until then, I plan to remain on the sidelines.

Even the truth is just a mere thought .”? Mokokoma Mokhonoana

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