AUPH - Aurinia Pharmaceuticals Has Strong Upside Potential

2023-03-23 06:22:38 ET

Summary

• Aurinia Pharmaceuticals Inc. has strengthened its patent position in the industry and now has more clout as a marketer than just a developer of therapies.
• Its lead product, LUPKYNIS, an immunosuppressive drug for lupus nephritis, appears to be a highly qualified product to capture a profitable market that offers growth opportunities.
• LUPKYNIS is the first therapy of its kind to be approved by the US Food and Drug Administration [FDA] and has also received approval in the EU and UK.
• Everything seems really poised for higher sales and a reversal in the bottom line, which could potentially act as a powerful catalyst for higher share prices.
• In recent days, fears of a financial crisis have created headwinds that have pushed stock prices down to more favorable levels.

Many Sectors, Including Biotechnology, Are Much Lower on Fears of a Financial Crisis

The crisis of part of the regional banking sector in the US and the financial problems of Credit Suisse Group AG ( CS ) and the resulting fear that these events could trigger a domino effect affecting the entire banking system in the US and Europe have created significant headwinds for US-listed equities across sectors.

The US-listed biotech sector is also much cheaper as concerns about the resilience of the banking system, which arose with the collapse of Silicon Valley Bank on March 8, caused several stocks in the sector to trade lower.

The chart above illustrates that iShares Biotechnology ETF ( IBB ) and SPDR S&P Biotech ETF ( XBI ), two indexes used as benchmarks for US-listed biotech companies, have lost 2.81% and 6.08% respectively so far, as a result of a downward trend accentuated by concerns about the stability of the banking system.

Investors should consider the current unfavorable performance of US-listed biotech stocks not only as a problem but also as an opportunity to increase exposure to good companies by taking advantage of lower prices.

The intervention tools of banking supervisors and monetary authorities to prevent major consequences for the banking system are significantly more effective than during the 2008 financial crisis.

The likelihood of a domino effect for financial institutions is low right now, and once these headwinds are overcome, good companies in the form of US-listed biotech stocks should regain investor appreciation, potentially leading to a strong rebound in their publicly traded equities.

Aurinia Pharmaceuticals Inc. ( AUPH ) is certainly one of the US-listed biotech stocks with significant upside potential as this Canadian biotechnology company, having bolstered its patent position in the industry, now has more weight as a marketer than just a developer of therapies.

Its lead product, an immunosuppressant for lupus nephritis, appears to be a highly qualified product to capture a market that - just in the U.S. -- may offer more opportunities for growth than is widely believed.

If the company has chosen the right commercial strategy, the market should notice higher sales of Aurinia Pharmaceuticals' lead drug over the next few years, increasing the chances of a positive turnaround in the bottom line.

There is strong potential for Aurinia Pharmaceuticals' stock price to trade steadily above current levels.

About Aurinia Pharmaceuticals Inc., Its Product, and Targeted Diseases

Headquartered in Victoria, British Columbia, Aurinia Pharmaceuticals is a biopharmaceutical company focused on providing therapies for the treatment of patients suffering from autoimmune disorders, kidney problems and rare diseases.

Aurinia Pharmaceuticals relies on a fully integrated organization in the global biotechnology industry with a mission to solve the health problems of patients with unmet medical needs.

In January 2021, Aurinia Pharmaceuticals launched its lead pharmaceutical product called LUPKYNIS, a Voclosporin-based oral therapy indicated for the treatment of active lupus nephritis in adult patients.

According to Aurinia Pharmaceuticals, LUPKYNIS is the first therapy of this type to be approved by the US Food and Drug Administration [FDA].

Voclosporin is an immunosuppressive drug used in combination with other immunosuppressants and corticosteroids to treat lupus nephritis.

Immunosuppressants are drugs that act on cells of the immune system by de-potentiating the immune system's response to various antigens.

The antigen is a substance that can be bacterial, viral, enzymatic, or therapeutic in nature. When this substance is introduced into the tissues or bloodstream of an animal organism, it induces the formation of antibodies. The antibodies selectively bind to the inducer antigen to destroy or inactivate it.

Immunosuppressants are widely used in the treatment of autoimmune diseases and for the administration of organ transplant rejection.

Patients with lupus nephritis have a kidney disease caused by systemic lupus erythematosus link [SLE], or simply lupus.

Lupus is an autoimmune disease because a person's immune system attacks cells and organs in his own body.

People with kidney disease caused by lupus are at risk of the disease getting worse over time.

In addition, cases in which the disease can degenerate into kidney failure are not uncommon.

Common triggers of lupus include overwork, inadequate rest, excessive exposure to fluorescent or halogen lights, and the presence of infections and the occurrence of certain injuries.

Lupus nephritis is more common in women than men, while African-American, Asian, and Hispanic women are highly susceptible to the most severe form of the disease, particularly between the ages of 15 and 44.

First of all, it is important to note that there is no definitive cure for lupus nephritis and that available treatments, including Aurinia Pharmaceuticals' LUPKYNIS, can relieve symptoms while helping to prevent the disease from becoming worse.

The therapies against lupus nephritis, i.e. immunosuppressive drugs, are effective if patients can lead a normal life with a normal life expectancy.

Financial Results from Fiscal Year 2022

Aurinia Pharmaceuticals reported full-year 2022 total revenues of $134 million, a 2.9-fold increase over the prior year, driven by higher sales volumes of the LUPKYNIS product as the product managed to increase its penetration of the lupus nephritis market.

However, total revenue also increased thanks to the $30 million milestone payment that Aurinia Pharmaceuticals received from Tokyo-based drugmaker Otsuka Holdings Co., Ltd. ( OTCPK:OTSKY ) after the European Commission granted marketing authorization for LUPKYNIS in September 2022.

The gross margin for 2022 was 96%, down about 200 basis points from 2021.

Total costs were $245.5 million, an increase of 8.5% year-over-year due to higher product-related revenues, the sustainment of legal and pharmacovigilance costs, and higher costs related to the commercialization of LUPKYNIS.

Total costs were also impacted by inflationary pressures on inputs, particularly wages and benefits, and an increase in stock-based compensation expenses, while research and development costs were lower.

Financial costs rose 4.6x year-on-year to $5.1 million in 2022, reflecting tighter Federal Reserve policies to combat elevated inflation.

As such, for the full year 2022, Aurinia suffered a net loss of $108.2 million, or a net loss of $0.76 per common share, compared to a net loss of $181 million, or a net loss of $1.40 for 2021.

The Company Calls for a Further Increase in Sales for 2023 Versus Analysts' Estimates

For fiscal 2023, the company expects LUPKYNIS revenue to be between $120 million and $140 million, representing annual growth of 15.4% to 34.6% in terms of net product sales.

While analysts expect that Aurinia Pharmaceuticals will increase total revenue to $142.82 million in 2022 and to 192.7 million in 2023.

Regarding the bottom line, analysts forecast another net loss over the next 2 years but improving from 2022. They estimate a net loss of $0.74 per common share in 2023 and a net loss of $0.49 per common share in 2024.

The Financial Position of the Company

As of December 31, 2022, Aurinia's balance sheet had $389.4 million in cash and short-term investments, which the company says should be sufficient to fund commercial activities, advance its R&D programs and service its working capital obligations for several years.

According to analysts at GuruFocus, Aurinia Pharmaceuticals has an Altman Z-Score of 10.04, meaning the company's financial health is sound, which translates to zero probability of bankruptcy for the time being.

The balance sheet contains funds the company is using to advance a pipeline aimed at improving people's lives and giving them better outcomes in autoimmune and inflammatory diseases. Much can be done to improve people's quality of life if they are adequately treated from the earliest stages of the disease, reducing the risk that lupus nephritis can have the most serious consequences for the patient, namely impaired kidney function or even kidney failure. Of course, the disease implies a higher risk of developing cardiovascular disease, since the patient's urinary function is impaired by the disease.

Lupus Nephritis Is a Profitable Market to Conquer that Could Offer a Lot More Opportunities Than Is Commonly Thought.

In the US alone, the disease lupus nephritis represents a good market for Aurinia Pharmaceuticals' LUPKYNIS, as approximately 1.5 million US citizens live with some form of lupus, while 50% of them will develop lupus nephritis in their adulthood.

In addition, there are recent results from the Optum Electronic Health Record study that indicate strong potential for a greater need than commonly thought for therapies like LUPKYNIS of Aurinia Pharmaceuticals. The study was conducted between 2015 and 2019 and included more than 150,000 patients diagnosed with systemic lupus erythematosus (the cause of lupus nephritis).

According to the results of the study , there is evidence that ~50% of patients with systemic lupus erythematosus do not receive screening for lupus nephritis.

The more screening, the more cases of lupus nephritis that need treatment are sure to be found.

Among patients diagnosed with lupus nephritis, patients regularly monitored by healthcare professionals account for not more than 2%.

Therefore, there should be a very high percentage of patients with lupus nephritis who may discontinue therapy or require adapted therapy with more advanced products. So it's about the probable existence of a world that should be explored and perhaps supported with treatments that are more efficient today than they were a few years ago.

The percentage of patients with lupus nephritis who do not receive any treatment is very high, approximately 70% of the diagnosed cases of the disease.

This is a very important figure which would increase the chances of commercial success for Aurinia Pharmaceuticals' treatment if the company manages to augment its penetration rate in the US lupus nephritis market. In this regard, it should be noted that Aurinia Pharmaceuticals is investing heavily in activities that support the commercialization of LUPKYNIS. As shown by the 2022 income statement data , travels, grants and sponsorships were key factors in the 12% increase in total operating expenses through 2022.

The company's business strategy will focus on establishing LUPKYNIS among the treatments that physicians commonly prescribe for patients with lupus nephritis.

This strategy is implemented through the following 5 points :

The product has also been approved in the EU since September 15, 2022, and in Great Britain since November 29, 2022. So, these markets could be profitable as well.

Finally, the Optum Electronic Health Record study reveals another telling fact regarding the need for more modern treatment to counter the complications of lupus nephritis. 50% of lupus nephritis patients receiving the then-available therapy developed complications until they reached end-stage renal disease within a year.

Why Aurinia Pharmaceuticals' LUPKYNIS Has the Potential to Address the Lupus Nephritis Market Opportunity

The effectiveness and benefit of the treatment can be measured using a biochemical parameter called proteinuria, which has been linked to the long-term complications of the disease of lupus nephritis. Proteinuria means protein in the urine of the patient with lupus nephritis, indicating possible kidney damage.

LUPKYNIS favours the stability of podocytes while acting like many other immunosuppressants by inhibiting T-cell activation and cytokine production.

Podocytes are highly specialized epithelial cells that line the outer layer of the glomerular basement membrane of the kidneys.

Because podocytes proliferate in kidney disease, including lupus nephritis, their stability over time most likely means that patients with lupus nephritis take proactive measures to avoid the risk of serious complications.

A LUPKYNIS-based therapy in patients with lupus nephritis achieved the following milestones after checking the proteinuria values. The reduction in proteinuria levels in patients receiving therapy for their lupus nephritis disease defines a renal response metric used to assess the treatment efficacy.

LUPKYNIS achieved almost three times more a complete renal response in lupus nephritis patients than a placebo, as shown in a 52-week study 1.

The study also indicates that urine protein levels in lupus nephritis (it was measured by urine protein-to-creatinine ratio [UPCR]) returned below target (?0.5mg/mg) much faster in patients taking LUPKYNIS than in the placebo group. The median number of days in LUPKYNIS was 169 compared to 372 days in the placebo group.

In addition, the results of a 2-year extension study called AURORA 2 concluded that "the significant and meaningful reductions in proteinuria initially achieved in AURORA 1 were maintained during AURORA 2," providing the following evidence: patients with lupus nephritis will benefit from LUPKYNIS in the long run.

Stock Valuation

Shares of Aurinia Pharmaceuticals Inc. are trading at $9.21 per unit as of this writing giving it a market cap of $1.31 billion.

The above chart also shows that the current share price is slightly above the 50-day simple moving average of $8.72 and above the longer-term trends of the 100-day simple moving average of $7.02 and the 200-day simple moving average of $7.95. Also, the stock price has fluctuated between a low of $4.07 and a high of $13.42 over the past 52 weeks and is currently trading in the upper half of the range.

Despite these comparisons between the stock price and its historical levels or trendlines, Aurinia Pharmaceuticals' stock doesn't look expensive on the NASDAQ stock market.

First, should the company be able to make the most of its lead drug, there is potential for an amazing rise in its share price from current levels.

Expectations are based on Aurinia Pharmaceuticals' ability to successfully pursue its goal of making its immunosuppressive drug the standard of care for lupus nephritis. Plus, since most available statistics at this time may underestimate the number of patients requiring treatment for lupus nephritis, the addressable market may be larger than commonly believed.

Second, based on the chart below, Aurinia Pharmaceuticals Inc. shares are more than 3.5 times down from the all-time high of $33.08 set by the stock on October 29, 2021.

Additionally, the table below provides some key metrics evaluating the Aurinia Pharmaceuticals Inc. stock versus its own historical values and versus the industry.

Based on the past performance of its own metrics and a comparison to a peer group, Aurinia Pharmaceuticals Inc's stock appears to be reasonably valued.

Conclusion

Aurinia Pharmaceuticals has the potential to trade much higher than it currently is if its business performs as expected.

The company's portfolio includes a quality product aimed at addressing what appears to be a profitable lupus nephritis market.

In recent days, the share price has become even cheaper due to headwinds from fears of a financial crisis.

For further details see: