AUPH - Aurinia Pharmaceuticals: Some Improvement In Topline But A Buyout Alone Will Unlock Value

2023-03-24 04:47:31 ET

Summary

• Aurinia Pharmaceuticals' Lupkynis revenue figures aren't bad this quarter.
• However, the target population is the problem.
• I still think only a buyout from big pharma will unlock full potential.

I covered Aurinia Pharmaceuticals ( AUPH ) on January 5, a day after its patent dispute got settled with Sun Pharma. Fresh patents were also applied for or granted in the US (notice of allowance) and EU (notice of intention to grant), which would extend the coverage to 2037. I said then that without a buyout, this company has no future. I actually used the word "upside" when I meant future, but the two things are different. "Upside" is about the stock, and the stock is up 30% in 2 months, buoyed by the patent settlement - so I was wrong. But "future" is about the company and I still think investors cannot realize the full potential from their investments unless this company is bought out by somebody. Voclosporin sales have been consistently poor and, apart from other factors, outreach is also important, which a small company generally does not have in adequate quantity.

So anyway, the question now becomes, what else is going on at Aurinia? Is there any other determinate catalyst for AUPH stock?

Note, first, that they released earnings late last month and there was no significant impact on the stock from that earnings. Meanwhile, a fellow contributor published a quite bearish article yesterday, so we need to see what he says, and also look at the earnings call for hints about the future of Aurinia.

Voclosporin's biggest problem is its target patient population. I discussed this in detail earlier. The molecule targets a patient population that is Black, Hispanic or Asian. The disease is active lupus nephritis ((LN)). This is a complicated form of the autoimmune disease, systemic lupus erythematosus (SLE), and SLE becoming LN is much more likely among this minority patient population. Indeed, the trial population, according to an earnings call quote I provided last time, was this:

Remember, we're dealing with primarily a patient population that's an African-American, Hispanic and Asian female population in the U.S.

So this is a female population on top of everything else. Worse still, like I noted before, although the pivotal voclosporin study took in patients in the 18-75 age group, the median age was more like 30. People familiar with the US situation will surely understand that this is almost the toughest population to get a drug to. First, minorities, especially the Black population, do not have insurance (I discussed the numbers in that earlier article). Second, studies show that insurance for this population becomes somewhat better when they reach the age of 65, when Medicare kicks in. While this molecule does target that population as well, first, its trial population didn't do that exclusively, and two, there is no information of the age of onset of this disease from the company. A quick research tells me that the age is early, usually between 20 and 40. That is a very difficult population indeed for a drug in the American market . Perhaps the only worse target population in terms of adherence would have been young Black males. Of course, the approved label covers both sexes. See it here .

This, therefore, is the insurmountable obstacle Aurinia is being forced to face. No wonder revenue had not been great in previous quarters.

I was, thus, pleasantly surprised to see that in the last reported quarter, that is, the quarter that ended in December and was reported in February, there was an uptick in revenue. Consensus estimate was $27.13mn while the company estimate was $28.4mn, and it appears that they met this target. I said "appears" because there is some discrepancy in the presented news as I see it on Seeking Alpha. Full year revenue also shows a doubling of revenue year over year, and falls right in the upper middle of guidance. This is certainly positive news. On the other hand, Otsuka made a one-time $30mn payment last quarter for voclosporin receiving marketing authorization in the EU. This influx of funds may produce a wrong picture in the mind, however, it is almost a one off event. Approvals in three of the five major countries in the EU will trigger an additional $10 million milestone from Otsuka. Japan approval will produce another $10mn. The company expects this to happen this year.

Details of the patent settlement with Sun Pharma are not available but here's an interesting bit of news :

However, Aurinia is suing Sun and its Cequa dry eye medicine approved in 2018 over two patents from its voclosporin ophthalmic solution. Aurinia revealed the suit in December 2020 claims Sun's dry eye med Cequa, or cyclosporine, infringes on two of its patents and is asking for an injunction to stop Sun from selling Cequa and monetary relief including cost. Sun has denied the charges and said the two patents at issue are invalid. That case is expected to go to trial in March 2023.

I should venture to assume that as part of the settlement, each company agreed to withdraw its suit. This is exactly what actually happened - per the earnings call, "both parties agreed to dismiss their claims and counterclaims." So Sun did not gain from voclosporin in LN, but Aurinia did not get any money for the alleged infringement in the eye indication. Interestingly, voclosporin earlier failed its own phase 2/3 trial in an eye disease indication. Note though, that Jefferies' Maurice Raycroft asked just this question about Sun's Cequa sales in their earnings call, and the CEO answered in the negative.

Coming back to LN, another interesting tidbit the company mentions in the percentage of dropouts. The company terms this as persistence of patients in treatment, and the rate is 45%. Look at it another way, and a whopping 65% of patients do not persist in treatment over 1 year to 15 months. This was something we saw in the trial as well, that this particular patient population does not grade high in adherence. This is money left on the table. Exiting 2022, the company treated 1525 patients. With perfect adherence, this could have been doubled, directly impacting their topline.

Financials

AUPH has a market cap of $1.3bn and a cash balance of $389mn. Research and development expenses were USD 9.9 million for 4Q. Selling, general and administrative expenses, inclusive of share-based compensation, were USD47.5 million. Cost of sales were USD1.4 million. At that rate, the company has a cash runway of some 6-8 quarters, considering funds from sales.

Bottomline

This discussion leads me back to my original opinion - that this company is going nowhere without a buyout. LN is a potentially large market, but outreach is going to be very critical to succeed in this market. A small company just doesn't have that sort of clout. If Aurinia gets acquired by another company, that is the only way this drug is going to succeed in the market.

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