AUPH - Aurinia: Strategic Alternatives Could Go Either Way For Stakeholders

2023-07-18 12:50:45 ET

Summary

• Aurinia Pharmaceuticals has reported increased Q1 2023 net revenue of $34.4 million, largely due to higher sales of its Lupus Nephritis drug, Lupkynis. However, the company also recorded a net loss of $26.2 million.
• The company is exploring strategic alternatives, potentially including a sale, merger, or other strategic transaction, leading to the resignation of two board members. The outcome of this exploration is currently uncertain.
• Despite increased revenues and robust growth, concerns persist around Aurinia's profitability, mixed market momentum, and potential instability. The recommendation remains "Sell".

Introduction

Aurinia Pharmaceuticals ( AUPH ) is a biopharmaceutical firm delivering therapies for autoimmune, kidney, and rare diseases with unmet medical needs. In 2021, it introduced Lupkynis (voclosporin), the first FDA-approved oral treatment for active Lupus Nephritis ((LN)). The drug functions as an immunosuppressant, improving LN outcomes when used with specific drugs. Aurinia has partnered with Otsuka Pharmaceutical for Lupkynis's development and commercialization in certain regions. It also announced two new assets, AUR200 and AUR300, in 2021, currently in pre-clinical development, with projected FDA submissions in 2023 and 2024 respectively.

In my previous analysis , I concluded that despite promising results and FDA approval, Aurinia Pharmaceuticals' Lupkynis failed to become the preferred treatment for active lupus nephritis. Its high cost, when compared to similar yet affordable alternatives, significantly restricted its market potential. Additionally, their "treatment protocol" patent for Lupkynis, while providing some protection, was not fully secure against potential competitors post-January 2026. Aurinia's inability to meet its 2022 revenue projections further raised concerns about Lupkynis's long-term market viability. Therefore, I advised investors to exercise caution and thoroughly analyze it before investing in Aurinia, recommending a "Sell" position.

Recent developments: On June 29th, Aurinia announced they are exploring "strategic alternatives to maximize shareholder value," inspiring a stock rally.

The following article reassesses Aurinia in light of their pursuit of strategic alternatives.

Q1 2023 Earnings

Before we begin, let's review the financials. Aurinia Pharmaceuticals reported an increase in its Q1 2023 total net revenue to $34.4 million, up from $21.6 million in Q1 2022, largely due to higher sales of its LN drug, Lupkynis. Despite this, the cost of sales and operating expenses also increased to $64.0 million from $59.5 million, and the company recorded a net loss of $26.2 million, albeit lower than the $37.6 million loss in Q1 2022. Increases were also seen in selling, general and administrative expenses, rising to $50.1 million, and research and development costs, which grew to $13.2 million, due to the progression of AUR200 and AUR300 programs. Interest income rose to $3.8 million due to higher yields from increased interest rates. As of March 31, 2023, Aurinia held cash, cash equivalents, and short-term investments of $361.5 million, down from $389.4 million at the end of 2022 due to continued investments in commercial activities and pipeline advancement. Despite this, the company believes it has adequate financial resources to fund operations for at least the next few years.

AUPH Stock Assessment

Per Seeking Alpha data, AUPH is experiencing a positive trend in earnings revisions, with 100% upward revisions for FY1 and no downward revisions, earning it a B+ in this category. Revenue growth also looks robust, with YoY growth of 121.39% and a CAGR of 672.88% over the last 3 years. This gives it a B in the growth category.

However, the stock's valuation is less appealing. With a P/E GAAP ratio not measurable and an EV/Sales ratio of 8.43, it received a C for valuation. Its Price/Book ratio is also relatively high at 4.07.

Profitability is a concern, with a negative EBIT margin (-70.27%) and negative net income margin (-65.90%), yielding a grade of B. Return on Equity and Return on Assets are also negative at -23.08% and -13.45% respectively.

Momentum, evaluated as B+, is mixed. Over the last 3, 6, and 9 months, AUPH has seen increases of -0.89%, +22.06%, and +51.50%, respectively, but has fallen by -3.97% YoY, underperforming the SP500 across all these periods.

In terms of capital structure, AUPH has a market cap of $1.59B, with minimal total debt ($7.93M) and a healthy cash reserve of $360.86M, yielding an enterprise value of $1.24B.

Aurinia Announces Plan to Pursue Strategic Alternatives

Aurinia Pharmaceuticals has announced the exploration of strategic alternatives, considering options such as a potential sale, merger, or other strategic transaction. No particular timeline or outcome is guaranteed. The company has enlisted JPMorgan as a financial advisor, and Skadden, Arps, Slate, Meagher & Flom, LLP, and Borden Ladner Gervais LLP as legal counsel. Additionally, board members George Milne and Joseph Hagan have resigned, with Korn Ferry tasked to assist in finding their replacements. Aurinia affirms its commitment to transparency and stakeholders' best interests.

In the biotech world, seeking "strategic alternatives" is typically a sign of changes on the horizon, but whether it's positive or negative often depends on the company's specific circumstances. For instance, Dova Pharmaceuticals announced exploring strategic alternatives in July 2019 due to slow sales of its thrombocytopenia drug, Doptelet. The company was later acquired by Swedish Orphan Biovitrum AB, Sobi, a significant positive outcome for shareholders. However, in the case of Immune Pharmaceuticals in 2017, the exploration of strategic alternatives was a prelude to bankruptcy , a negative outcome for stakeholders.

For Aurinia, the resignation of two directors who received less than majority support suggests some internal turmoil, while seeking strategic alternatives could hint at an unstable financial situation, impending takeover, or a strategic pivot. However, this could also lead to a positive outcome if it results in a lucrative acquisition deal or a strategy that boosts the company's financial performance. It's important for investors to monitor the situation closely and consider these potential implications.

My Analysis & Recommendation

In conclusion, while Aurinia Pharmaceuticals has demonstrated some positives such as increased revenues in Q1 2023 and robust growth, several concerns persist. Despite the rise in revenues, the company's operating expenses also increased, leading to a net loss. The company's financial metrics reveal issues in profitability, and its mixed momentum suggests potential risks in the market. The exploration of strategic alternatives and recent board resignations indicate potential instability or a significant change of direction for the company. Historically, such moves in biotech firms can either signal an advantageous shift or herald troubling times. Therefore, despite promising advances in its drug portfolio, it remains crucial for investors to approach Aurinia with caution given these mixed signals. Hence, I maintain my "Sell" recommendation for the company, as uncertainties persist in its operational and financial trajectory.

Risks to Thesis

When the facts change, I change my mind.

In recommending a "Sell" position on Aurinia Pharmaceuticals, I must acknowledge certain risks to my recommendation. Firstly, Aurinia's Lupkynis has demonstrated potential in treating Lupus Nephritis, and if the drug can achieve deeper market penetration, it could significantly improve the company's financial performance.

Secondly, Aurinia's exploration of strategic alternatives could lead to positive outcomes such as a beneficial merger or acquisition, which could boost the company's value and contradict my current recommendation.

Thirdly, their two new assets, AUR200 and AUR300, currently in pre-clinical development, could offer substantial upside if they achieve regulatory approval and commercial success.

Lastly, while the current financials show a net loss, Aurinia's robust cash position could enable it to weather short-term financial challenges and invest in opportunities that could enhance its long-term profitability.

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