RARE - Ultragenyx: Rating Speculative Buy Playing Setrusumab Data Release

Summary

• Ultragenyx has been punished on the chart over the past 2 years to date.
• Investors haven't rewarded the company's top-line growth, nor recognized the potential in its investigational pathways.
• Despite this, we believe there is scope for the stock to re-rate on the back of its setrusumab pipeline.
• In that vein, we are taking a contrarian view and looking to play RARE's setrusumab data due for release in early-mid 2023.
• Net-net, rate speculative buy to $67.

Investment Thesis

Numerous publicly listed entities are now working towards providing unmet medical needs in complex disease segments. For those seeking exposure to breakthroughs for rare genetic diseases, Ultragenyx Pharmaceutical Inc. ( RARE ) offers a potential entry point to position against into the future. The asterisk to that point is that the market hasn't recognized this potential just yet, and the company has a ways to go in order to convince investors otherwise. The stock has continued to drift lower for the last 2-years, despite testing its longer-term resistance line at multiple points along the way.

We've identified RARE as a potential reversal play should it convert on some of its pipeline assets over the course of this year. In particular, we are interested in its hypothesis on osteogenesis imperfecta, a relatively rare genetic disease that impacts ~60,000 patients worldwide. Whilst a relatively small addressable market, it is well defined, and any advancement in treatments here is likely to see a rapid uptake in our opinion.

Exhibit 1. Continued selloff for RARE equity over last 2-years

The company's revenue ramp has accelerated at pace, and it expects this to continue. It recently released its preliminary FY22 estimates, calling for ~$356mm in total product revenue from its Crysvita and Dojolvi segments combined [Exhibit 2]. It also expects ~$425mm in turnover from existing products for FY23E.

Exhibit 2. RARE revenue ramp, FY22-23'

Despite this, the market hadn't responded until a bounce of RARE's November lows last year. We saw the price and lagging line cross the cloud, meaning we can trade the upside targets discussed later. Hence, we are taking a contrarian stance to the market's view and are looking to play its osteogenesis imperfecta studies due for readouts midway this year. Results in early-phase studies have been promising to date. Net-net, rate buy, seeking upsides to $67.

Exhibit 2a. Bullish cross above the cloud in November

Risks to thesis

Note: There are many risks investors must understand before considering reading any further. The market hasn't agreed with growth in RARE's existing markets. Nor has it recognized the company's potential for setrusumab just yet, evidenced by the heavy downside in its price action these 2 years. Moreover, there is a probability that our thesis will be nullified with further downside action. The market is also still volatile, and susceptible to central bank policy, therefore potentially compressing valuations in names such as RARE. It would also be unwise to open a large position in RARE, considering these obvious risks. Instead, small position sizing should be employed as risk management, and we are looking to take profits earlier than normal if it runs to our price objective. In the same breath, if the stock pulls back below $40 we are exiting completely. Investors must recognize this extensive list of risks before reading any further. It is imperative to do so.

RARE's setrusumab play

We are interested in the company's setrusumab [UX143] data that has shown promise to date. It is focused on providing a breakthrough in osteogenesis imperfecta ("OI"). OI is colloquially known as "brittle bone disease". It is a genetic disorder distinguished by the patient's predisposition to fractures. It results from a deficiency in collagen type I - a crucial component of bone cellular matrix. The insufficient collagen deposits lead to reduced cancellous and cortical bone density [cortical thickness, stiffness], resulting in bones that fracture easily with minimal trauma, sometimes even spontaneously.

Exhibit 3. RARE upcoming catalysts

OI is an autosomal dominant condition that manifests in a wide spectrum of clinical phenotypes. It involves mutations to the genes encoding the alpha-1(I) chain of type I collagen - and, therefore, a broad distribution of potential outcomes. As a result, the clinical manifestation is also highly heterogeneous, ranging from perinatal lethality, to relatively mild cases with normal life expectancy. Short stature is often seen accompanying the condition. There are currently eight recognized types of OI, each with a distinct genetic cause and unique clinical presentation. Ultimately, the severity of the disease depends on the type of mutation, and the amount of normal type I collagen produced.

Exhibit 4. Setrusumab action on OI

Currently, the gold standard of OI management requires a multidisciplinary approach. Pharmacotherapy, physiotherapy, surgery, and post-operative rehabilitation from the current treatment paradigm. Yet, it does nothing to alleviate the underlying mechanisms that cause the disease. As such, there are no approved formal treatments of the condition.

Hence, there is an unmet medical need in this domain, providing scope for RARE's setrusumab to traction across the phase-studies to approval. The key differentiator that has piqued our interest, RARE reports setrusumab has demonstrated propensity to normalize bone mass in mouse studies - even if the alpha-1(I) chain type 1 collagen is still mutated. This is an interesting hypothesis that could bypass a lot of the genetic hurdles one must overcome in order to solve the condition.

Exhibit 5. setrusumab action on bone density

RARE is currently dosing patients in its human phase 2/3 Orbit study investigating the efficacy and safety of setrusumab in OI. The study will enroll patients from 5 to <26 years old and will assess the 2-month changes in bone biomarkers in response to the dosing regimen of setrusamab. Enrollment is expected for completion early this year and investors can expect data by mid FY23', with the interim results expected to be available in mid-2023. RARE will gauge the optimal dosing regimen[s] for the phase 3 component of the study, so we look forward to the readouts. It also intends to initiate a randomized study in the H1 FY23', comparing the efficacy of bisphosphonates to that of setrusumab in children under 5 years of age with severe versions of the disease. Hence, we are looking closely to the data of both these trials in order to gauge RARE's success in this domain further.

Price targets and conclusion

With the bounce off its lows in December, we now have upside targets to $67 on the point and figure ("P&F") studies below. P&F charts are an objective measure of price structure by providing a cleaner measure of the prevailing trend, cancelling out the noise of time, and the short-term fluctuations in price. We can therefore obtain a more accurate view of the directional velocity of the stock price, and mathematical formulas are used to obtain the target prices in, again, an objective manner. A new movement in the chart won't be activated until these parameters are met, so we can get a cleaner picture of what the price is doing, based on either supply [sellers] or demand [buyers]. You'll see that previous targets have served us well at reversal points. Alas, we are entering with a small position, seeking $67 as an initial price objective. This is ~45% return potential.

Exhibit 6. Upside targets to $67, initial price objective

Net-net, we rate RARE a speculative buy, aiming to take profits earlier than normal if the stock runs to our price objective of $67, ~45% return potential. The play is on RARE's setrusumab segment that aims to provide a medical breakthrough in osteogenesis imperfecta.

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