RARE - Ultragenyx: Speculative Innovation Amidst High Expenditures Merits Caution (Rating Downgrade)

2023-11-14 21:51:36 ET

Summary

• Ultragenyx shows clinical innovation in rare diseases; financial growth is offset by high net loss and cash burn.
• Recent earnings indicate YOY revenue growth but a substantial net loss; operating expenses have decreased.
• Ultragenyx's liquid assets and recent funding extend its cash runway, but additional financing may be needed soon.
• I recommend "Sell" based on high expenditures, high-risk clinical ventures, and uncertain biotech market trajectory.

At a Glance

In my previous analysis of Ultragenyx Pharmaceutical ( RARE ) and its collaboration with Mereo BioPharma ( MREO ) on setrusumab, a focus was placed on the financial dynamics and the promising yet uncertain clinical outcomes in treating Osteogenesis Imperfecta ((OI)). Since then, Ultragenyx has continued to demonstrate a blend of clinical innovation and financial strategy crucial in biotechnology. The advanced therapies, especially setrusumab for OI, still mark significant strides in addressing unmet medical needs. A closer look at the updated Phase 2 study findings of setrusumab indicates evolving potential and limitations, warranting a continuation of cautious optimism. The company's pipeline, including GTX-102, UX701, DTX401, and DTX301, although speculative, remains robust, covering various rare genetic disorders. Financially, Ultragenyx’s growth in revenues is counterbalanced by a substantial net loss and high cash burn rate, reflecting the complexity of biotech investments. However, their solid liquidity position suggests a calculated approach to funding R&D. As the company approaches key trial results, its clinical and financial trajectory appears more pivotal than ever, underscoring a balanced view of its innovative treatments against inherent developmental risks.

Q3 Earnings

To begin my analysis, looking at Ultragenyx's most recent earnings report , there's a noticeable YOY growth in revenues for the three-month period ending September 30, 2023. Total revenues increased from $90.7M in 2022 to $98.1M in 2023, driven primarily by a significant surge in royalty revenue from $5.4M to $55.7M. Product sales also grew from $32.5M to $42.3M. However, the company reported a substantial net loss of $159.6M in 2023 compared to $245.1M in 2022, reflecting improved but still challenging financial health. Operating expenses saw a decrease from $315.8M to $243.1M, with research and development expenses reducing notably from $237.3M to $157.2M. Notably, share dilution remained minimal, as evidenced by a slight increase in weighted-average shares used in computing net loss per share from 70.1M in 2022 to 71.7M in 2023.

Financial Health

Turning to Ultragenyx's balance sheet , the combined total of 'cash and cash equivalents' ($72.6M), 'marketable debt securities' ($369.5M and $82.1M), and 'equity investments' ($4M) amounts to $528.2M in liquid assets. Including the recent capital raise of approximately $326.5M in October, their total liquid assets approximate $854.7M. The 'current ratio', calculated as total current assets ($599.2M) over total current liabilities ($254M), stands at roughly 2.36, indicating sound short-term liquidity. Comparing total assets ($1.24B) against total liabilities ($1.21B) reveals a closely matched financial position.

Ultragenyx's net cash used in operating activities over nine months is $390.9M, leading to a monthly cash burn rate of about $43.4M. With this burn rate and the adjusted liquid assets, the cash runway extends to nearly 20 months. The recent capital infusion significantly bolsters the company's financial endurance.

Despite this improved liquidity, given the substantial monthly cash burn, the likelihood of Ultragenyx requiring additional financing within the next twelve months remains considerable. However, the recent financing does provide a cushion. As always, these insights are derived from historical data and may not fully predict future trends.

Market Sentiment

According to Seeking Alpha data, Ultragenyx presents a complex picture. Its market capitalization of $2.86 billion suggests moderate confidence, reflective of its niche in rare disease therapeutics, yet tempered by financial uncertainties. Growth prospects are promising, with analyst projections showing revenue increases from $428.32M in 2023 to $681.81M in 2025, signaling optimism about the company's pipeline and market penetration.

Stock momentum, however, trails the SP500: RARE declined by -4.46% over 3 months and -28.18% over 6 months, compared to the SP500’s -1.20% and +6.71% respectively, indicating market skepticism or sector-specific challenges.

Short interest stands at 5.68%, with 4.16M shares short, a significant but not alarming level, suggesting a moderate bearish sentiment among investors.

Institutional ownership is high at 84.46%, with notable recent activity: 24 new positions (3,603,729 shares) and 37 sold out (1,737,127 shares). Leading institutions include Vanguard (7,018,502 shares), RTW Investments (5,405,089 shares), and Wellington Management (5,177,521 shares), showing substantial institutional engagement.

Insider trades reveal a mixed trend with net activity at -16,498 over the past three months but a positive 116,754 over twelve months. This pattern suggests cautious short-term actions by insiders, possibly in response to recent developments or market conditions, but overall longer-term confidence in the company's trajectory.

Ultragenyx's Setrusumab as a Lead Clinical Prospect in OI Treatment - Analysis and Limitations

Ultragenyx's recent emphasis on setrusumab as a key therapeutic candidate for Osteogenesis Imperfecta [OI] merits a nuanced analysis, particularly in light of the Phase 2 study findings presented at ASBMR 2023. These findings, indicating a significant decrease in fracture rates and improvements in bone mineral density [BMD] over nine months, are encouraging. Yet, a deeper scrutiny of the study's methodology reveals several limitations that must be weighed in evaluating setrusumab's efficacy.

Key Observations

• Fracture Rate Reduction: The 67% decrease in annualized fracture rate in OI patients treated with setrusumab is substantial, yet this was observed over an average nine-month period rather than a full year.
• BMD Enhancements: The increase in lumbar spine bone mineral density [BMD] suggests potential bone-strengthening effects of setrusumab.

Analyzing the Limitations

• Small Sample Size: The involvement of only 24 patients restricts the generalizability of these findings to the broader OI population. Larger, more diverse studies are necessary.
• Absence of Control Group: The lack of a placebo or control arm challenges the attribution of observed outcomes solely to setrusumab, as external factors might have influenced the results.
• Timeframe Discrepancy: Comparing long-term historical data with short-term treatment results risks overestimating setrusumab's annual efficacy.
• Seasonal Variability: The nine-month (mean duration of treatment) period may not fully capture seasonal variations in fracture risks, skewing results against longer historical data.
• Regression to Mean and Natural Disease Fluctuations: The natural decrease in fracture rates and disease variability without a control group makes it difficult to isolate setrusumab's true impact.
• Historical Control Reliability: Relying on historical data introduces potential biases and inaccuracies.
• Behavioral Factors: Patient behavior changes due to awareness of receiving a novel treatment could independently affect fracture risk.

Looking ahead, Ultragenyx's ongoing Phase 3 trials—Orbit and Cosmic—offer avenues to address these limitations. Orbit, targeting 195 pediatric and young adult patients across multiple countries, and Cosmic, comparing setrusumab against intravenous bisphosphonate therapy in a younger cohort, will provide more comprehensive data. These trials, particularly given their larger scale and diverse demographics, are pivotal in establishing setrusumab's long-term efficacy and safety, solidifying its potential as a viable treatment for OI.

Breaking New Ground in Rare Diseases: Ultragenyx's Approach

Outside of OI, Ultragenyx is carving a niche in the rare disease therapeutic space, leveraging innovative approaches like gene therapy and antisense oligonucleotides. This strategy not only targets areas of high unmet medical need but also positions the company at the cutting edge of genetic medicine.

1. GTX-102 for Angelman Syndrome:

• Clinical Advancements: The Phase 1/2 extension cohorts for GTX-102 have shown promising outcomes in treating Angelman syndrome , marked by improvements in several key neurological domains. These improvements, mirrored by EEG changes, hint at GTX-102's potential to modify disease progression, a significant leap in treating this complex neurogenetic disorder.

• Safety Profile and Future Prospects: The lack of new severe adverse events reinforces the therapy’s safety, an essential factor in rare disease treatments. The ongoing global expansion cohorts are expected to bolster this data, providing a more comprehensive safety and efficacy profile by the first half of 2024.

2. UX701 for Wilson Disease:

• Pivotal Study Insights: Early data from the Cyprus2+ study's first cohort shows promising reductions in urinary copper levels , suggesting that UX701 could reduce, or even eliminate, the need for existing therapies. This not only signifies potential efficacy but also a possible paradigm shift in managing Wilson disease.

• Safety and Study Progress: The favorable safety data to date augments the therapy’s profile. The completion of Stage 1 of the pivotal study by year-end, with results expected in early 2024, is pivotal for determining the optimal dosing strategy.

3. DTX401 for Glycogen Storage Disease Type Ia (GSDIa):

• Phase 3 Completion: The conclusion of Phase 3 dosing for DTX401 marks a critical milestone. The focus on reducing dependency on oral glucose replacement is a significant endpoint, addressing a core challenge in GSDIa management. Positive results could revolutionize treatment standards for this metabolic disorder.

4. DTX301 for Ornithine Transcarbamylase (OTC) Deficiency:

• Study Dynamics: The ongoing Phase 3 study of DTX301 is a significant step toward addressing OTC deficiency. The study's design, focusing on reducing the need for traditional treatments, reflects an understanding of the disease's daily impact. The anticipated completion of enrollment by mid-2024 sets the stage for a critical evaluation of DTX301's potential in altering the treatment landscape for OTC deficiency.

Ultragenyx's approach, focusing on a range of rare genetic disorders, not only diversifies its portfolio but also underscores its commitment to innovation in areas traditionally overlooked by larger pharmaceutical companies. The upcoming data from these varied trials will be crucial in assessing the true potential of these therapies, potentially marking a new era in the treatment of rare genetic diseases.

My Analysis & Recommendation

In conclusion, Ultragenyx presents a complex investment picture. Financially, while revenues show growth, the significant net loss, and high cash burn rate, even with the recent capital infusion, signal a cautious outlook. The company's strong liquidity position and minimal share dilution offer some stability, but the need for additional funding in the foreseeable future remains a considerable risk.

Clinically, Ultragenyx's focus on rare diseases through gene therapies (AAV8 and AAV9) and antisense oligonucleotides is ambitious but highly speculative. The R&D spend demands significant clinical successes, especially in their pipeline outside of OI, where I maintain skepticism about their prospects. The ongoing trials for GTX-102, UX701, DTX401, and DTX301 hold promise but are still in stages where conclusive data is pending. These therapies, if successful, could redefine treatment standards in their respective areas, but the inherent risk in drug development, especially in rare diseases, remains high.

Investors should closely monitor Ultragenyx's upcoming trial results and cash burn rate. Diversifying investments to mitigate the inherent risks in biotechnology, particularly in companies focused on rare diseases, is advisable. A balanced portfolio with a mix of stable and speculative stocks could be a prudent strategy in this scenario.

Given these factors, I assign a confidence score of 35/100 and recommend a "Sell". This recommendation is guided by the company's high expenditure, the high-risk nature of its clinical ventures, and the uncertain trajectory in the highly competitive biotechnology market. Investors should be prepared for potential volatility and be attentive to any shifts in the company's clinical trial outcomes or financial strategies in the coming weeks and months.

Risks to Thesis

In my assessment, I might have underemphasized certain aspects that could challenge my "Sell" recommendation for Ultragenyx. Firstly, I may have underestimated the potential market impact of their innovative treatments. The success of therapies like setrusumab, GTX-102, UX701, and DTX301 could significantly disrupt the rare disease treatment market, offering substantial upside potential.

Secondly, I may have overlooked the strategic importance of their diversified portfolio in rare diseases. This diversification reduces reliance on a single product and spreads the risk across multiple therapeutic areas. Given the unmet medical needs in these areas, any clinical success could lead to rapid market adoption and a corresponding increase in stock value.

Additionally, I might have overemphasized the company's current financial strain without fully considering the long-term investment nature of biotech R&D. The high cash burn rate is typical for companies at this stage and should be weighed against the potential for groundbreaking therapies.

Finally, my focus on the company's financials and clinical trials may have led to an underappreciation of the broader sector trends, particularly the increasing interest and investment in genetic and rare disease therapies. As the sector evolves, Ultragenyx's positioning could prove more favorable than currently anticipated.

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