ALDX - Why I Am Selling Aldeyra Therapeutics: A Sour AbbVie Deal And A Lack Of Transparency

2023-11-09 09:04:59 ET

Summary

• Aldeyra Therapeutics is a strong sell as bearish developments have been met with silence from the management team, amplifying the uncertainty surrounding the future.
• The company is facing challenges in its journey to become a commercial biotech company, with back-to-back rejections from the FDA just this year.
• Reproxalap was promising, but the new deal with AbbVie has effectively knee-capped its potential.

Introduction

Aldeyra Therapeutics (ALDX) was the first stock I wrote about when I joined Seeking Alpha in 2021. At the time, I was quite bullish about the prospects of Aldeyra following the setback of TRANQUILITY. Just a year after that article was published, the stock appreciated by nearly ~60%. Later, the equity continued to appreciate as Aldeyra's successes continued to mount. It made a lot of sense then to be bullish, and shareholders who managed their risk prudently and sold over time have realized a significant return.

Today, Aldeyra faces a very different setback. Shares of Aldeyra first fell by ~70% after an SEC filing revealed that the FDA had communicated to the company that the submitted body of data did not support Reproxalap's approval as a dry eye disease treatment. However, as of the time of writing, the stock has rebounded by over 60% following the news that Aldeyra entered a licensing deal with AbbVie for Reproxalap. Will Aldeyra be able to fully recover following this massive setback and reach new 52-week highs again, like it had following TRANQUILITY's failure?

In my view, the answer to that is a resounding no. At the foundation of this thinking lies one simple change: the Aldeyra of today is no longer the Aldeyra of yesterday. A lack of transparency from the management team, coupled with what I see as a less-than-favorable deal with Reproxalap, changes the fundamentals completely. Consequently, I would assign the stock a strong sell rating with no price target.

Thesis

Simply put, Aldeyra is facing long odds in its journey to become a commercial biotech company. It has seen back-to-back rejections from the FDA, and the pipeline is in limbo as a result. Given the recent Reproxalap deal with AbbVie and the lack of transparency over the past year, I would assign Aldeyra a strong sell rating.

A Lack Of Transparency

First, it is important to emphasize the concerning lack of transparency from Aldeyra regarding Reproxalap and their future plans. First, Aldeyra did not issue a press release or hold a conference call detailing their latest quarterly earnings report. Nor did they deem it necessary to have either means of shareholder communication for the quarter before that.

Beginning with this announcement of first quarter 2023 financial results, Aldeyra will no longer conduct quarterly conference calls to discuss financial results. Aldeyra plans to continue hosting conference calls, as appropriate, to report the results of certain clinical trials and other material information concerning regulatory and clinical developments.

Source: 1Q'23 Press Release

Aldeyra's first quarter earnings press release disclosed that there would be no more quarterly earnings calls going forward, but it did not mention anywhere that they would entirely stop publishing earnings press releases. The choice to stop holding conference calls and press releases outlining quarterly updates amid such an important year is strange.

Even stranger is that Aldeyra scheduled conference calls to discuss when ADX-629 succeeded in phase two chronic cough and phase two retinitis pigmentosa trials respectively -- nor did it hesitate to hold one after INVIGORATE-2 (phase 3 trial for allergic conjunctivitis) succeeded. Yet Aldeyra does not see the merit in holding conference calls for post-earnings updates and whenever things do not go their way.

For example, Aldeyra did not hold any conference calls discussing their future plans after the FDA rejected ADX-2191's NDA earlier in June. Most egregiously, Aldeyra did not even file a press release disclosing the recent revelation that the FDA does not believe the existing data behind Reproxalap did not merit approval, let alone hold a conference call to discuss it. In fact, the public became aware due to an SEC filing describing the whole ordeal in a brief paragraph. And when Aldeyra announced their licensing deal with AbbVie, there was again no conference call to discuss the strategy behind it. These are critical developments, so shareholders should ask themselves why Alderya has been so shy in communicating with shareholders and analysts.

Another concern relating to transparency is that both NDA revelations came out of nowhere; this issue is particularly acute when it comes to Reproxalap. The FDA may not only reject Aldeyra's NDA but will likely request one or more clinical trials. A lack of data can only be rectified by more data, and according to Aldeyra, they believed that their dry eye disease NDA was the most " comprehensive ever. "

As you know, the Reproxalap NDA for dry eye disease has been accepted and thus, to some extent, regulatory risk has been removed at least as it relates to the FDA's review of that FDA. As we've said before, we believe the NDA submission is the most comprehensive ever for a dry eye disease drug with three different signs and a variety of clinical trials that feature acute and chronic administration up to 12 weeks for efficacy and now 12 months for a safety.

Source: CEO Todd Brady, Q4'22 Conference Call

In hindsight, this belief and sentiment did not age well. It is hard to tell exactly where this misplaced optimism originated from, but it is a red flag to remember going forward. What has become apparent is that the Aldeyra of then is no longer the same as Aldeyra today; the shift away from holding public events amid pivotal developments is a bearish flag.

A Bad Deal

Another glaring issue I see is Aldeyra's failure to realize more value from Reproxalap. Take their recent licensing deal with AbbVie ( ABBV ) for example. Aldeyra is only getting $1 million upfront. AbbVie effectively assumes no risk in taking this deal, as they are granted an option to collaborate (that only costs $5 million to extend) in developing and commercializing Reproxalap.

AbbVie has full discretion and autonomy in deciding if they want to execute the option. If they do exercise the option, then Aldeyra receives a $100 million payment, up to $300 million more in milestone payments, and 60% of the cost of commercializing Reproxalap. In exchange, Aldeyra is forsaking 60% of the revenue from Reproxalap and only receiving tiered royalties from international net sales. Critically, Aldeyra is also giving up the right of first negotiation to AbbVie.

"((C)) a right of first negotiation for compounds that are owned or otherwise controlled by Aldeyra in the field of ophthalmology relating to treating conditions of the ocular surface and ((D)) a right to review data for any other compounds that are owned or otherwise controlled by Aldeyra in the fields of ophthalmology and immunology before such data is shared with any other third party"

Source: SEC Filing Describing AbbVie Deal, 8-K

In my view, this is a terrible deal. Granting AbbVie an option essentially gives them the power to go forward only when it is favorable for them; there is no risk-sharing in this collaboration. AbbVie has the freedom to only exercise this option when they know that Reproxalap is a slam-dunk, so why would they not wait until all the smoke settles? Moreover, AbbVie can now short-circuit any competitive M&A with their right of first negotiation and the ability to review internal data prior to it being shared.

Even if Reproxalap were to be eventually approved, the upside is now capped by this agreement. For reference, when Novartis sold Xiidra (a dry eye disease treatment) and their clinical ophthalmology assets, they were able to net 1.75 billion upfront and ~$750 million in milestone payments.

As of their latest quarterly earnings, Aldeyra holds ~$143 million in cash and cash equivalents and $20 million in long-term debt. Since being founded in 2004, the accumulated deficit has ballooned to nearly $400. After nearly twenty years and nearly half a billion in capital investment, Aldeyra has yet to materialize a single commercial product. It should also be noted that their cash burn staying at $8 million per quarter is unlikely, given the need to finance more clinical trials for ADX-629 and possibly Reproxalap too.

As a result of the sheer degree of uncertainty (largely due to a lack of communication from the management team,) it is nearly impossible to value Aldeyra. Any assumptions made to forecast future cash flows or attempt at comparable company analysis are further complicated by the difficult financing environment and bear market in biotech; a big reason why I assigned a strong-sell rating is because of this difficulty.

Conclusion

Past results do not predict the future, but they can be a reason for skepticism. Even the most promising science and pipeline can ultimately be squandered when you take a bad deal. Complicating matters is that Aldeyra's consistent and prompt pattern of public communication to shareholders has eroded. Quarterly earnings fly by with no public announcement or call to accompany them, and the management team's shyness when it comes to public conference calls creates uncertainty. Even if you believe Reproxalap works and should be approved, ask yourself: do you think the management has done a good job in communicating the reasoning behind their execution? The absence of transparency is a core reason why I am assigning a strong-sell rating to Aldeyra.

Risks To Thesis

There are several risks to my thesis and reasons why my recommendation may turn out to be unwise; two stand out in particular:

1) AbbVie ends up exercising their option early and then proceeds to buy the company. The possibility of this is remote, but non-zero. It depends very much on the strategic thinking underpinning AbbVie's decision to collaborate with Aldeyra over other dry-eye biotechnology companies.

2) The FDA ends up approving Reproxalap by November 23rd ( the PDUFA date. ) In my view, this is even less likely than the first risk, as it would require Reproxalap's data deficiency to be addressable with information from the clinical trials that have been already conducted. Substantive review issues typically cannot be solved on such short notice, and the FDA has no legal obligation to review any information submitted after the warning.

Ultimately, either of these two risks panning out would completely change the narrative. I personally don't see either situation occurring, but they are still worth acknowledging to get a full grasp of the situation.

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