2023-05-23 09:42:04 ET
Summary
- Despite recent production hitches with Skyclarys and the halt of bardoxolone, Reata Pharmaceuticals remains a compelling investment prospect.
- The expedited FDA review of Skyclarys' NDA supplement underscores the drug's crucial role in treating Friedreich's ataxia.
- Solid financials and a new debt facility arrangement equip Reata to manage near-term expenditure and ensure operations till 2026.
- Upgrading from "Hold" to "Buy," investors are advised to consider Reata if shares are under $80, hinting at a potential windfall when Skyclarys enters the market.
Introduction
Reata Pharmaceuticals ( RETA ) is a commercial-stage biotechnology company that addresses severe medical conditions that currently have limited or no approved treatment options. Among Reata's key initiatives is Skyclarys, an FDA-approved medication designed specifically for treating Friedreich's ataxia ((FA)).
In my previous analysis of Reata, I viewed the company in a positive light, chiefly due to the FDA's approval of Skyclarys for FA. I appreciated the stability of Reata's financial status, the potential of Skyclarys in the FA market, and the fact that the company faces limited competition. The orphan drug exclusivity enjoyed by the company was also a major positive point. Although I recognized that expenses are likely to surge due to preparations for the commercial launch of Skyclarys, I felt confident in Reata's ability to raise additional capital if required. Overall, I perceived the company as a promising investment opportunity with considerable potential for growth. Nonetheless, at that time, I suggested a "Hold" stance on the stock, recommending future investment only if the share price falls.
Recent developments: In May, Reata surprised many by announcing that Skyclarys had not been sold yet due to manufacturing issues ("process impurity"). They initiated the setup for physicians to prescribe Skyclarys and received approximately 500 patient start forms. The final stages of drug production and packaging are completed, but an NDA supplement is required for FDA approval to release Skyclarys to the pharmacy. The FDA is, however, expediting the review process, aiming for approval by mid-August 2023. Reata anticipates Skyclarys to be available through the pharmacy by that time. Furthermore, the company disclosed the discontinuation of its studies on bardoxolone, a candidate for kidney disease. This news caused Reata’s stock to fall ~20%.
Q1 2023 Financials
Let's first review the company's most recent financial report . As of March 31, 2023, Reata Pharmaceuticals had $321.0 million in cash, cash equivalents, and marketable securities, compared to $387.5 million at the end of December 2022.
Research and Development (R&D) expenses for the first quarter of 2023 were $55.5 million, up from $39.8 million in the same quarter of the previous year. This rise is attributed to increased costs of ongoing clinical studies and stock-based compensation due to the vesting of performance-based equity awards following the FDA approval of Skyclarys.
Selling, General and Administrative (SG&A) expenses were $54.9 million for the first quarter of 2023, a significant increase from $24.8 million during the same period in the previous year. The increase was primarily due to expanded commercial activities and a rise in stock-based compensation resulting from the vesting of certain performance-based equity awards upon the FDA approval of Skyclarys.
The net loss for the first quarter of 2023 was $116.1 million, or $3.14 per share, compared to a net loss of $73.8 million, or $2.03 per share, for the same period in the previous year.
On May 5, 2023, Reata secured a debt facility with Pharmakon Advisors, LP, a fund management company. The facility allows Reata to borrow a total principal amount of $275 million, which will be provided in four installments. The first installment of $75 million will be disbursed on May 12, 2023. The second installment of $50 million will be granted once specific regulatory or production requirements are met. The remaining two installments of $75 million each will be made available upon achieving certain sales milestones.
Reata updated its cash guidance, stating that, given its current operating plans, its existing cash, cash equivalents, and marketable securities, along with funds available from the new debt facility, will be sufficient to fund operations through the end of 2026.
Addressing a Process Impurity: Reata's NDA Supplement for Skyclarys and FDA's Priority Review
A "process impurity" in pharmaceutical manufacturing refers to any unintended substance that is present in a drug product due to the manufacturing process. It could originate from raw materials, be a byproduct of a reaction, or come from the manufacturing equipment itself. The type and acceptable level of impurities are usually defined in the regulatory specifications for the drug product, and they are required to be monitored and controlled to ensure the safety and effectiveness of the drug.
In Reata's case, they discovered a process impurity in Skyclarys that was above the level specified in their New Drug Application (NDA) during process validation. Consequently, they submitted an NDA supplement to the FDA to increase the specification for this impurity. This is a formal request to adjust the allowed level of that specific impurity in the drug product.
Addressing a process impurity can vary in complexity depending on the source and nature of the impurity. If the impurity is due to a component of a raw material or a predictable byproduct of the manufacturing process, it may be easier to identify and control. However, if the impurity arises from unpredictable sources like equipment wear or environmental contamination, it can be more challenging.
It's also worth noting that modifying the specification doesn't necessarily eliminate the impurity, but rather adjusts the acceptable levels of that impurity in the final drug product. The company must provide adequate justification that the new level of impurity does not impact the safety or efficacy of the drug.
The FDA's review of this supplement under a Priority Review implies they recognize the importance of this matter, potentially due to Skyclarys's role in treating FA. If the FDA approves the supplement (potentially even earlier than the projected date of mid-August 2023), this will allow the release of Skyclarys to the specialty pharmacy, meaning Reata can move forward with the supply of the drug.
My Analysis & Recommendation
In conclusion, Reata Pharmaceuticals is carving out a unique space for itself in the rare disease space. Despite a recent hiccup in Skyclarys' manufacturing process that delayed its release to the market, the sheer demand for this drug is apparent, with around 500 patient start forms already received, showcasing its promising blockbuster potential.
However, investors should be aware of the challenges the company faces. Discontinuing the kidney disease candidate, bardoxolone, contributed to a drop in Reata's stock. However, this decision could be viewed as positive since the drug, in my view, had limited prospects and was costly. With a solid cash position and flexible debt facility, Reata is well-equipped to overcome these temporary difficulties. Expenses are rising due to increased commercial activities and ongoing clinical studies, but they are justifiable considering the potential of Skyclarys in the rare disease market.
The impurity issue during the manufacturing process of Skyclarys is a concern, but it's a solvable problem. Their NDA supplemental filing with the FDA, aimed at adjusting acceptable levels of the identified impurity, indicates proactive management. The expedited review process by the FDA also reflects the urgency and significance of Skyclarys in the treatment of FA.
In spite of the recent challenges, Reata appears to maintain its strong financial stability in the long run. The company's revised cash forecast provides reassurance to prospective investors, indicating that they have enough funds to sustain their operations until 2026. Furthermore, as I have previously emphasized , Skyclarys has the potential to become a highly successful drug, securing close to $1 billion in estimated peak annual revenue, and Reata will have exclusive market rights for an extended period. Although the setback is disheartening, I believe it does not warrant a 20% reduction in valuation.
Balancing these factors, I upgrade my rating on Reata from "Hold" to "Buy" as long as its shares trade under $80, suggesting an enterprise value considerably below $3 billion. This price point presents an attractive entry for investors looking to capitalize on the company's potential upside once Skyclarys hits the market. Investors should watch out for the FDA's response on the NDA supplement and the commercial launch of Skyclarys, expected around mid-August 2023. These milestones could serve as significant catalysts for Reata's stock performance in the upcoming quarters.
Risks to Thesis
When the facts change, I change my mind.
Here are some potential risks to my "Buy" rating:
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Regulatory Risk: There's a risk that the FDA may not approve the NDA supplement for Skyclarys, which could further delay the drug's launch and impact Reata's financials negatively.
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Market Acceptance: Even though the company has received approximately 500 patient start forms, there's no guarantee that the drug will be widely adopted by patients and physicians once it's commercially available.
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Competition: While the company currently faces limited competition, there's always a risk that competitors could emerge, potentially offering superior or more cost-effective treatments for Friedreich's ataxia.
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Manufacturing Issues: The company has already experienced one manufacturing issue. It's possible that further manufacturing problems could arise, potentially leading to more delays or quality concerns.
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Profitability Risk: Increased costs of ongoing clinical studies and expanded commercial activities may continue to increase expenses, impacting profitability.
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Cash Burn: While the company has projected that it has sufficient funds to sustain operations till 2026, there is a risk that unexpected expenses or problems could lead to an increased rate of cash burn, potentially necessitating additional capital raises that could dilute existing shareholders.
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Pipeline Diversification: With the discontinuation of bardoxolone, there is a risk of overreliance on Skyclarys. If problems occur with this drug, the company could be left with a less diversified pipeline, which could impact its valuation.
For further details see:
Reata Pharmaceuticals: 'Buy' Following Skyclarys Delay And Bardoxolone Discontinuation (Rating Upgrade)