2023-04-29 05:21:19 ET
Summary
- Reata graduated to owning a commercial pharmaceutical product on February 28.
- Projecting timing for Skyclarys or any new therapy’s revenue ramp is difficult.
- Expertise gained and the rest of the pipeline are reasons for optimism about the stock price.
Reata Pharmaceuticals ( RETA ) stayed mainly below $50.00 per share during the last year. After the announcement that the FDA approved Skyclarys (Omaveloxolone) for Friedreich’s ataxia on February 28, 2023, RETA stock climbed closer to $100.00 per share. It closed on April 27, 2023, at $98.23, giving Reata a market capitalization of about $3.6 billion. This article will focus on valuation: is the price likely to continue to climb, or did it go too high given the situation? I believe RETA stock is still undervalued for long-term investors, but there are some short-term risks that potential investors should consider.
I last wrote about Reata in Reata Pharmaceuticals: Buy While preparing for Commercial Launch on January 3, 2023. At that time Reata’s 52-week low was $18.47 and its 52-week high was $43.90. In retrospect, that was a good time to buy, but my article pointed out some risks to weigh against my optimism. Note too that back in early 2020 the stock had been over $200 per share, before disappointing clinical data brought it low again. I said “Reata’s setbacks were due to the complicated nature of the metabolic pathways that are its preferred therapeutic targets.” I will not review the longer history here, but I think investors occasionally need to remind themselves that past clinical failures do not imply there will be no future clinical successes.
Skyclarys
Omaveloxolone, now Skyclarys, is a small molecule that activates Nrf2 , an antioxidative transcription factor, while inhibiting NF-kB, a pro-inflammation transcription factor. This happens within mitochondria. This was proven in clinical trials to help with Friedreich’s ataxia , a genetically induced disease that causes nerve tissue damage and consequent muscle weakness and loss of control. It affects about 50,000 people in the United States. Nff2 signaling is impaired in Friedreich’s patients, resulting in a lack of antioxidant defense mechanisms. Omaveloxolone’s Nrf2 transcription results in a cascade that restores antioxidant defense and the health of nerve cells hurt in ataxia.
Stifel analyst Annabel Samimy believes peak sales of Skyclarys could reach $1 billion per year. Numerous other potential therapies are under development by competitors, but being first in the field is a considerable advantage. How quickly revenue can ramp depends on reimbursement decisions by payors as well as sales initiatives. Few of the potential patients would be Medicare dependent because most patients do not make it to that age bracket. The official wholesale acquisition price is $370,000 per year. The drug must be taken daily.
Bardoxolone
Bardoxolone, like omaveloxolone, is an Nrf2 transcription factor that appears to restore mitochondrial function. Its leading indication is now CKD, or chronic kidney disease, when caused by Alport Syndrome. An FDA Complete Response Letter was issued for Bardoxolone for Alport Syndrome CKD (chronic kidney disease) on February 25, 2022. The problem is CKD is slow to develop and EGFR, which was measured in the Phase 3 trial, is not considered a valid clinical endpoint by all physicians. On December 8, 2021, the FDA Advisory Committee had unanimously rejected the drug. The CRL might be fixed by a large Phase 3 trial in Japan in diabetic CKD with a new primary endpoint of dialysis delay. The Japanese Ayame trial follows patients for 3 years and was expected to complete enrollment in late 2022. Reata is working with the FDA on next steps, but it looks like acceptable data might be about 3 years away.
Bardoxolone is also in Phase 3 clinical trials for CKD caused by ADPKD (Autosomal Dominant Polycystic Kidney Disease) and caused by diabetes. Positive results were reported in the two Phase 2 trials. ADPKD is an inherited kidney disease dependent on PKD1 and PKD2 genes and their various mutations. Its progression leads to the need for dialysis. It does have some treatment options, notably tolvaptan. There may be 300,000 or more cases in the United States. Many go undiagnosed until patients are between 30 and 50 years old. CKD eventually affects about 1 in 10 people, causing nearly 1 million annual global deaths. One in three adults with diabetes have CKD.
Platform and Rest of Pipeline
I was attracted to Reata because of its emphasis on diseases related to mitochondria and the large unmet medical need in kidney diseases. It is interesting that Reata’s first approval came in a neurological disease. I can’t say whether Bardoxolone will ever get approval, but it has shown promise. The only other indication in the Reata Pipeline is RTA 901 for DPNP (diabetic peripheral neuropathic pain), which completed a Phase 1 trial successfully. With commercial revenue coming in from Skyclarys, I would expect Reata to ramp up its research efforts, so we could see other therapies come out of preclinical development as the decade progresses.
Risks
I see moderate risk that Reata will run out of cash without a dilutive stock offering. At the end of 2022 the cash and equivalents balance was $388 million. Cash used in operations in Q4 was $204 million, but the average run rate in 2022 was approximately $125 million. I do not expect very significant sales of Skyclarys until Q3, but Q2 is the first full quarter after the February 28 approval. The main risk to the ramp is slow approval by insurance companies. Given the market capitalization is now near $3.6 billion, a fair amount of operating cash could be raised with relatively little dilution. I would look to an estimate for cash-flow break even when the company reports Q1 results, likely on May 8, 2023. A cash raise at any point would not surprise me.
Valuation
Taking a conservative approach, I am going to guess at a $750 million per year revenue run rate for Skyclarys after a few of years of ramping. Other guesses, higher and lower, are equally valid. I will take $500 million as the annual operating expense rate. That presumes Reata management will not go wild with spending, not always a good assumption. That gives an estimated $250 million per year in net income. At 20 times earnings (my rule of thumb for P/E when things are going reasonably well) that equates to $7.5 billion in market capitalization. At today’s price of near $99 per share the market cap is $3.6 billion. So as product sales ramp, if nothing goes wrong, I expect the stock price to approximately double during the course of the ramp. Good news on the pipeline front could push that higher. A total Bardoxolone fail would be a bad scenario, though that should not affect income from Skyclarys. On the whole, I see Reata as a good buy for anyone who can endure the risks and thrills of several years of (hopefully) Skyclarys revenue ramping.
For further details see:
Reata Pharmaceuticals: Still A Buy After Skyclarys Approval Jump