2023-03-23 09:43:09 ET
Summary
- Reata Pharmaceuticals recently received FDA approval for Skyclarys, the first drug approved to treat Friedreich's ataxia (FA) in adults and adolescents aged 16 years and older.
- Skyclarys is expected to experience significant utilization among FA patients, with a potential peak annual revenue between $800 million and $1 billion in the US alone.
- The competitive risk for Skyclarys is relatively low, as many potential competitors are in early development stages or have faced setbacks in clinical trials.
- Reata will benefit from Skyclarys' orphan drug exclusivity, providing seven years of market protection from potential generic competitors.
- Although there are uncertainties and risks linked to bringing a new drug to market, Reata Pharmaceuticals offers an appealing investment opportunity with considerable growth potential. Reata stock is currently a "Hold," but consider buying on dips.
Introduction
Reata Pharmaceuticals ( RETA ) is a commercial-stage company specializing in the development of small-molecule therapeutics with unique mechanisms of action. Their focus is on treating severe diseases with few or no approved treatments. Skyclarys, one of Reata's primary programs, is an FDA-approved drug for Friedreich's ataxia ((FA)).
Recent events: On February 28, Reata announced FDA approval for Skyclarys, the first drug to achieve this for FA. The company received a broad label indication "for the treatment of Friedreich’s ataxia in adults and adolescents aged 16 years and older." Shortly after, Reata set the annual price of Skyclarys at $370,000. Reata plans to launch Skyclarys in May in the US and is preparing for EU launch early next year.
The stock price almost tripled following the FDA approval, which is highly unusual for a biotech company valued near $1 billion. Many, myself included , had expected either rejection or a more limited approval with restrictions such as a REMS program, boxed warning, or exclusion of certain FA patients.
Reassessing Reata: Skyclarys' Approval and its Impact on Investment Outlook in the Face of FA Market Potential
My initial doubts regarding Skyclarys' approval were mainly due to the "persuasiveness of the single trial," as the primary endpoint's p-value exceeded 0.01 (within the treatment population that excluded FA patients with pes cavus). Reata had previously mentioned the FDA's concern regarding the significance of the data. However, Reata's submission of natural history external controls and an updated Delayed-Start Analysis of the MOXIe Extension study provided the necessary confirmatory evidence for Skyclarys' approval. In retrospect (hindsight is 20/20), I believe I underestimated the influence of regulatory decisions considering "the seriousness of the disease, particularly where there is an unmet medical need; the size of the patient population; and whether it is ethical and practicable to conduct more than one adequate and well-controlled clinical investigation."
Moving forward, Skyclarys' FDA approval has significantly altered the outlook for Reata Pharmaceuticals. Subsequently, my investment thesis has changed. The following article aims to examine Skyclarys' potential in the FA market and its implications for investing in Reata Pharmaceuticals.
Financials
Let's first review Reata's latest financial report . As of December 31, 2022, Reata Pharmaceuticals had $42.3 million in cash and cash equivalents and $345.2 million in marketable debt securities. The company's R&D expenses for 2022 were $169.8 million, and SG&A expenses were $109.3 million. Reata Pharmaceuticals reported a net loss of $311.9 million for the year ended December 31, 2022. The company believes their cash guidance runway extends through the end of 2024.
Navigating Treatment Guidelines: Monitoring Skyclarys Adoption in FA Care Amid Evolving Recommendations
When there are considerable changes in the treatment guidelines for a particular ailment, I pay close attention to them and scrutinize the new recommendations. UpToDate, a highly regarded source of information for healthcare professionals, currently endorses the use of Skyclarys for all FA patients aged 16 and above, in line with the product's label. This recommendation, though classified as "weak" and based on "low-quality evidence" according to UpToDate, is still noteworthy given the limited availability of effective treatments for FA.
As more data becomes available and matures, this recommendation may potentially strengthen, further solidifying Skyclarys as a preferred treatment option for FA patients. The current "weak" recommendation could be an initial step towards establishing Skyclarys as a standard of care, and as more robust evidence emerges, healthcare professionals may grow increasingly confident in its efficacy. This, in turn, could lead to a significant rise in Skyclarys utilization among FA patients, filling a critical gap in therapeutic options for this debilitating condition.
Based on the FDA's broad labeling allowance and apparent acceptance (with some caution) from the medical community, I am now convinced that Skyclarys is positioned to excel in the FA market.
Skyclarys Revenue Projections: Exploring Potential Market Share Scenarios and Annual Earnings for Reata's FA Treatment
As Skyclarys costs $370,000 per year, and there are, according to Reata, 4,500 potential FA patients >16 years of age in the US market, we can estimate the peak annual revenue if Skyclarys secures 40% [low], 60% [medium], and 80% [high] of the FA market.
First, we'll calculate the number of patients the drug will reach at a 40% market share:
- 4,500 patients * 40% = 1,800 patients
- 4,500 patients * 60% = 2,700 patients
- 4,500 patients * 80% = 3,600 patients
Next, we'll calculate the peak annual revenue based on the number of patients and the cost per year:
- 1,800 patients * $370,000/year = $666,000,000/year
- 2,700 patients * $370,000/year = $999,000,000/year
- 3,600 patients * $370,000/year = $1,332,000,000/year
Reata notes that "about 2,500 unique patients with FA were seen by a neurologist or other HCP in the last two years". I believe the most likely scenario is somewhere between the low and medium estimates, which pegs the drug around $800 million-$1 billion in US peak annual revenue, which is consistent with analyst estimates .
Please note the following disclaimers and assumptions:
- The calculation assumes the drug's price and the number of potential patients remain constant throughout the year.
- The estimate does not account for any discounts, rebates, or price reductions that may be negotiated with insurers, hospitals, or other stakeholders.
- Market conditions, competitive landscape, and regulatory factors may affect the drug's ability to secure market share or maintain that share over time.
- The calculation is a simplified model and may not accurately represent real-world complexities or fluctuations in the market.
Skyclarys' Competitive Edge: Analyzing FA Treatment Pipeline & Market Exclusivity Benefits
According to the Friedreich's Ataxia Research Alliance, there are several potential competitors in the pipeline for FA treatment, including one Phase 3 candidate and a few in Phase 2. At first glance, the competitive risk to Reata's Skyclarys seems relatively low, but it's essential to remain cautious as the landscape can change.
PTC Therapeutics' Phase 3 candidate, vatiquinone, failed to meet its Phase 2 study endpoints related to FA. Phase 3 data is expected in Q2 2023. Leriglitazone did not meet endpoints in a Phase 2 proof-of-concept study. The HIV antiviral drug, etravirine, demonstrated increased frataxin levels in FA patient-derived cells but is awaiting Phase 2 clinical trial results. Most other drugs are in Phase 1, while gene therapy is in pre-clinical development.
Reata's Skyclarys will benefit from orphan drug exclusivity, providing seven years of market protection before potential generic competitors can enter. This exclusivity offers a significant competitive advantage, allowing Skyclarys to establish itself in the FA treatment market. Additionally, Skyclarys qualifies for a pediatric review voucher , which can often be sold for over $100 million, providing another potential financial benefit for Reata.
Reata's Balancing Act: Managing Expenses, Commercialization, and Funding Options for Skyclarys in 2023
Reata's SG&A expenses are expected to increase due to upcoming commercialization efforts. However, the company remains focused on research and development, especially with their long-term Skyclarys studies and Nrf2 activator platform. As a result, it is anticipated that Reata's expenses for the remainder of 2023 will be similar to last year. Skyclarys revenue is not expected until the second half of 2023, and the first two quarters of commercialization are unlikely to generate significant revenue. While Reata expects to have enough cash to last until the end of next year, it remains uncertain whether they will need additional funding. If so, they have several options available, such as licensing the ex-US market, selling their voucher for approximately $100 million, incurring debt, or offering shares. There is also a possibility that Reata could become profitable before needing additional capital.
My Analysis & Recommendation
Reata Pharmaceuticals has recently undergone a significant change in its outlook, primarily due to the FDA approval of Skyclarys for the treatment of Friedreich's ataxia. The company's financial position remains relatively stable, with a cash runway extending through 2024. Skyclarys' potential in the FA market is substantial, with peak annual revenue estimates ranging between $800 million and $1 billion in the US alone, based on a market share of 40-60%.
While competition in the FA treatment space does exist, the risk appears relatively low, as many candidates are still in early development stages or have experienced setbacks in clinical trials. Reata will benefit from Skyclarys' orphan drug exclusivity, providing seven years of market exclusivity.
As Reata gears up for Skyclarys' commercial launch, SG&A expenses are expected to increase. However, the company has several options for raising additional capital if required, including selling their pediatric review voucher or licensing ex-US markets.
Taking all factors into account, Reata Pharmaceuticals presents a promising investment opportunity. Skyclarys' breakthrough in the FA treatment landscape, combined with the company's strong financial position and relatively low competition, make Reata a compelling prospect for investors seeking exposure to a unique pharmaceutical company with significant growth potential. However, investors should be aware of the uncertainties and risks associated with commercializing a new drug, as well as potential fluctuations in the competitive landscape and regulatory environment.
In my opinion, Reata seems to be reasonably valued at around $3 billion, taking into account Skyclarys' peak annual revenue of $1 billion. Therefore, my current recommendation is to "Hold" on to the stock, but I still see potential for growth and would be particularly interested in investing if the share price falls.
Risks to Thesis
While my bullish thesis presents a promising outlook for Reata Pharmaceuticals and Skyclarys, there are several risks that could challenge this perspective:
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Slower-than-expected adoption: Skyclarys may face slower uptake among healthcare providers and patients due to the drug's high cost, reimbursement issues, or limited awareness about the treatment. This could result in lower-than-anticipated sales and a slower path to profitability.
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Pricing pressures: Insurance companies, regulators, or other stakeholders could push for lower prices on Skyclarys, which may affect the company's revenues and profitability. Additionally, as new competitors enter the market, pricing pressures could intensify.
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Clinical trial setbacks for other pipeline products: Reata Pharmaceuticals has other drugs in its pipeline. Any setbacks in their clinical trials or regulatory approval process could negatively impact the company's prospects and valuation.
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Regulatory hurdles in international markets: While Skyclarys has received FDA approval in the US, it is still awaiting approval in the EU and other markets. Any delays or setbacks in gaining approval could limit the drug's revenue potential.
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Potential safety concerns: As with any new drug, post-market safety concerns could arise as Skyclarys is prescribed to a broader patient population. Any significant safety issues may result in additional warnings, restricted usage, or even withdrawal of the drug from the market, negatively impacting Reata's revenues and reputation.
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Stronger-than-anticipated competition: Although the current competitive landscape for FA treatments appears relatively weak, there is always the possibility of new, more effective treatments emerging, which could outperform Skyclarys and capture market share.
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Financial risks: Reata Pharmaceuticals may require additional capital to support its commercialization efforts, R&D pipeline, and ongoing operations. Any fundraising activities, such as issuing new shares, incurring debt, or licensing agreements, could dilute existing shareholders or increase financial risk for the company.
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Management and execution risk: Successfully commercializing a new drug requires effective management and execution. Any missteps in marketing, manufacturing, or distribution could hamper Reata's ability to capitalize on Skyclarys' potential.
Investors should weigh these risks against the potential rewards when considering an investment in Reata Pharmaceuticals.
For further details see:
Skyclarys' Positive Reception By FDA And Medical Community Bolsters Reata's Future