RAPTOR PHARMACEUTICAL CORP RPTP S
April 30, 2013 - 2:11pm EST by
virus
2013 2014
Price: 7.30 EPS $0.00 $0.00
Shares Out. (in M): 55 P/E 0.0x 0.0x
Market Cap (in $M): 400 P/FCF 0.0x 0.0x
Net Debt (in $M): -30 EBIT 0 0
TEV ($): 370 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Pharmaceuticals

Description

Thesis

Short RPTP.  Its flagship drug, Procysbi, will not generate anywhere near the revenue/profits that analysts are expecting.  The stock price should come to reflect this over the next year.  
 
Please note that when this was written, the drug had not yet been approved-- it was approved by the FDA today, making this a timely short.

Glossary 

Cysteamine: drug used to treat disease cystinosis

Cystinosis: rare disease found in ~500 people in the US and ~2,000 people globally

Cystagon: Mylan Lab’s cysteamine brand, currently sold for approximately $9,000/patient/year, approved in 1994

RP103: RPTP’s alternative to Cystagon, it consists of tiny cysteamine spheres coated with enteric to create a delayed release effect

RP104: Similar to RP103, but the coating is on the outside of the tablet rather than the cysteamine.  Currently only being used in NASH clinical trials

Enteric: A commonly-used barrier applied to many oral drugs and supplements that are stable in acidic environments but can be broken down by basic solutions.  For the most part, this is used to prevent treatments known to have negative side effects when digested in the stomach from being digested there.  The enteric will prevent them from being digested until they reach the intestines, which contain a basic medium. 

Procysbi: Brand under which RPTP plans to sell RP103 to cystinosis patients

Convivia: RPTP’s treatment for Asian Flush

Summary 

1)      Procysbi, RPTP’s flagship drug, is very likely to get approved for treating cystinosis.  However, RPTP’s total market for Procysbi is significantly smaller than investors seem to realize, and comes nowhere near justifying the current $400mm market capitalization. When RPTP acquired the patent for the drug in 2007, it only paid $2.6mm—there was a very good reason for why the price for a drug that was almost assured of future regulatory approval was so cheap.  Even under the rosiest assumptions, Procysbi would not be enough to bring RPTP to profitability.  Based on its most recent quarterly earnings, even if RPTP instantly captured 100% market share for cystinosis, charged 5x the going price of cysteamine, and achieved gross margins of 100% with no incremental sales & marketing, distribution, production, taxes, fees, or other associated costs, it would still be reporting a net loss every quarter.  Analysts have created an unrealistic story that appears to be accepted by investors: Vista Partners previously covered it, and Roth, Canaccord, and ThinkEquity are projecting pricing of $70,000 - $200,000 per patient per year—a range of 7.8x to 22.2x the current price charged for the only competing drug on the market.  The approval of the drug and subsequent pricing and/or sales will likely bring the stock back down to earth

2)      There is little to no scientific backing for RPTP’s other clinical pursuits.

Introduction

RPTP has a diluted market capitalization of approximately $400mm.  RPTP’s business is based around one primary drug that it is trying to prove efficacy with for six diseases.  For one disease (cystinosis), RPTP has completed Phase 3 trials, is awaiting an FDA decision, and will likely be approved.  However, we believe the extremely small size of the market as well as the fact that it is currently dominated a drug with the exact same active ingredient as RPTP’s drug, present serious challenges to RPTP’s ability to monetize the drug post-FDA approval.  We believe it will suffer a similar fate as Dendreon and see erosion of shareholder value of up to 80%, with an eventual bankruptcy likely. 

The other drug indications in the pipeline provide shareholders with very little in the way of safety.  Two of the drug indications are in the middle of Phase 2 trials, but are unlikely to go anywhere due to significant flaws in the theories RPTP has presented to investors as to why they would be successful.  The other three indications were acquired in the past seven months and have shown little evidence of efficacy.

RPTP also has a patent for using an existing drug, 4-methylpyrazole (currently on the market for the treatment of alcohol poisoning), for a new indication: Asian Flush (this is RPTP’s Convivia drug).  RPTP is attempting to license this out to other pharmaceutical companies to perform the clinical trials.  We believe this will never come to fruition because the drug has one serious side effect: it makes the user even more intoxicated and keeps ethanol in the users’ bloodstream for an extended period of time.  We believe this is why RPTP never went beyond a small 32-person Phase 2A study that concluded over 4 years ago and why there have been no press releases regarding its 2010 licensing deal with Uni Pharma in Taiwan since it was first announced.

Background

On May 25, 2006, RPTP was a reverse-merger penny stock worth $310,000.  Today it trades on the NASDAQ with a total diluted market capitalization of $350mm.  The company was originally formed in September 2005 by alumni of BioMarin Pharmaceutical (NASDAQ: BMRN), a $6 billion pharma company focused on the orphan and ultra-orphan drug markets.   

RPTP reverse-merged with Highland Clan Creations Corp. (OTCBB: HCLN) in April 2006.  RPTP then proceeded to raise $5mm through a private placement. 

RPTP purchased Encode Therapeutics in December 2007 and received its license for delayed-release cysteamine.  Total consideration was approximately $2.6mm, all of which was allocated to intangible assets.  This is the drug that RPTP has stuck with over the years, and appears to be the core of the bull argument for the stock.

On June 30, 2008, a $10mm private placement at $0.50/share plus warrants at $.75 in one year and $0.90 in two years was completed.  The placement was done by Limetree Capital, a firm based in Germany: apparently they had to sell to European investors because Americans weren’t buying it.

In August 2009, RPTP raised another $5mm via a private placement (agent unspecified) of units, including each stock and warrant.

RPTP reverse-merged with TorreyPines Therapeutics (which was also a reverse-merged pharma company) on September 29, 2009.  The first thing RPTP did after completing the reverse merger was to dismiss Ernst & Young, TorreyPines’ former auditor.[1]  E&Y was promptly replaced by Burr Pilger Mayer, Inc.

As part of the TorreyPines reverse-merger, RPTP acquired TorreyPines’ drug candidate as well as its NASDAQ listing.  TorreyPines’ drug candidates, tezampanel and NGX 426.  These programs had total capitalized R&D expenses of $0.9mm, and were written off during Q3 2012 due to Management’s “decision to discontinue development”.  

In December 2009, RPTP raised another $7.5mm from institutional investors through a registered direct offering, placed by Ladenburg Thalmann. 

In August 2010, RPTP completed a PIPE financing for another $15mm.  This was placed by JMP Securities.

In September 2011, RPTP closed a secondary offering for $46mm.  This offering was led by JMP Securities as sole book-runner, with Canaccord Genuity and Cowen & Company acting as co-lead managers.

In May 2012, RPTP entered an at-the-market sales agreement with Cowen & Company for $40mm worth of stock (with Cowen receiving a 3% commission on sales).  Through November 30, 2012, RPTP sold 2.7mm shares for net proceeds of $13.3mm.

RPTP’s Pipeline 

RPTP’s pipeline consists of three segments: drug delivery systems, Convivia, and indications treated by RP103/RP104.  None of these are promising, including the treatment of cystinosis with RP103 (RPTP’s drug closest to FDA approval).  This section will explain why.

Procysbi (RP103 for Cystinosis)

Procysbi, the brand RPTP plans to sell its RP103 under assuming regulatory approval, addresses cystinosis.  Cystinosis is a rare disease that affects approximately 500 people in the US and 2,000 people worldwide, according to the Cystinosis Research Foundation.[2]  In a 2007 investor presentation, RPTP stated that Cystagon, at the time (and at present) the only drug approved for treatment of cystinosis, was generating approximately $10mm in revenue per year for Mylan Laboratories.[3]  We found this to be roughly consistent with current pricing and patient information.

Procysbi is a delayed-release form of cysteamine, a drug currently being marketed by Mylan Pharmaceuticals under the name Cystagon.  We believe RPTP is vastly overvalued due to the fact that investors are grossly overestimating how much money RPTP will be able to charge for its drug and how much market share it will be able to capture.  The current range provided by analysts covering the stock is $70,000 per patient per year to $200,000 per patient per year.

It is true that payers/nationalized health care systems have accepted price ranges of approximately $200,000 to $400,000 per year per patient for novel ultra-orphan therapy.  However, RPTP’s drug is not novel—it’s the exact same as its predecessor, except it is coated with enteric (this is a commonly used method of producing the delayed-release effect).

The Hard Math

Recommended dosage for cysteamine is between 1 gram and 2 grams/day, depending on age and body mass.  Assuming maximum dosage, we find that the 300 patients in the US would be taking 2 grams/day every day.  Pricing available online shows the cost as $1,790.10 for 500 tablets containing 150 mg each.  This works out to $3.58/tablet, or $23.87/gram.  At that price, the daily cost is $47.74, or $17,423.64/year.  This is the price at which someone can purchase the tablets from the distributor—not the amount that Mylan is receiving.  Assume the distributor is taking a 25% margin.  Assuming there are 1,000 patients total patients in North America and Europe and they are all being treated with the drug, this means that Mylan is receiving, at most, approximately $13.1mm/year from the drug: assuming 100% compliance and maximum dosage for everyone (both certainly not the case).  And that’s when Mylan has 100% market share. 

A 2011 article hosted on RPTP’s own website indicates that the market size is even smaller:

“Cystagon is currently priced at about $9,000 per year…”[4]

Using this number, we find that the total market size for Cystagon should be $9,000 x 1,000 = $9.0mm.  Both of these numbers are roughly consistent with the number provided in the investor presentation.  Okay, so where does RPTP’s $400mm market cap come from?  The last excerpt was intentionally cut off.  Here is the rest of it:

“Cystagon is currently priced at about $9,000 per year but Canaccord analysts reckon the orphan indication, data to support significantly improved clinical outcomes, and the prevention or delay in the need for a kidney transplant, mean an annual cost of $150,000 could be justified. Roth Capital analysts have estimated an annual cost $70,000.”[5]

Analysts covering the stock don’t appear to put much stock in RPTP’s other drugs: they are focused on Procysbi.  A ThinkEquity analyst claimed during an August interview that there is a market of approximately $100mm for the new drug, based off an addressable patient population of 1,300, and drug pricing of $200,000 in the US and $100,000 in the EU.[6] 

This is incredibly unrealistic.  The drug is not dramatically different from the treatment it is competing with: it has the same active ingredient and is merely a delayed-release formula.  Furthermore, if such high prices could be charged, why wouldn’t Mylan Laboratories have already done so while they had a stranglehold on the market?

This is the core bull thesis for this stock.  It doesn’t make sense: competing drugs that are not significantly differentiated drive prices down; not up.  Rather than clarifying the firm’s pricing strategy, the CEO of RPTP likes to keep the waters muddied.  During an interview with a reporter from the San Francisco Business Times, the CEO refused to give any indication of how much RPTP would charge cystinosis patients for RP103.[7]

In order to charge significantly higher prices, RPTP has to produce demand for its product.  Sigma Tau produces a medicine for the treatment of corneal cystine crystal accumulation in cystinosis patients (Cystaran).  Sigma Tau was able to get 300 patients for its Cystaran clinical trials, yet RPTP was only able to scrounge 43.  What does this say about market demand for RPTP’s new product? 

Further, the competing drug (Cystagon) is made by one of the largest generic manufacturers in the world.  If it did happen to turn out that RP103 was wildly popular due to the convenience of taking it twice per day as opposed to four times, Mylan would surely create its own delayed-release pill and sell those.  There are many different ways to produce the delayed release effect, and by filing an abbreviated NDA, Mylan could expect to have it completed, approved, and on the market within 1.5 to 2 years.

RPTP claimed that its drug would be superior in three ways:

1)      It is delayed-release, meaning that patients have to take it every 12 hours as opposed to every 6 hours.  This is more convenient and is true.

2)      The drug tends to have sulfur odor-related consequences for patients.  This has been addressed through the delayed-release formula, which causes the drug to be processed in the small intestines rather than the stomach.  Patient feedback published in RPTP-sponsored studies has confirmed this, but is very limited (n=4) and appears to be excluding most of the patients in the study—an unusual move that may be hiding undesirable results.

3)      Cystagon has been linked with GI distress.  In a November 2012 investor presentation, RPTP provided this as a way to differentiate its product from current therapy.  However, the results of the Stage 3 study, published in July 2012, showed that RP103 actually increased the GI distress—by three times!

“There were three-fold more gastrointestinal side effects [in patients using RP103] compared with using Cystagon.”[8]

If it does sell, RPTP will have to pay royalties to UCSD (“mid-single digits” per Management, and 1.75% to 5.5% per RPTP’s SEC filings along with other unspecified milestone payments).  

Drug Delivery Systems

RPTP has three preclinical drug delivery platforms in the pipeline: WntTide, HepTide, and NeuroTrans. 

RPTP purchased the NeuroTrans program from BioMarin via a tiered system where they were required to pay $50,000 after raising $2.5mm in capital, another $100,000 after raising total financing of $5.0mm, $500,000 after filing an NDA for the product, and further increasing milestone payments upon completion of clinical trials, marketing approvals, and revenue milestones.  RPTP signed on Roche as a development partner for the program under an agreement where Roche gained worldwide development rights and RPTP would receive “collaboration fees” subject to progression of the program, however, Roche abandoned NeuroTrans in October 2011, and was completely written off on 8/31/2011 after paying BioMarin $150,000.

WntTide and HepTide are both still in preclinical trials with no compelling results or planned clinical trials to speak of. Total cumulative R&D spend on the other two programs as of August 31, 2011 was $1.6mm for HepTide and $0.4mm for WntTide.  In FY 2012, RPTP did not break the programs out, and lumped them into “Minor and Inactive Programs”, which was allocated $1.7mm in R&D expenses for the FY 2012.  RPTP is currently seeking development partners for the drug delivery programs.[9]  We believe that these are both long-shots that are unlikely to influence RPTP’s financial results.  Any future FDA approval would take at least 6-7 years to achieve, and thus far, there is little reason to think such approval will ever be obtained.

Convivia

Convivia is taking a drug that is already on the market for specific types of alcohol poisoning and using it as a treatment for Asian Flush.  The drug, 4-methylpyrazole, does work: it is already on the market as a treatment for antifreeze and/or methanol poisoning.  It blocks the enzyme responsible for converting the alcohol to the aldehyde, so the result is that prevents the ethanol from being broken down.  The reduces the build-up of acetaldehyde, a by-product of ethanol processing, which is what causes Asian Flush.  However, the flip-side effect is that it keeps ethanol floating around in the subjects’ bodies for an extended period of time, which effectively causes people to be more drunk—the impact depending on the dosage of 4-methylpyrazole.  The better it works, the longer the patient’s exposure to the side effects of extended ethanol presence in their system, and the more intoxicated the patient would become.

We believe that, as a result of this particular side-effect as well as the fact it’s a gimmicky drug designed purely for treating the results of a vice known to carry negative side effects, the drug will never be approved.  This is likely why RPTP decided not to continue past Stage 2a trials with 32 clients, and instead decided to focus on out-licensing the drug.  In the past several years, RPTP has only succeeded in licensing it out to one company, Uni Pharma, in 2010, and Uni Pharma appears to have abandoned it.  The Uni Pharma website (www.uni-pharma.com) lists its pharmaceutical partners, and RPTP is conspicuously absent.  Likewise, Convivia is conspicuously absent from Uni Pharma’s list of products.  Since announcing the licensing deal with Uni Pharma in June 2010 covering Taiwan with the option of South Korea as well, there have been no further press releases from either company concerning the drug.

Non-alcoholic Steatohepatitis (“NASH”)

NASH is a relatively common disease affecting 2-5% of Americans.  It is also commonly referred to as fatty liver disease, because the major feature of the disease is excess fat build-up in the liver.  This disease can cause damage and cirrhosis of the liver.   Predictably, the prescription given by doctors today to combat NASH is diet, exercise, and cutting back on alcohol consumption.  Sometimes drugs are not necessary.

RPTP spins this as a fantastic opportunity to its investors: it’s a common disease with no drug to cure it.  The basis for RPTP using cysteamine to treat the disease is that one by-product of cysteamine is a particular antioxidant, glutathione.  RPTP is claiming that this could reverse liver damage caused by NASH “by preventing significant [glutathione] depletion”. The problem with that solution is, NASH doesn’t cause glutathione depletion, making extra glutathione completely irrelevant.  A 2007 study published by Nara Medical University in Japan showed that glutathione levels were “similar” between healthy volunteers and patients with NASH.[10]  Additionally, even if there were glutathione depletion present in NASH sufferers, glutathione and its precursor can be purchased over the counter for about $0.67/gram at your local Wal-Mart.

Huntington’s Disease

Huntington’s Disease is a genetic defect affecting the brain.  RPTP is claiming that RP103 will slow the progress because it increases brain-derived neurotrophic factor (“BDNF”) levels in mice and non-primates.  RPTP is supplying current ongoing clinical trials in France testing whether this is applicable in humans.  These trials commenced in October 2010.  On May 24, 2011, a study was published showing that BDNF is not informative or reliable as a marker of anything regarding Huntington’s Disease.[11]  We expect RPTP to relay that to investors when it announces its clinical results in Q1 2014 (expected announcement date for HD clinical trial results per the latest investor presentation).

Other Indications for RP103/RP104

RPTP claims to have three other indications in the pipeline that can be addressed by the same drug used to treat cystinosis: malaria, Parkinson’s, and tissue fibrosis.  To be clear, the difference between RP103 and RP104 is just that RP103 is a capsule filled with tiny enteric-coated cysteamine spheres, while RP104 is an enteric-coated tablet containing cysteamine.

These indications were recently licensed from universities (and a research hospital), and do not appear to have a real future.  The malaria indication is dependent on being attached to another drug that is currently used to fight the disease (and there are already at least 5 other major drugs used to treat malaria), the Parkinson’s indication merely showed “signs” of helping, with no firm hard statistics available to back those signs up, and the tissue fibrotic indication is based off of an $89,000 study involving mice that apparently did not produce results worth publishing.

Conclusion

It says something when a start-up that has been around for less than seven years and insiders own just 3% of the company.  Rather than slowing down with selling around the time when the drug that everyone, including us, believes is going to get approved, insider selling has accelerated dramatically in the past 12 months. 

Let’s assume that RPTP can charge double what Mylan is charging for its drug, and capture 50% market share immediately, with no associated expenses.  In that case, RPTP will be generating roughly $10mm/year from its drug.  Even under these ridiculously bullish assumptions, RPTP is going to continue to lose money (around $40mm/year) and be forced to continue its tradition of equity raises.  RPTP’s net loss in the last reported quarter (the three months ending November 30, 2012) was $13.4mm.  Based on its most recent quarterly earnings, even if RPTP instantly captured 100% market share, quintupled the price of cysteamine, and achieved gross margins of 100% with no incremental sales & marketing, distribution, production, taxes, fees, or other associated costs, it would still be reporting a net loss every quarter.  Take a moment and let that soak in.

There are two potential catalysts that will drive the stock price down: RPTP will announce an unreasonably high price for the drug, and the stock price will fall in the long term when sales fail to materialize due to lack of insurance coverage, or RPTP will announce a reasonable price for the drug, and the stock will tank immediately when people do the math.

Using Dendreon as a comparable company, we believe that disappointing revenue in the year following FDA approval (FDA decision is now slated for April 30, 2013) could see up to 80% of the equity value wiped off.  This could happen much sooner should RPTP announce a price far lower than analysts are expecting.

As was discussed and explained earlier in this piece, we believe that the other indications marauding in RPTP’s pipeline are worthless.  Long-term, barring a miracle, we believe the equity will continue to deteriorate in value while RPTP continues with its annual equity raises and cash burning until the company can no longer do further equity raises and RPTP goes bankrupt.  


[1] http://www.sec.gov/Archives/edgar/data/1070698/000107069809000046/raptor8k100509.htm

[2] http://www.natalieswish.org/About-Cystinosis

[3] http://media.corporate-ir.net/media_files/irol/19/198466/Raptor_Presentation.pdf

[6] http://seekingalpha.com/article/816861-raptor-pharmaceuticals-an-interview-with-thinkequity

[7] http://www.bizjournals.com/sanfrancisco/blog/biotech/2012/04/raptor-cystinosis-cystagon-ucsd.html?page=all

[8] http://www.ncbi.nlm.nih.gov/pubmed/22554716

[9] 2012 10-K, p. 6

[10] http://www.ncbi.nlm.nih.gov/pubmed/17331168

[11] http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0022966

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

There are two potential catalysts that will drive the stock price down: RPTP will announce an unreasonably high price for the drug (8-10x the price of the current drug on the market), and the stock price will fall in the long term when sales fail to materialize due to lack of insurance coverage given the fact that the drug is identical in every way to the current market leader other than that it is coated with enteric (making it a delayed-release version), or RPTP will announce a reasonable price for the drug, and the stock will tank immediately when people do the math and realize that it's not enough to come anywhere near profitability.
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