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Raptor Pharmaceuticals Corporation's (NASDAQ:RPTP) lead compound, RP 103 (DR Cysteamine), is a nephropathic cystinosis treatment with interesting potential. Since it's simply a modification of the current standard of care, Cystagon®, the drug will likely be approved by the U.S. FDA at its upcoming PDUFA meeting on April 30, 2013. But, long-term the drug could face some issues with reimbursement, given its high cost relative to an already-effective Cystagon®.

In this article, I'll explore the genesis of the drug, why short-term traders may want to go long, and some risks that long-term investors may want to consider before buying.

Background Information

Raptor Pharmaceuticals is a biopharmaceutical company with a lead compound, RP 103 (DR Cysteamine) for the treatment of nephropathic cystinosis. The condition affects approximately 2,000 patients around the world, including 500 U.S. patients and 800 European patients, according to Raptor Pharmaceuticals' estimates. Relative to many other indications, this is a relatively small patient population, albeit with a strong need for effective treatment.

Cystinosis is a rare genetic lysosomal storage disease characterized by the abnormal accumulation of the amino acid cystine. The disease appears to amplify and alter apoptosis (or cell death), forcing cells to die inappropriately, leading to loss of renal epithelial cells and ultimately Fanconi syndrome - a disease of the proximal renal tubules. The problems caused by nephropathic cystinosis particularly affect the kidney, leading to a loss of important minerals, salts, fluids and other nutrients. Despite being diagnosed at an early age, many studies of cystinosis patients before Cystagon® was available showed renal death occurred at a median age of less than 10 years with the therapies being lifelong.

Cysteamine treatment (e.g. Cystagon®) represents the current standard of care and works by reducing cystine levels in cells, ultimately delaying or preventing kidney transplants or other clinical manifestations of the disease. But unfortunately, patient compliance is challenging due to frequent dosing and gastrointestinal side effects, such as nausea, vomiting and anorexia. In clinical studies, Cystagon® patients showed well-maintained glomerular function, compared to placebo patients that saw a gradual rise in serum creatinine. Moreover, patients on the treatment maintained growth, remaining below normal levels for their age, but not showing an increasing growth failure compared to their normal age demographic.

The Upcoming Catalyst

The company's RP 103 (DR Cysteamine) aims to improve upon Cystagon® by creating a formulation of cysteamine bitartrate that's enteric coated in microbeads to deliver the active ingredient in a well tolerated twice daily formula. Since Cystagon® is currently administered multiple times per day and has gastrointestinal side effects, the new drug formulation aims to address the many problems related to patient compliance. The compliance problems are amplified by the fact that many patients are younger than 16 years old.

In Phase III clinical trials, the drug met its endpoint of non-inferiority compared to Cystagon®, which is currently marketed as an immediate release cysteamine bitartrate. Moreover, RP 103 achieved these end points at a lower average dose and lower dosing frequency than Cystagon®, in a study that was conducted at eight clinical research enters in the U.S. and Europe. Notably, the company's clinical trial end points came in with a confidence interval of 0.16, which was well below the 0.30 specified and required by the FDA's Statistical Analysis Plan. And in a related study, the firm demonstrated bioequivalence of RP 103 administered as either whole capsules or as capsule contents sprinkled into apple sauce - enhancing its appeal to younger people.

In March of 2012, the company applied for marketing approval in both the U.S. and E.U. for the treatment of nephropathic cystinosis. The U.S. FDA is expected to make its PDUFA decision on April 30th of this year, while the E.U.'s regulatory body is expected to make a decision in 2013. With the favorable Phase III clinical trial and little question of safety given the use of an existing active ingredient in lower doses, I believe that it's unlikely that either regulatory body will come back with any major concerns that would derail a positive decision. As a result, the upcoming PDUFA date could be an interesting catalyst to move the stock higher as it approaches, since there's usually a built-in discount when drug approvals are concerned.

Some Long-term Concerns

Long-term investors may have reason to be a little less bullish, however. The company hasn't discussed the pricing of RP 103 yet, particularly relative to a product that's already on the market and effectively treats the condition. While the increase in equality of life may help the drug command some of a premium, there are also concerns that the company may not be able to justify the treatment to many insurance companies that provide reimbursement. According to some sources, Cystagon® costs just around $10,000 and RP 103 may have a price take in the $200,000 range in order to extract the necessary value, making it an up-in-the-air decision.

That said, if the company is successful in convincing payors that its treatment is valuable, there could be significant long-term upside. Some analysts predict that RP 103 could see peak sales of around $60 million in the U.S. and $93 million in the E.U, with pricing of between $200,000 and $300,000 per year per treatment.

Trading and Investing in the Stock

Traders and investors have a number of options when it comes to buying Raptor Pharmaceuticals for the short-term or long-term. Within this article, we discussed that the short-term opportunity for approval is certainly present, but long-term success will depend on the pricing, so a buy-and-hold strategy may warrant some waiting. Meanwhile, the stock itself has come under some selling pressure lately, down more than 6% over the past month, meaning traders wait a bit before taking a position ahead of the company's PDUFA date.

Another potential play may be the May 13 call options on the stock, of which the at-the-money 5.00 call options trade for an ask of 1.60 with 1,887 open contracts. The median 1.50 between the bid and ask would enable investors to take a position that breaks even at $6.50 per share, or roughly a 21.6% premium over the current stock price. Given that the stock has recently traded above that price pre-approval in March of 2012, it may be an attractive price that would be surpassed in the event of an approval. A 40% move higher from current levels ($7.48 per share) upon approval could then result in a $98 profit on a $150 contract, or 65% gain before commissions and taxes.

Source: Trading Raptor Pharmaceuticals' RP 103 FDA Decision