Desert Gateway, the parent company of Retrophin (NASDAQ:RTRX), announced today that the company has entered into definitive agreements with institutional investors in connection with a private placement, or PIPE financing. When the transaction closes (the week of February 11, 2013), the company will receive gross proceeds of approximately $10.0 million. The consideration for this deal comes with the issuance of 3,333,332 shares of common stock. Also included are warrants allowing the investors to purchase an additional 1,530,559 shares of common stock.
Retrophin intends to invest the proceeds to advance its pipeline of rare-disease drug candidates. The compound that is furthest along in development is RE-021, a potential treatment for focal segmental glomerulosclerosis (FSGS). Re-021 is on the cusp of beginning a Phase II clinical trial within the first half of this year. Should the compound gain "orphan drug" status, it is possible that FDA approval could come after the Phase II trial. This potentially would mean that Retrophin will have a drug on the market in early 2014.
Other drugs in the Retrophin pipeline include RE-024 for Pantothenate Kinase Associated Neurodegeneration (PKAN), and RE-001, for Duchenne Muscular Dystrophy.
The timing of this announcement comes just after the 15th Annual BIO CEO & Investor Conference, which was held February 11th and 12th in New York. Retrophin CEO Martin Shkreli presented at that conference. It would appear that players at the conference see potential in Retrophin and its pipeline of compounds to treat rare diseases.
Retrohin has a focus on diseases that have no currently available treatments or very little competition. The strategy may well pay off, as "orphan drugs" can get an expedited processing through the FDA, and such drugs can command a high price point once on the market.
For investors, there is opportunity to be had here by getting in on the ground floor before the company gets any drugs to the market. While there is certainly a risk involved by getting into an equity this early, the potential reward is also bigger. Clearly, the company's story was compelling enough to bring about a $10 million investment. The reason I like this play is that Retrophin's RE-021 could be on the market at some point in the next year with other drugs already in the pipeline.
Consider RE-021, which is used to treat FSGS. The patient pool for FSGS is quite small. If you were to apply the usual $1,500 per year for a drug, you would conclude that the costs of developing a pill for FSGS will never be recovered. However, orphan drugs command much higher annual revenues. It is not unheard of for insurers to cover drugs that cost as much as $200,000 per year. The Retrophin corporate presentation outlines several important factors. In the case of RE-021, a price point of $25,000 per person (preliminary numbers) is what the company is currently working with. There are 50,000 FSGS patients. The potential is that RE-021 could be a $1 billion drug. If that happens, the value of Retrophin stock will be much different than it is today. If not, you gave an investment a shot, and it did not pan out. That is the play here.
Disclosure: I am long RTRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.