Biotech companies developing and marketing orphan and ultra-orphan drugs have done exceptionally well in 2013 and in recent years. These include such names as: Biomarin (BMRN), Alexion (ALXN), NPS Pharma (NPSP), Synageva (GEVA), Raptor (RPTP), Sarepta (SRPT), and others.
One company on few investors' radar is Retrophin (RTRX), developing an ultra-orphan drug for a disease known as PKAN, Pantothenate kinase-associated neurodegeneration. PKAN is a neurodegenerative, autosomal recessive disease that primarily features excessive iron deposition in the basal ganglia due to mutations in the gene known as PANK2. PANK2 encodes an enzyme, pantothenate kinase, a key regulator enzyme in CoA synthesis.
Clinical Presentation of PKAN
The more common or "classic" form of PKAN presents in the first decade of life (88% before age 6) with a mean age of onset of 3.4 years. Presentation includes signs of a severe movement disorder including such symptoms as severe dystonia, dysarthria, rigidity and other Parkinsonian features. Symptoms may also include personality changes, psychiatric illness, retinitis pigmentosa, dementia, and chorea. Loss of ambulation inevitably deteriorates rapidly and death follows, usually within 10 ten years of diagnosis. An atypical form of PKAN is less severe and presents in the second to third decade of life, with the clinical hallmark of ongoing independent ability to ambulate
Below (from Retrophin's 8-K), is a summary of the CoA pathway: PKAN patients are unable to phosphorylate pantothenate into phophopantothenate (Step 1 below).
There is no current treatment for PKAN but naturally, since iron accumulation is a feature of the disease, iron chelation has been attempted, unsuccessfully. Efforts have also been made to treat the system with large amounts of pantothenate, but this too has failed.
Retrophin has developed RE-024, a proprietary form of phosphopantothenate which in mice with PANK deficits, has been shown to fully restore levels of CoA, unlike panthothenate or even phosphopantothenate.
In a preclinical study just reported, Retrophin investigators gave mice hopantenate, a pan-pantothenate kinase inhibitor, designed to replicate the PKAN state by restricting CoA production. The test mice were "rescued" with RE-024 while the control mice were not. In this study, 93% of the RE-024 mice survived while none of the control mice survived.
Why should we care about a preclinical study?
What is particularly exciting about RE-024 is that:
a) the company believes it can proceed based on the mouse study to an IND
b) the first human study could be a pivotal study because the disease pathogenesis and its correction with RE-024 is straightforward.
c) the human study could begin as early as the first half of 2014.
RE-021 for focal segmental glomerulosclerosis
Retrophin is also developing RE-021, a combination endothelin antagonist and angiotensin receptor blocker, for the treatment of focal, segmental glomerulosclerosis, an uncommon kidney disorder which affects approximately 50,000 patients in the US alone and which is a leading cause of the broader kidney disorder known as nephrotic syndrome. The hallmark of FSGS is a protein in the urine and a particular form of scarring seen only on kidney biopsy. FSGS leads to kidney failure and the need for transplantation in most patients. Few have spontaneous remission.
The most important clinical predictor of prognosis is resolution of proteinuria, typically occurring with treatment. Treatment includes corticosteroids, ACE inhibitors and angiotensin receptor blockers but efficacy is limited and few patients have complete remissions. Recurrence is common.
Retrophin believes that RE-021 will be particularly helpful in the proteinuria of FSGS because both of the drug's individual components, the endothelin antagonist and the ARB, are effective in reducing proteinuria. RE-021 has been shown to be a safe drug, having been tested already in seven Phase 1 and two Phase 2 studies when it was being developed by a company called Pharmacopeia (which has since been acquired by Ligand [LGND]). Retrophin believes therefore, that its current trial, "FONT-3", could serve as a pivotal study though this remains to be seen. The primary endpoint of the trial is proteinuria.
The exact number of PKAN patients is difficult to ascertain but is estimated to be between 5000 and 10,000 patients worldwide. If we make a highly conservative estimate that the prevalence is even just 1000 in the US and we also assume a $500,000 price tag for the annual revenues per patient, we derive a $500 MM opportunity for PKAN.
Retrophin owns 100% of the rights to RE-024 and it has a full patent life. If we look at the valuations of other companies with ultra-orphan drugs, we can conclude that it is not unreasonable to value such companies at 5 times sales and use a DCF model to derive a current valuation. Assuming approval in 2016 (which might be conservative), sales of $100 MM in 2017, sales of $500 MM in 2020, and discounting back at a rate of 25%, yields a current NPV for RE-024 of $14. Valuation in 2020 could reach $70 for this product alone. Again, I emphasize that I used conservative numbers for US disease prevalence, did not count EU and rest-of-world sales and may have underestimated the price of the drug by as much as 100%.
All of the above does not include the value of RE-021 for FSGS because it is difficult to value at the current stage of development. Retrophin is on the verge of licensing a drug, for the treatment of autism and schizophrenia from a major pharmaceutical company. Both autism and schizophrenia are very large markets but it is premature to ascribe any value to this drug until we know its identity and mechanism.
With regard to Retrophin's financial position, $25 MM was recently raised in a PIPE financing and the company had approximately $2.5 MM in cash as of Q2 prior to this financing. The burn rate is $2-3 MM per quarter, but I expect this to increase as RE-021 and RE-024 both enter clinical trials.
Risks to the story include:
a) FDA may not allow the company to bring RE-024 into humans based on the mouse study
b) FDA may not allow the first human study of RE-024 to be a pivotal study.
c) Other competitive drugs could emerge for PKAN
d) There is always the risk that drug trials fail
e) With regard to RE-021, there is no proof yet that proteinuria reduction with this drug will be superior to the reduction seen with ARB's alone
f) It remains unclear whether FDA will accept proteinuria as an endpoint
Despite the risks, Retrophin's current $6 stock price appears to yield a great investment opportunity with significant short and long-term upside.