Why I Think Relypsa Is Overvalued By $400M

| About: Relypsa, Inc. (RLYP)

Since going public just 22 days ago, shares of Relypsa, Inc. (NASDAQ:RLYP) have jumped more than +125%, making it one of the strongest IPOs in recent memory. However, Relypsa is nothing more than a sophisticated pump and dump. Relypsa is a small biotech firm with an enormously large burn rate, no cash, and a non-existent drug pipeline.

The Drug

Relypsa, Inc. is a pharmaceutical company that focuses on the development and commercialization of non-absorbed polymeric drugs to treat disorders in the areas of renal, cardiovascular, and metabolic diseases in the United States.

The lead drug in Relypsa's pipeline is Patiromer, a non-absorbed potassium binder that is in Phase III clinical trials for the treatment of hyperkalemia. Hyperkalemia is a condition in which elevated levels of potassium appear in the blood. Most potassium in the body (98%) is found within cells and organs. Only a small amount of potassium circulates through the bloodstream.

Potassium helps nerve and muscle cells - including those in the heart-function properly. Your kidneys usually maintain levels of potassium in the blood, but kidney disease - the most common cause of hyperkalemia - can cause potassium levels to build up.

The Market

Hyperkalemia is a difficult disease to diagnose. It is estimated that only 8% percent of patients with severe kidney disorders are ever diagnosed with hyperkalemia. Furthermore, 40% of patients with hyperkalemia can control their high potassium levels through diet and exercise.

One serious problem facing Relypsa is the total size of the hyperkalemia market. Relypsa itself admits that only 2.4 million patients could benefit from using their Patiromer drug. While this sounds like a large market that could very well result in millions in revenue for Relypsa, the question becomes how much? It would be hard to pinpoint an exact sales figure for Patiromer but let's look at it this way: not a single prescription drug for the treatment of hyperkalemia appears in the sales data for the top 200 drugs of 2012 as published by Pharmacy Times. The lowest in drug sales on that list is Lidoderm, which is used to relieve itching, burning, and pain from skin inflammations in dental surgery, and has annual sales of $900,000,00. Since no prescription for hyperkalemia appears in the top 200, it would be safe to say that if Relypsa sold Patiromer to every patient affected with hyperkalemia, they would not be anywhere close to $900 million in sales. The reality is Patiromer is most likely worth $200 million in annual sales, and even that is probably being generous. With Relypsa stock reaching close to $30 on December 16th 2013, Relypsa's market cap has reached an inflated $900 million. This company is easily overvalued by a minimum of $400 million. To put the long term prospects and financial upside of Patiromer in perspective, more people have skin rashes during dental surgery than hyperkalemia. This is a very small niche market.

The Cash Hemorrhage

Relypsa has run up more than $223 million in losses since it was founded in 2007. This includes a $43.7 million loss in 2012 and, in 2013, Relypsa posted a $72.1 million net loss - up from $32.1 million in the same period last year. Perhaps the most shocking is that John Orwin, the CEO of Relypsa, believes that the stock price should only be worth $16 to $18 dollars. This is a far cry from the $30 Relypsa hit on December 16th, 2013. Not to mention since August of 2013, Relypsa has had to do four separate cash offerings to keep up with their enormous burn rate

For a company that has had to raise cash four times in five months and currently has seen their market cap surge from $200 million to $900 million, they would be foolish not to file for additional financing.

The Competition

The most commonly used treatment for is hyperkalemia is Kayexalate, which is offered by a multitude of pharmaceutical companies. However, the largest threat to Relypsa's Patiromer would come from bio firm ZS Pharma. ZS Pharma already has a similar drug to Patiromer called ZS-9 to treat hyperkalemia. ZS-9 is further along in clinical trials than Patiromer and quite possibly will beat Relypsa's Patiromer to market. With the already fierce competition in the hyperkalemia space and with ZS Pharma a step ahead of Relypsa, Patiromer is small fish in an already overcrowded pond.

The Upgrades

In the last week alone, coverage was initiated on Relypsa by four Investment bank firms: Stifel Nicolaus, Wedbush, Merrill Lynch, and Morgan Stanley. Each initiated outperform ratings. It should come as no surprise that these firms have been compensated by Relypsa for investment banking services and also to make the market for Relypsa's stock. Typically when so many buy ratings surface on a stock that has already returned an abnormal +120% to shareholders in 20 days, a secondary offering or financing deal is most likely in the works.

The Conclusion

With a multitude of effective hyperkalemia treatments currently available to patients and ZS Pharma's ZS-9 further along in development, Relypsa is trying to be the shining star in a crowded galaxy. Not to mention Relypsa only has one other researched compound that is currently in preclinical trials. Their pipeline of drugs is nil. This is an "all or nothing" scenario for Relypsa. This would explain the compensated underwriting and the current manipulated stock price. Relypsa will need several millions of dollars to complete the final clinical trials on Patiromer and with no other drugs in the pipeline, Relypsa will need to raise a significant amount of cash. That cash may very well come from a secondary or shelf offering which is probably right around the corner. Until there is concrete phase 3 data and a period of slow down for the stock price, Relypsa shareholders are skating on thin ice and are leaving themselves open to a financial butchering in the near term. With +125% gains in 20 days, insiders will look to seize profits on the current inflated stock price. My suggestion would be to take your gains and sit on the sidelines until more clinical data can be obtained. Relypsa is a strong sell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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