Relypsa, Inc. (NASDAQ:RLYP) must be celebrating!! What a great month!
Not only did Relypsa raise $150MM in debt financing earlier this month (to ensure it has sufficient funds to commercially launch Veltassa), and file a Supplementary New Drug Application (SNDA) to the FDA a few days ago for an improved label change, but also yesterday the FDA issued a Complete Response Letter ("CRL") to AstraZeneca's (NYSE:AZN) ZS-9 drug (instead of approving the same as was widely expected, the ZS-9 drug is a potential direct competitor to Relypsa's only approved drug "Veltassa", recently approved by the FDA on October 21, 2015, for the treatment of hyperkalemia). Hyperkalemia is a life-threatening condition defined as abnormally elevated levels of potassium in the blood. This was the first new drug approved by the FDA to treat hyperkalemia in 50 years, and a vast improvement over the existing therapies.
AstraZeneca purchased ZS Pharma (NASDAQ:ZSPH) last year for $2.7 Billion to acquire the drug ZS-9, which AZN (and most analysts) believed would be approved by the FDA for the treatment of hyperkalemia as well. ZS Pharma is now a wholly-owned subsidiary of AstraZeneca.
Various analysts have been writing articles over the past number of months about how Relypsa was ripe for a buyout at a multiple of the current share price. When the buyout of Relypsa didn't materialize in the past few months, the speculation was that any interested buyer of Relypsa would want to know whether ZS-9 was approved by the FDA and what black box warnings, if any, came with that approval.
While Relypsa has now launched commercially, some analysts and investors were concerned about a number of factors, which recently appear to be addressed:
1. AstraZeneca's ZS-9 drug had a PDUFA date with the FDA of May 26, 2016, at which time there was concern by Relypsa's investors that ZS-9 might be approved by the FDA without any black box warning (or at least a very minor one), which could give ZS-9 a substantial marketing advantage over Veltassa. As detailed below, instead of approving the drug, the FDA issued a complete response letter and has not approved ZS-9;
2. Veltassa was approved by the FDA in October 2015 with a black box label, which required no other drugs be taken at least six hours before or six hours after taking Veltassa. Based upon a series of additional Phase 1 drug-drug interaction studies conducted by Relypsa, it filed a SNDA with the FDA a few days ago to change the label to three hours as set out in a press release issued by Relypsa on May 25, 2016, the day before the expected ZS-9 PDUFA date (and anticipated FDA approval of ZS-9);
3. Relypsa had given guidance a few months ago that its expenses for 2016 would be in the $250MM to $275MM range, and there was concern that the company's cash position of $336 MM at the end of Q1 2016 might not be sufficient given the expected revenues in 2016. The $150MM debt financing announced earlier this month has helped allay that concern (even though the 11.5% interest rate may be considered a little high); and
4. the actual commercial launch of Veltassa in the U.S., which commenced on December 21, 2015, while quite successful, isn't ramping up quite a quickly as some analysts had anticipated. Both the rejection of ZS-9 as a competitor in 2016 and the anticipated label change are going to materially help sales of Veltassa.
Because of the uncertainty over FDA approval of ZS-9 and its impact on the value of Relypsa, as well as the factors mentioned above, trading in Relypsa's shares has been subject to a war by a large group of investors shorting the stock and driving its share price down over the past number of months. Based on figures issued by the NASDAQ as of May 13, 2016, short interest in Relypsa was 14,752,469 shares (6.6 days to cover) based on RLYP's average daily trading volume of 2,234,227 shares.
Relypsa's share price closed at $16.60 on May 26, with a 52-week share price range between $10.26 and $37.45. The closing price was before the news came out from AstraZeneca this morning regarding the FDA's refusal to approve ZS-9 at this time.
AstraZeneca issued a press release early this morning, advising that the FDA had issued a Complete Response Letter (CRL) regarding the New Drug Application for ZS-9. Effectively, the FDA has rejected approval of ZS-9 at this time. AstraZeneca's press release goes on to indicate that:
"… The CRL refers to observations arising from a pre-approval manufacturing inspection. The FDA also acknowledged receipt of recently-submitted data which it has yet to review. The CRL does not require the generation of new clinical data. AstraZeneca and ZS Pharma are evaluating the content of the CRL and will work closely with the FDA to determine the appropriate next steps for the NDA…"
This is terrible news for AstraZeneca, which paid $2.7 Billion for ZS Pharma late last year, and simply great news for Relypsa. Not only is there great uncertainty surrounding the timing for the approval of ZS-9 (which will likely ultimately get approved by the FDA with some black box labels sometime in the next 8 to 14 months), but also in the interim, Relypsa will have the entire hyperkalemia market to itself, and will very likely receive a much improved label for Veltassa from the FDA later this year. I'm estimating 8 to 14 months, or more, for the FDA approval of ZS-9 based on the fact that it will take AstraZeneca and ZS Pharma some months to address the issues raised in the CRL (which may include a new inspection by the FDA of the manufacturing facilities which can take months for the FDA to re-inspect, as well as the FDA considering the recently submitted data by AZN).
Once AstraZeneca has satisfactorily dealt with the issues raised in the CRL, it will then have to file a new NDA with the FDA. The FDA procedure in dealing with NDA resubmissions following the issuance of a CRL is set out in its Manual of Policies and Procedures revised as of February 26, 2015, (MAPP 6020.4 Rev.2) (the "MAPP"). The FDA has 30 calendar days to acknowledge the receipt of the resubmission and advise whether the NDA is complete or not. If the FDA accepts the resubmission as complete, it will also advise AstraZeneca whether it considers the resubmission as a Class 1 Resubmission (in which case the FDA will review the resubmitted NDA within two months), or consider it a Class 2 Resubmission in which case the FDA will complete the review within six months. Class 1 Resubmissions involve fairly minor issues, which are outlined in the MAPP, and while I would not rule out that the FDA would consider AstraZeneca's anticipated Resubmission as a Class 1 Resubmission (with a two-month review), it is more likely to be considered a Class 2 Resubmission involving a new PFUDA date set six months after acceptance of the resubmitted NDA.
Given the huge level of short interest in Relypsa's shares, I expect its share price is going to substantially increase today and for the following few trading days. This also bodes well for any larger pharmaceutical companies interested in buying Relypsa. Given that AstraZeneca paid $2.7 Billion for ZS-9 (without approval by the FDA), I would not be surprised if Relypsa gets sold for $2 Billion or more later this year, especially if the FDA approves Veltassa's label change request to provide a shorter three-hour period in which to take Veltassa before or after taking other drugs. A buyout in that price range would translate into a share price for Relypsa of $50.00 or more, substantially higher than the $18.60 share price that RLYP is trading at the time of my writing of this article.
Relypsa and its shareholders (at least the longs) are celebrating!
Disclosure: I am/we are long JANUARY 2017 $10 CALL OPTIONS.
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.