Relypsa: Bears Bring Nothing New To The Table

| About: Relypsa, Inc. (RLYP)

Summary

Relypsa was the subject of two bearish reports over the last two weeks.

The absence of a market reaction to these reports speaks for itself and I disagree strongly with both reports.

The company reported May script numbers, which were solid, but scripts are still far from desirable levels.

Growth in 2H 2016 to pick up on better coverage and the ZS-9 CRL.

Looking at two script growth scenarios.

Relypsa (NASDAQ:RLYP) was the subject of two bearish reports over the last two weeks. The reports did little to reveal new bearish arguments - those that were raised are largely known to the investment community and some of them are even misleading and not relevant for Relypsa. I have addressed both of these attacks in the Growth Stock Forum and will share them in the article and I will also offer my thoughts on Veltassa's growth prospects in the second half of the year along with analyst commentary after the latest script numbers.

Bears attack, but the market doesn't react

Relypsa was a target of two bearish articles over the last two weeks. On June 9, The Street Sweeper published a bearish article on Relypsa and stated eight reasons to "run away from this stock and not join the circus." I have addressed the points raised the same day in the Growth Stock Forum and here is my answer to the eight points raised by the Street Sweeper (their arguments are in bold with my response below every point):

1. Relypsa paid $12.5 million to acquire Veltassa from Ilypsa and the selling entity "didn't even bother" to keep a percentage of any future royalties as it wanted to sell the drug and "take the money and run."

So what? It sounds like a great business decision by Relypsa and a poor decision by Ilypsa.

2. The U.S. Food and Drug Administration concluded Veltassa dangerously binds with other oral drugs which decreases its effectiveness.

This issue was addressed with the DDI study and Veltassa has a good chance for a favorable label change.

3. Relypsa's stock "cratered" in early May due to its debt-tied private stock placement and "miserable" earnings.

Yes, it did. Shares cratering is not a fundamental reason to sell or short a stock. Earnings were actually above views while Veltassa sales were in line. And the debt offering removed a near-term dilution overhang and put the company in a better position to negotiate with potential suitors.

4. Three weeks after May's "miserable" earnings print, a stock promoter called Bull In Advantage sent out thousands of emails hyping Relypsa at a convenient time when "the stock needed a boost."

Maybe this would have worked with some micro-cap. I think that it is hard for some newsletter to move a stock with an $850 million market cap.

5. Investors heavily bought Relypsa's stock after the FDA delayed approval of AstraZeneca plc (NYSE:AZN) ZS-9 under the assumption this is a bullish sign for Relypsa's drug. However, investors "misunderstood" the ramifications and erroneously assumed the two drugs were similar when they're not.

And why it wouldn't be bullish for Relypsa? A delayed approval for a competing product. I cannot think of a real reason to spin this around as negative.

6. Insiders sold more than 10,000 shares of Relypsa's stock just this week.

This hardly qualifies as relevant - it amounts to around $200,000.

7. Relypsa could burn through $275 to $300 million in cash this year at a time when revenues rose just $11 million in the prior quarter due to a partial recognition of a one-time payment.

If I was a Relypsa bear, I would say something like this: "Relypsa could burn through $275 million to $300 million in cash this year at a time when Veltassa revenues are just $0.6 million a quarter." The rest of Q1 revenues were milestone payments. And the cash burn should be $250 million to $275 million (the above number includes non-cash stock-based compensation). This is a legitimate concern, but it's not something we were not aware of before.

8. Finally, Relypsa's executives are "profiting from this unprofitable company" with excessive salaries, bonuses, stock options, relocation benefits and "other goodies" that "really add up for the top folks."

Every company does this. If this is one of the main bearish arguments, it's a very poor one.

The second bearish report came from SA author White Diamond Research and was titled "Why Relypsa Is Likely A Zero: The Chronic Hyperkalemia Treatment Market Is Small." I addressed this article shortly after it came out in the Growth Stock Forum, but fellow author Bret Jensen wrote a rebuttal to White Diamond's thesis, with which I largely agree and will not take up more space here. The comment section of the White Diamond Research article is rich with counter-arguments as well and points to the weakness of the thesis. The same comment section speaks well to the usefulness of Seeking Alpha as a crowdsourcing community, which was shown to predict future stock returns.

The market did not react to these short reports and Relypsa's share price performance over the last two weeks is in line with the sector performance. The only significantly weak trading day was prior to the script numbers release as investors/traders were likely expecting another poor month. However, the company reported mostly solid numbers which drove the price higher the following day. Friday's weakness was largely due to the selloff in the biotech sector - the SPDR S&P Biotech ETF (NYSEARCA:XBI), a proxy for small cap biotech stocks was down 2.64% Friday. Relypsa is down 16% from early June highs and XBI is down 11% in the same timeframe.

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Source: Stockcharts.com

May numbers are better but Veltassa still has a long way to go

It was really encouraging to see solid script growth in May after dismal numbers in April. The free starter supply scripts and retail TRx were up 14% and 33% month-over-month respectively while hospital scripts were slightly lower.

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Source: Relypsa 8-K

With five months of script data, I think that we have enough for some rough growth projections for the rest of 2016. I believe that Veltassa scripts should accelerate in the second half of 2016. If those 1,700 physicians that prescribed Veltassa in Q1 start writing scripts to 10 patients or more after testing it with 2-3 patients, it would lead to a 3x to 5x increase in prescriptions for these early adopters in the following months. The improvements in reimbursement should also help with the growth efforts and prescriptions should accelerate once physicians get comfortable enough with Veltassa Connect and are sure that the product will get reimbursed. The ZS-9 CRL should also help with payer decisions and should also lead to physicians prescribing Veltassa more as I suspect some of them were waiting to test ZS-9 on patients.

In the table below, you can see my base case and bullish case estimates for Veltassa script numbers for the rest of 2016. The base case assumes a 20% to 30% month-over-month growth for the rest of the year while the bullish case assumes 30% to 40% monthly increases. I believe both scenarios are reasonable and that they might be even pessimistic if the prescribing patterns change as mentioned.

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Source: Relypsa SEC filings, author's estimates

The net sales estimate assumes 87% gross to nets.

The Annual net sales run rate calculation = each month x 12

I am looking forward to June script numbers, the Q2 report and the conference call to get more details about how the launch is progressing. Absent a buyout, I think the share price should rise if prescriptions trend above the base case estimates. However, in either case, the company will still be far from prescription levels needed to alleviate the funding concerns, which will remain an overhang on the share price if the company is not acquired this year.

What are analysts saying after the May script numbers release

Analysts were mostly bullish after Veltassa May scripts report with two exceptions:

  • Morgan Stanley said that "growth plateau suggests limited chronic patient base with poor persistence and low conversion to paid scripts."
  • Raymond James stated that "Veltassa launch metrics continue to track behind our estimates", and that "Relypsa shares are fairly valued and likely to trade in line with the market." The firm has a $16 fair value target for Relypsa, a $35 PT for a buyout and a long-term bullish case target in the mid-50's.
  • Wedbush reiterated its buy rating and $51 PT. The firm stated that "the slow but steady uptake in Veltassa is in line with our view and comments we have heard from nephrologists. On our recent KOL call, Dr. Matthew R. Weir M.D. said that he expects the Veltassa launch to steadily grow as physicians become more comfortable with Veltassa as a chronic treatment and prescribing through a specialty pharmacy hub."
  • Cantor Fitzgerald reiterated its buy rating and $41 PT. The firm expects sales to be skewed year-end and that prescription numbers are so far in line with its forecast.
  • BTIG reiterated its buy rating. The firm's 2016-2018 Veltassa revenue estimates are $26.5 million, $84.5 million and $205 million respectively.

Conclusion

My long-term thesis on Relypsa remains unchanged. The May script numbers are encouraging but Relypsa still has a long way to go to reach the levels needed to support itself from a financial perspective. I think that the current valuation is reflecting two things: the buyout potential and Veltassa's long-term potential in the hyperkalemia market with Relypsa as a standalone company, and neither is likely to go away anytime soon. The two recent bearish reports did little to undermine the share price and the market's reaction (or the lack thereof) speaks for itself - I would attribute the latest weakness to poor sector sentiment.

Disclosure: I am/we are long RLYP.

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.

Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.