Versartis, Inc. (NASDAQ: VSAR) is developing a long-acting formulation of recombinant human Growth Hormone (rhGH) in treatment of Growth Hormone Deficiency (GHD) in children and adults. We expect this formulation, Somavartan to become the standard of care in potential $4 billion/year global rhGH market. Recent significant institutional buying adds confidence to our bullish investment thesis and the stock has several up-coming catalysts. We are initiating coverage on the common stock of Versartis with Buy rating and price target (intrinsic value) per share= $21.30 (based on sum-of-the parts enterprise DCF method).
- Common stock price target= $21.30
- Current stock price= $11.12
- 52-week stock price range= $6.17 to $19.76
- Market Cap= $327.25 million
- Average daily share volume= 105,331
- Cash/cash equivalents= $160.93 million
- Cash enough to last till= Q1, 2017
- Debt= nil
- Short Interest= 4.9%
- Short Interest (days to cover)= 14.68
Figure 1: Versartis, common stock price chart (from Bloomberg.com)
Overview of Growth Hormone deficiency:
Growth hormone deficiency (GHD) can result due to idiopathic causes like genetic mutations, radiation treatment for the brain, chemotherapy, and pituitary surgery (for tumors, etc.). An estimated prevalence of the disorder is three per 10,000 children in the US and E.U. The estimated prevalence is one per 10,000 adults in the US and E.U. (source: 10-K). In children, the clinical features include short stature, tendency towards obesity, delayed and deficient mineralization of the skeleton, and impaired growth of skeletal muscle. In adults, clinical features include increased fat mass, decrease muscle mass, skeletal demineralization and abnormal lipid profile; all of which may lead to increased mortality.
Current standard for treatment of GHD is daily, subcutaneous injection of recombinant human GH (rhGH). However, daily administration of these injections is painful, resulting in poor compliance. According to an estimate by Versartis, 46% of the patients missed at least two injections per week, and 26% missed at least three injections per week. Due to the missed doses, these children have reduction in their height velocity. Over 50% of adults with GHD also stop treatment or refused treatment due to painful daily injections.
Earlier attempts to develop longer-acting formulations of rhGH have been unsuccessful. Genentech developed a depot formulation (Nutropin depot) by licensing technology from Alkermes (NASDAQ: ALKS) in 1999; but this formulation caused significant pain at the injection site and skin deformation by lipodystrophy. This formulation had to be removed from the market to these side effects. Pfizer (NYSE: PFE) tried PEGylation of rhGH, but the formulation was not readily absorbed at injection site and caused severe lipoatrophy. This product also had to be taken off the market. PEGylation approaches are more expensive to manufacture and may be unsafe (possible vacuole formation in brain and kidneys). Fusion protein approach formulations have less than one-week duration and have limited safety data. At present, no other long-acting formulations for rhGH are in development or approved.
Somavartan, Versartis' proprietary one or twice monthly administered formulation of rhGH could become the new treatment standard in Growth Hormone deficiency:
Somavartan was developed using Versartis' proprietary XTEN technology. A long, N-terminal, hydrophilic amino acid is attached to rhGH, which results in decreased kidney clearance of the hormone. Another C-terminal amino acid is also attached to the hormone, which reduces target receptor binding and potentially reduces receptor-mediated clearance. The product has a half-life at least 30 times longer than daily rhGH preparations with similar safety and tolerability profile.
Figure 2: Molecular structure for Somavartan
In early clinical trials, no lipoatrophy or deformation of skin has been seen at the injection site, even after two years of treatment. There have been no reports of nodule formation at the injection site. The needle size is similar to the that of daily injections. Somavartan can also be administered using convenient, pen-injectors with disposable needles.
Somavartan is expected to improve patient compliance, result in better clinical outcomes, and even increased sales of rhGH due to improved patient compliance.
Global sales of rhGH products were $3 billion in 2014. According to the company estimate, the global annual sales can be increased to $4 billion after launch of the long-acting formulation. Sales of rhGH in the treatment of pediatric GHD is about $1.5 billion annually. The pediatric rhGH market is expected to increase to $2 billion by 2018. Pediatric rhGH sales were $500 million in 2014 in Japan and $550 million in Europe. Adult rhGH market is about $400 million annually. However, adult GHD market could double to $800 million/year at 100% compliance rate (which is possible with Somavartan).
In addition to pediatric and adult GHD, Versartis also plans to develop Somavartan for treatment of additional indications like idiopathic short stature, small for gestational age, and Turner's syndrome, which together account for about 20% of rhGH market.
Figure 3: Versartis, product developmental pipeline
Clinical studies of Somavartan:
In a phase 2a study in children, weekly, twice-monthly and monthly does of Somavartan were tested. Dose of 5 mg/kg of Somavartan achieved similar height velocity at six months as annual height velocity in our daily rhGH injections at maximum dose.
In the extension phase of this phase 2a pediatric study, dose of Somavartan was increased to 3.5 mg/kg twice monthly. Nearly 100% adherence to twice monthly injection schedule was noted after 18 months of at-home treatment (figure 4). The mean height velocity after 2-years of treatment with Somavartan was comparable to maximum, daily rhGH dosed regimes (figure 5). There were no serious adverse events. The frequency of mild adverse events like injection site pain decreased over time. Twice monthly injections of Somavartan can be conveniently administered at home by a visiting nurse.
Figure 4: Nearly 100% adherence schedule was seen with all dosing schedules of Somavartan in a pediatric phase 2 extension study (source).
Figure 5: Phase 2 extension study in pediatric GHD showing efficacy data (source).
A phase 3, multicenter clinical trial (VELOCITY) in pediatric GHD is ongoing. Total 136 study subjects will be enrolled. Somavartan at dose of 3.5 mg/kg twice monthly is being tested in comparison with 34 µg/kg/day per gram per day rhGH, which is the highest approved dose of daily preparations. The study primary end-point is non-inferiority based on mean, year-one height velocity. The study enrollment is expected to complete in mid-2016 and the data is expected in mid-2017. A separate phase 2/3 trial in pediatric GHD is on-going in Japan.
A phase 2, multi-center (VITAL) trial of Somavartan in adult GHD is on-going (with planned monthly dosing). The extension phase of this trial was started in January, 2016.
- Interim data from phase 3, VELOCITY trial in pediatric GHD could be announced over next 6-12 months.
- Enrollment in phase 2 VITAL study in adult GHD has been completed (as per clinicaltrials.gov) and data might be announced later this year.
Intellectual property: Versartis owns all world-wide rights to commercialize and market Somavartan. Various patents protecting Somavartan extend till 2032.
President and CEO, Jay Shepard: He has 33-years of drug development experience in pharmaceuticals and biotechnology industry. He was a former president and CEO at Nextwave pharmaceuticals, and interim CEO and president at Relypsa.
Senior Vice-President of Clinical Affairs, Bert Bakker, MD, PhD: He is a pediatric endocrinologist, and has treated children with GHD deficiency for more than 30 years. He also worked at Genentech managing the rhGH pipeline.
Competition: Competing daily-administered rhGH products include ones from Novo Nordisk, Eli Lilly, Roche/Genentech, Pfizer, Merck Serono, Teva and Sandoz GmbH.
- Ascendis (NASDAQ: ASND): once-weekly injection of rhGH in pediatric (phase 2 completed, phase 3 not started yet) and adult GHD (in phase 3).
- Biopartners (China): once-weekly rhGH under development.
- Critical Therapeutics: Developing once every two weekly injection of GH, finished preclinical stage; also developing intranasal formulation of GH.
- Opko Health (NASDAQ: OPK): developing long-acting GH using reverse PEGylation (once-weekly administration). Phase 2 has been completed in pediatric GHD. Phase 3 is on-going in adult GHD.
Institutional stakes: Institutions own 69.2% of the common stock and include FMR LLC, Baker Brothers and Perceptive Advisors (figure 6).
Figure 6: Versartis common stock, institutional holdings (source: Nasdaq.com).
Valuation of common stock (enterprise discounted cash flow method):
Contribution of non-operating assets (like cash) minus liabilities:
After adjusting for deferred tax-assets like operating loss carry-forwards and liabilities (including fair value of employee stock options) and using undiluted common share count, we calculated the contribution of non-operating assets minus liabilities to the intrinsic value per common share= $5.75. The spreadsheet can be downloaded here.
Contribution of future revenues from Somavartan in pediatric GHD:
About 20,000 children were reported to be receiving GH replacement therapy in a U.S. study. In another U.S. study, the prevalence was reported as one case per 3500 children (source). Another article described the prevalence of pediatric GHD as ranging from 1/4000 to 1/10,000 children (source).
Annual global sales of Norditropin, a daily injectable GH preparation by Novo Nordisk were about $1.06 billion while Pfizer's Genotropin occupied the second place with annual global sales of $720 million. The global GH therapies market is expected to grow at annual rate of 4.22% from 2015-2019 (source).
The existing global market for GH replacement therapies in children in about $1.5 billion (company estimate). We assumed that about 50% of these patients on daily injections will switch to long-acting Somavartan due to convenience.
There is potential for increasing the global pediatric GH replacement therapies market by another $500 million/year by 2018. This could be achievable by increased market penetration by improving compliance. We assumed that about 50% of these new patients will be started on Somavartan.
Using these inputs, we forecasted about $1 billion of sales for Somavartan globally in 2023 (5 years after drug launch) and then growing at 1.2% annually till patent expiry in 2032. We risk-adjusted the forecasted revenue using probability of reaching the market=67% (average for drugs in phase 3, as per Milken Institute data), thus calculating about $746 million peak risk-adjusted revenue globally in 2032 from this clinical indication. These estimates seem reasonable considering the sales of existing daily GH preparations.
License agreement with Amunix: Under this agreement, Versartis will pay milestone payments up to $40 million to Amunix, and 1% royalty on net sales of any single marketed product, which could increase to high single-digits if more than one product is marketed.
After adjusting for 5% royalties on sales payable to Amunix, we calculated peak, global, risk-adjusted revenue from Somavartan= $708.6 million in 2032 from this clinical indication.
We input net income=17.5% of revenue (after drug launch) and depreciation and amortization=7.3% of revenue (after drug launch). Using reinvestment rate of 90% of net income after drug launch, capitalizing R&D expenses and discount rate =15% for first 5 years (then decreasing to 12%, and then 10%), and undiluted share count, we calculated contribution to intrinsic value per common share from this clinical indication= $12.58. The spreadsheet for this calculation can be downloaded here.
Contribution of future revenues from Somavartan in adult GHD:
The estimated annual incidence of adult GH is 1/100,000 adults. About 6,000 adults are diagnosed with GHD annually in the U.S. alone (source).
Annual adult GH global market is about $400 million as per company estimate. About 50% adult GHD patients are non-compliant due to inconvenience. This market can be doubled to $800 million/per year globally as per company estimate.
We assumed that about 50% of adults on existing daily injectable therapies will switch to Somavartan and 50% of potential new patients will be initiated on Somavartan. Using these inputs, we forecasted about $400 million of sales for Somavartan globally in 2023 (5 years after drug launch) and then growing at 1.2% annually till patent expiry in 2032. We risk-adjusted the forecasted revenue using probability of reaching the market=30% , thus calculating about $127 million peak, risk-adjusted revenue globally in 2032 from this clinical indication (after deducting royalties payable to Amunix).
Using similar inputs for net income, depreciation & amortization and discount rate as described above, and undiluted share count, we calculated contribution to intrinsic value per common share from this clinical indication= $1.97. The spreadsheet for this calculation can be downloaded here. If the drug is successful in the phase 2 trial, we will increase the probability of reaching the market to 67%, thus resulting in even higher contribution to intrinsic value per common share form this clinical indication.
Contribution from Somavartan in other clinical indications like Turner's syndrome, idiopathic short stature etc:
Turner's syndrome is caused by absence of one X chromosome in females and is believed to occur in 1 in 2000 to 1 in 2500 live female births. Idiopathic short stature is a diagnosis of exclusion. About 20% of global rhGH sales are estimated due to these indications (excluding GHD) which translates to about $600 million in global annual revenue.
We assumed that Somavartan will gain 50% market share of this existing market (or $300 million/year global sales from patients on existing daily injections being shifted to Somavartan). We estimate that the compliance rate is similar as GHD (about 50%) in these patients as well and additional $600 million/year of global sales can be added if the compliance rate is 100% (which is possible with Somavartan). Assuming that 50% of these new patients are initiated on Somavartan, this translates to additional $300 million or total global sales of about $600 million 5 years after drug launch) from these multiple non-GHD clinical indications.
Using similar calculations as above, we calculated peak, risk-adjusted (at 10% probability of reaching the market at this stage), global sales (after deducting payable royalties) of about $64 million from non-GHD indications, contributing $1 per common share to the intrinsic value. The spreadsheet for this calculation can be downloaded here.
Sum-of-the parts calculation:
Adding the contribution from various clinical indications mentioned above and non-operating assets minus liabilities, we calculated the price target (intrinsic value) per common share for Versartis= $21.30. This translates to about 84% upside to the stock price from its current level, despite the run-up in recent months.
Figure 7: Sum-of-the parts valuation for Versartis common share using the enterprise DCF method.
Risks in the investment: The risks are similar to those for any emerging biotechnology company with no significant revenue and described in our previous reports. Various product candidates mentioned above might fail to succeed in clinical trials, side effects might limit their use, regulatory agencies might not approve them and healthcare insurers might not reimburse them. While the cash is enough to last until early 2017 at present, a future capital raise may dilute existing shareholders and put downward pressure on the stock price.
In conclusion, we are initiating coverage on the common stock of Versartis with Buy rating and price target (intrinsic value) per share= $21.30 (which could represent about 84% upside from the current stock price). The stock also has upcoming near-term catalysts that could propel the stock higher. A suggested allocation is 1 to 2% of the portfolio.
Updated firm model portfolio:
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Disclosure: I am/we are long VSAR.
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 represents my own opinion and is not a substitute for professional investment advice. It does not represent solicitation to buy or sell any security. Investors should do their own research and consult their financial advisor before making any investment.