Reata Pharmaceuticals: Hidden Red Flags Hinder Bardoxolone Clinical Studies

| About: Reata Pharmaceuticals (RETA)

Summary

The company’s leading candidates — RTA 409 and its homolog, RTA 402 — are antioxidant inflammation modulators, which target the bioenergetic and inflammatory pathways.

Reata terminated its clinical studies on RTA 409 in 2012 after patients with Chronic Kidney Disease were experiencing high systolic blood pressure, heart failure, hospitalizations and deaths.

RTA 409-induced low serum magnesium level developed high systolic blood pressure and heart failure in clinical studies.

Low serum magnesium as risk factor is not an exclusion criteria in current clinical trials.

Reata (RETA) is facing high risks from its clinical studies and lack of cash and equivalents.

The goal of this article is to determine the importance of previous pitfalls for Reata Pharmaceuticals and forecast any possible output in the current clinical trials for its leading compound bardoxolone methyl -BARD- and stock valuation following the expiration of the lockup period. BARD-clinical studies in 2014 came up against an increasing death rate due to increasing systolic blood pressure -BP-and heart failure in Phase III for Chronic Kidney Disease -CKD- and Type 2 Diabetes -T2D-.

Background

Reata Pharmaceuticals (NASDAQ:RETA) is a clinical stage biopharmaceutical company focused on identifying, developing, and commercializing product candidates that modulate the activity of key regulatory proteins involved in the biology of mitochondrial function, oxidative stress, and inflammation to address the unmet medical needs of patients with a variety of serious or life-threatening diseases. The company's leading candidates, bardoxolone methyl -RTA 409- and omaveloxolone -RTA 402-, are members of a class of small molecules called antioxidant inflammation modulators, or AIMs. Bardoxolone methyl is in Phase III clinical development for the treatment of pulmonary arterial hypertension -PAH- associated with connective tissue disease.

Bardoxolone Methyl -RTA 402-

The Company's bardoxolone methyl is an AIM, which targets the bioenergetic and inflammatory components of PAH, and can improve functional capacity in patients suffering from certain forms of this disease. The Company's bardoxolone methyl is in Phase II clinical development for the treatment of PAH, and pulmonary hypertension due to interstitial lung disease -PAH-ILD-, both subsets of PAH.

Omaveloxolone (RTA 408)

The Company's RTA 408 is a close structural analog of bardoxolone methyl that was developed to improve tissue distribution, including blood-brain barrier penetration. RTA 408 is in clinical development for multiple indications. The Company's RTA 408 is in Phase II clinical development for the treatment of multiple diseases, including Friedreich's ataxia -FA- and mitochondrial myopathies -MM-.

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Scientific articles and company reports state a drop of serum magnesium has contributed to develop high systolic BP, heart failure and increase in death rate in the bardoxolone methyl-treated group in Phase III. Low serum magnesium level has been identified as a risk factor by independent scientists and clinicians, but not in studies commissioned by Reata Pharmaceuticals. Current BARD-clinical studies have some excluding factors as pre-condition high systolic BP but not low serum magnesium. Here comes the paradox.

Investment thesis

The current market valuation assumes RETA will grow in-line with the biotech industry. My view is RETA will underperform the market over the next 3 to 6 months. This projection is based on an analysis of risks for Reata's clinical studies, relative valuation and recent price movement.

BARD's clinical studies risk

Low serum magnesium level -hypomagnesemia- correlates inversely with systolic blood pressure [ref1][ref2]

A pre-clinical study with bardoxolone methyl in primates in 2012 presented data of body weight loss at four weeks and inconsistent serum magnesium and its excretion in urine [ref]:

"Twenty-four-hour urine collections demonstrated that bardoxolone methyl administration did not alter the fractional excretion of sodium or magnesium in urine or the total amount of excreted creatinine (data not shown)."

"Serum electrolytes (.... and magnesium) in monkeys administered bardoxolone methyl for 28 days did not differ from those in controls. In the 12-month study, serum sodium, potassium, and calcium were also unchanged from vehicle (out of six electrolytes serum magnesium was not measured in the 12-month study)"

"Moreover, with the exception of decreased phosphorus, bardoxolone methyl administration did not alter electrolyte balance-electrolyte concentrations (including magnesium) and the fractional excretion of sodium and magnesium was unaltered."

Although in the same year, independent scientific clinicians reported hypomagnesemia and higher systolic BP correlated with muscle spasms (another primary effect of loss of magnesium) in patients suffering of CKD and T2D treated with bardoxolone methyl in Phase I-II [ref], stating that:

"Potential unwanted effects included a mild but significant increase of UACR and decreased serum magnesium. ... Interestingly, there was a trend toward higher systolic BP values in the 75 mg bardoxolone group, which was observed despite weight loss and that will merit close attention in further trials. The main adverse effects were muscle spasms (63% of patients in the 75 mg group) and nausea (25%)."

"Another significant effect was loss of body weight.....more evident in patients with higher (>35 kg/m2) BMIn (body mass index). However, and perhaps worryingly, it was also observed in patients with normal BMI (−3 kg over 52 weeks)"

In 2014, following a sudden spike in death rate for heart failure in patients in the bardoxolone methyl study group, FDA halted Reata' trials. For the record, Reata Pharmaceuticals withdrew four clinical studies (Oct 2012-Oct 2014), terminated seven studies (Nov 2007-Nov 2014) and completed ten clinical studies from 2007 to 2014.

In January 2015, another independent group identified several not-totally unexpected pitfalls in the studies, including a correlation between loss of magnesium and heart failure [ref]

"We evaluate the reasons why this outcome (cfr. bardoxolone methyl Ph3 CKD) in hindsight was possibly not totally unexpected a........ consistent drop in serum magnesium.... might have contributed to the development of heart failure"

Although in a comeback in 2014, CEO Dr. Huff reported pharmacological effects on muscle cramps, magnesium levels, weight, and blood pressure were consistent with prior clinical experience, and decreases in serum magnesium levels were not associated with changes in total urinary magnesium excretion, implying that the decreases in serum magnesium levels were not secondary to renal loss (referenced as Chin, M.P., et al. (2014b). Patient PK Study manuscript. (planned, but never released)) [ref] .

Any reference to hypomagnesiae and heart failure due to higher systolyc BP were interestingly not reported in an article commissioned by Reata Pharmaceuticals in 2014 [Ref] even if the latter condition is an exclusion criteria for the current Japanese clinical trial for CKD and T2D (systolic BP > 160 mmHg) and PAH trial (uncontrolled systemic hypertension as evidenced by sitting systolic BP > 160 mm Hg) [ref]

Price movement

Shares price $11.00 at IPO on May 26, 2016 (amount of the offer $60.5M). Lockup period expired on November 22, 2016 with a drop of -6.40% with vol/avg 56,978/52,162. EPS was $-0.04 and $-0.05 in Q2 and Q3 2016 beating analysts estimates.

Closing price $25.99 on Nov 30, 2016 (+285% since IPO) with a downtrend of -18% in the last two weeks. Reata's EBITDA is somewhat higher than comparables (biotech companies with small market cap and IPO in 2016) although EV hindered an insufficient cash and equivalents equal to 80.72% of the total assets ($95.66M). Operating margin -7.63%.

Click to enlargeThe current ratio, a liquidity ratio that measures a company's ability to pay short-term and long-term obligations, is 1.92 far below comparables and industry average. Net cash/share, the percentage of a firm's share price that is immediately accessible for spending on activities such as R&D, purchasing assets, paying down debt, buying back shares and making dividends payments to shareholders, is $-9.78 much lower than similar comparables. This suggests Reata might need some inflow of cash very soon, which will supposedly be carried out by a public offering of its common stock.

The overall sentiment is bearish with a very erratic short interest of 19.5 days to cover on November 15, 2016, which is longer than Reata's comparables. The current market price has already included catalyst Phase II LARIAT-outcomes.

Considering price momentum and stock valuation, it is my opinion RETA will underperform the market with a high risk from its bardoxolone methyl study in CKD caused by Alprot syndrome and lack of sufficient cash and equivalents.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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