In the biotechnology industry, there are always companies who exhibit valuations that investors can disagree vehemently on. These companies normally become well known and widely covered. This article is not about one such company. Instead, the company I will refer to is summarily inflated to the point that one begins to wonder exactly how and why the company gets to such a point. Repros Therapeutics (NASDAQ:RPRX) is the company I refer to, and I wish to lay out a case on why I believe this should be shorted by investors in the short term.
First, a bit about the company, straight from their 10-Q:
Repros Therapeutics Inc. was organized on August 20, 1987. We are a development stage biopharmaceutical company focused on the development of new drugs to treat hormonal and reproductive system disorders.
Our primary product candidate, Androxal®, is a single isomer of clomiphene citrate and is an orally active proprietary small molecule compound. We are developing Androxal® for men of reproductive age with low testosterone levels. Androxal® treats the underlying mechanism that causes secondary hypogonadism and restores normal testicular function.
Proellex®, our product candidate for female reproductive health, is a new chemical entity that acts as a selective blocker of the progesterone receptor and is being developed for the treatment of symptoms associated with uterine fibroids and endometriosis. We recently completed a low dose study to demonstrate both safety and signals of efficacy in low oral doses of Proellex®. Additionally, the FDA has accepted an Investigational New Drug Application for vaginally delivered Proellex® and, as a result, we have commenced a Phase 1/2 vaginal administration study for uterine fibroids in the first quarter of 2012.
In less than three weeks, Repros has shot up over 130% from $4.20 to a high of $9.84 on May 25, before settling to its current price of ~$8.25. What set off this investment firestorm?
Repros announced an agreement with the FDA to craft the phase III trial of the company's Androxal oral therapy for the treatment of secondary hypogonadism under a Special Protocol Agreement [SPA]. The company has not even been granted the SPA yet, and has already had to update its trial design, resetting the 45-day FDA SPA review process. Was this a meaningful data release? Successful submission of an NDA? PDUFA decision? No. The fact that the company increased over 100% on SPA news had me scratching my head - so I dug deeper into the company.
Per the company overview, Repros has two drugs in their pipeline - Androxal and Proellex. Androxal is an orally ingested drug that boosts testosterone without negatively affecting testicular function - a feature not currently available on the market. Proellex is an orally ingested drug to treat uterine fibroids and endometriosis.
In the spirit of full disclosure, I will say that from the data I have seen, Androxal does look quite promising for the company. Current topical treatments and injections negatively affect testicular function, so Androxal could gain good market share in this very crowded market. The target market for the drug is primarily older, significantly overweight men, so it would be interesting to see the patient population of men experiencing low testosterone that also care about fertility (based on the age profile).
Proellex, however, has seen more than one clinical trial terminated due to safety concerns from the FDA. The only thing new this time around is that the company is evaluating lower dosages. Interestingly, in the most recent press release, Repros mentions that "FDA has advised the Company it must complete an integrated safety analysis of completed studies of oral Proellex." Repros will submit the document in the coming weeks and the FDA will review it within a 30 day window. Put simply, this is just an added cost for Repros Therapeutics. Could this also be more of the same for Proellex in regards to safety issues? Time will tell.
I do not want to comment much on the actual drugs as my short thesis revolves around other issues with the company [cash]. However, I was forwarded an interesting article on the history of Repros and the years of development Proellex has seen, and needless to say it does not bode well for the drug. Feel free to read that article here.
The reason Repros is a great candidate for a short sale is due to their cash position. Currently the company has about $11mm cash (accounting for burn since posting of latest 10-Q). The company has a burn rate of ~$10mm a year per the company's 10-Q. Repros dilutes every year, the most recent February not being an exception. It is worth to note that the issue was completed at $4.50 a share, nearly a 50% discount to the current price and only 3 months ago!
The issue to note here is that the stated burn rate is associated with ongoing phase II trials. Most of these trials enrolled less than twenty patients (for both drugs). Phase III trials are significantly more expensive - the phase III trial for Androxal alone will enroll 900 patients (800 for 6 months and 100 for 1 year). These trials are supposed to start by June for Androxal and Q3 2012 for Proellex (see table). As you can see here, two trials are currently recruiting and two are active, but not yet recruiting.
Next Expected Milestone(s)
Commence Phase 3 safety study (Q2 2012)
Commence Phase 3 pivotal study (Q3 2012)
Complete a Phase 1/2 study (vaginal delivery) (Q4 2012)
Commence Phase 3 study (vaginal delivery) (Q1 2013)
Commence Phase 2 or 3 study (oral delivery) (Q3 2012)
As for the company's opinion on the cash issue, they say:
We believe we have sufficient funding to complete all of our clinical trials currently underway and to commence subsequent planned clinical trials in 2012; however, significant additional capital will be required for us to complete development of either of our product candidates. Based on these current and planned clinical trials, we will need to raise additional capital no later than the second quarter of 2013.
Note that Repros mentions cash to complete the four current outstanding trials, and to merely start planned clinical trials. In my opinion, these phase III trials should at least double the company's cash burn rate to support the enrollment, monitoring, etc. Thus, one should conclude that the company will have to raise cash before 2013.
In short, If I am the CEO/CFO of a biotech company that I know will be hungry for cash in a short period of time, I just offered over 2 million shares priced at $4.50, and my stock price has just doubled on what amounts to no news, I am going to dilute ASAP. I would much rather submit an offering at $6.50 versus $4.50.
So with all of this simple logic, why has the price fluctuated in this range for two weeks? This is also an interesting question, and prompts one to investigate institutional investors and insiders. For this we head to symbol RPRX over at Whale Wisdom. Notice the largest shareholder by a significant margin, Perceptive Advisors, LLC. The fund owns ~20% of Repros' current outstanding shares (also known as the "poison pill" threshold). The next largest holders own 10% and 5%, respectively. The company has a very small share count at approximately 13 million, so it is very thinly traded. Doing some research on Perceptive raised a few more questions for me.
Perceptive Advisors is a New York-based hedge fund founded by Mr. Joseph Edelman. Small as far as hedge funds go, Perceptive has been around for quite some time. Now I am not one for conspiracy theories, but there are articles out there linking Edelman and Perceptive to some Dendreon trading shenanigans (which I will not link here), as well as this lawsuit from the SEC (since settled). On the other hand, Mr. Edelman has also been recognized by Absolute Return + Alpha magazine.
From what I gather, Perceptive is simply a very aggressive hedge fund that performs complex options/equity trades. Why they are still buying Repros, even through the $7.00 mark, is baffling to me as the company will surely need to secure cash somehow, most likely through dilution. Their position in RPRX is only 2.5% of their portfolio - their 9th largest holding - but again they own 20% of the company. This could mean that Perceptive merely wants to take a board seat, or it could mean something entirely different. If anyone has any further information on this fund and how it invests (particularly in this company), please comment or message me as I would really like to piece this together.
Repros Therapeutics, whether they have a blockbuster drug or not, is going to have to raise cash in the short term in order to cover costs of upcoming phase III trials. Considering their last offering was at $4.50, I believe the current share price represents a very attractive opportunity for the company to perform another offering. As such, I am holding long puts on the company.
Disclosure: I am short RPRX.