After speaking with Repros Therapeutics' (RPRX) CEO, Joseph Podolski, I got a better idea of the company and its possible valuation. I think the company's two pipeline drugs, Androxal and Proellex, have the potential to do well in their upcoming clinical trials. However, as Podolski, or "Joe" as he informally likes to be called, was telling me: Data is everything. I don't believe sufficient data has been developed yet for Androxal and Proellex to merit such a high market cap for the company.
I believe a pullback will come soon for the stock because it's likely that some big holders will soon cash in on some of their Repros position. The selling pressure of the big holders will push the stock price down and put an end to its upward trajectory.
As shown in the latest 10-Q on page 11, the company has 5,362,348 potential common stock from stock options and warrants -- which, by the way, are excluded from diluted shares outstanding. The most recent warrant offering was from Feb. 7, 2011. To the company's benefit, very few of the warrants have been exercised.
However, Joe said that recently a warrant holder had requested to convert about 70,000 series B warrants. This comes out to approximately 171,500 shares of common stock. Relatively, this isn't a lot of shares, but it could signal the beginning of more conversions. It's worth noting that the two major warrant holders haven't converted any yet.
On Aug. 31, 2012, Repros sold 2,145,636 shares of common stock at $11 per share to a group of institutional investors in a capital raise. These shares haven't been registered yet. Joe said they will be registered in the next few days. After the shares are registered, the investors can sell them immediately if they choose to.
These investors, which include top biotech hedge fund Baker Bros., are excellent biotech investors. Joe said that these investors invest in early stage biotechs to go for a 100%-200% return. However, I think many of them wouldn't mind taking a risk-free one month 40%-plus return now and sell at least part of their position for $15-$16 per share rather than waiting a couple years for the home run.
Joe, although very optimistic on his company, struck me as a straight shooter, and not the kind of CEO that perpetually hypes up his company. He told me the following:
I have purchased shares in the company and have never sold a share. But can I justify the share price going from $9 to $16 in one month? No I can't. My job is to run the company the best and most efficient way I can. It's not my job to evaluate the share price, that's the investors' job. I can't recommend a buy here at $16. It would be best to wait for the data to come out in our next trials. The price might have gone this high because of the short sellers getting slammed.
What I'm looking for is more distribution. I want more institutional buyers to come in and own the stock. If the data comes out in the next trials for Proellex and Androxal and it looks good, then mutual funds will come in. They are looking for a 50%-80% return. When they come in, short sellers can do what they want, it won't matter.
The reason why I think a pullback would be good in the long run for Repros is because it might allow the company to get the distribution that Joe wants. A biotech firm won't be able to get a 200% return on Repros at its current price of $16 per share, because its market cap is approximately $357,471,568. This is calculated using the full 22,341,973 shares outstanding after adding the shares from the unexercised options, warrants, and latest share offering. At this high market cap level, it doesn't attract many sophisticated investors. It primarily attracts momentum chasers, short covering, or weak handed investors. If the stock pulls back to a more healthy level like $11-$13, then it might again catch the attention of a biotech fund.
During our interview, I asked Joe a few questions regarding Androxal and Proellex. A big theme to Joe's answers was "data." He puts lots of emphasis on the importance of good data.
1. Question: Why will patients use Androxal instead of the generic drug, Clomid?
Joe: Clomid isn't approved for the indications. It's not metabolized and it accumulates. There are no safety data for chronic use. Clomid is for women to ovulate if they have fertility problems. It's typically only used five days in a menstrual cycle. By the time the third cycle is done, it isn't good. The wrong isomer accumulates. Androxal can be used chronically. It has long term safety and efficacy in restoring normal testosterone levels. However, we need more data to prove this. The FDA wants to see it used on 800 men for six months, and 100 men for a year.
My comment: If clomid can't be used chronically, but Androxal can, then that would be a sufficient reason to use Androxal as opposed to the generic. I can't prove or disprove what Joe said because I'm not an expert on the subject. Clomid and Androxal have very similar structures, so I don't know if Clomid accumulates and if it does, why wouldn't Androxal accumulate as well?
2. Question: I noticed for the testosterone deficiency patents, five are owned by Repros, yet two are owned by a guy named Harry Fisch. Will Androxal's use infringe on Fisch's patents, and if so, what will be the expected costs to Repros?
Joe: Our legal counsel says not to worry. Anybody can get a patent granted. That's the easy part. However, to protect your patent isn't easy. Clomid is from the 1970s. Fisch just got those patents because he says you can use it to raise testosterone. However, Fisch doesn't have any enablement. He doesn't show any data. He's a urologist, but since he has no data and hasn't done any clinical studies, he can't claim it. We've done studies with Androxal on all kinds of animals and people.
My comment: I'm not sure if Repros will have to fight it out in court against Harry Fisch, or if it will be settled out of court. This article gives a good description of Repros' patent fight and suggests that a settlement is likely. Enablement does seem like a good argument against the patent, since Fisch hasn't done any clinical research. However, Repros has been fighting this patent since 2004. In December 2011, Fisch's patent infringement claims held up by the U.S. Patent Office even after the enablement argument was used by Repros.
3. Question: What does the FDA say the acceptable level of elevated liver enzymes from Proellex use is?
Joe: Elevations over three times the normal amount lasting over three weeks is a serious adverse event. No patient had lasting damage from a serious adverse event from Proellex. Those patients that were monitored monthly with high liver enzymes from the 2009 study all turned out OK. None of them needed a liver transplant or had permanent damage.
The FDA is willing to work with us on Proellex, despite the health risks, because endometriosis is a very bad disorder. Endometriosis causes extreme pain, irregular bleeding, and infertility and significantly decreases the quality of life for women.
We've already sent in the clinical trial revised protocol to the FDA. The efficacy endpoints are the same as the previous trials, and the FDA wants us to only do the trials on severe endometriosis. These are cases where the woman is in so much pain, that she can't even leave the house without taking narcotics. To measure efficacy, we have all kinds of questions to ask the patients to capture all the pain elements.
Since the safety risk was too high with 25mg and 50mg, the FDA is OK with us doing 12mg and 6mg doses. The oral dose of Proellex, if effective, makes a woman stop menstruating. If they don't menstruate, then there's no pain. In our previous trials, all the doses, from 50mg to 6mg caused women to stop menstruating, so I'm optimistic on this upcoming trial.
Proellex has the potential to be one of the bestselling woman's drug. It is expected to beat Premarin in sales. $1 billion a year in sales worldwide for Proellex is conservative.
My comment: I have seen evidence that if approved, Proellex has the potential to be a blockbuster. However, there's a risk that 6mg and 12mg won't be a high enough dose to have the required efficacy. The company reported that there was a "slight drop off" of efficacy using the 12.5mg dose compared to higher doses. The FDA stated that it would be difficult for Repros to determine a dose that would be both safe and effective. Since the FDA wants Proellex to only be used on severe endometriosis patients, that may indicate that it is concerned about the health risks with the drug, and only wants to risk it on patients that are most in need. If Proellex can only be used on patients with severe problems, that would limit its potential revenues.
4. Question: What are the Phase II studies of Proellex and Phase III studies of Androxal expected to cost per quarter?
Joe: The approximately $30 million we have in cash will take us to the middle of 2014. We should finish the Phase III for Androxal and submit an NDA. We also will be able to move Proellex into Phase III. The reason why we can afford this is because we do our own data. Clinical research organizations (CRO) are the most expensive part of clinical trials for biotec companies. Almost all of them use CROs, but we do it ourselves. Banks say that we have the lowest burn rate out of all the biotech companies.
My comment: This is good that Repros does its own research organization rather than hiring a CRO. The company saves a lot of money, and also shows more dedication to the trials than a third party would. I can only guess the drawbacks would be if the company spreads itself too think with it's workload or makes the trials biased in some way. But those negative risks seem small compared to the benefits. I wonder why most biotech companies don't do their own research data organization.
Wait for the Data
If you are intrigued by Repros and are thinking about taking a position, my advice is to watch and wait. "Wait for the data," as Joe would say. Although the company has made good progress in getting its clinical trials under way, technicals are a big reason for the parabolic move this month, in my opinion. I believe the anticipation of the inevitable share offering was keeping the stock depressed. Investors didn't want to take a position and then immediately face a dilution. However, what happened was, unexpectedly, a "buy on the bad news" event. Ironically, once the secondary happened it erased the dilution fear, and investors felt free to take a position. This caused a short squeeze and the stock jumped by 13% the day after. Add to this anticipation of new trials and a red-hot biotech sector, and voila! you get a parabolic price movement.
However, with some of the warrants soon to be converted, and the shares from the offering getting registered, I think investors will see some selling pressure and a stock decline in the near future. Sometimes big pullbacks can happen with biotechs after going parabolic. Look at biotech names like Rosetta Genomics (ROSG), Horizon Pharma (HZNP), and Arena Pharma (ARNA), for example. Getting into Repros right now, with its true market cap of $357 million, would be taking on sufficient risk. Efficacy still needs to be proven on a larger sample size for both Proellex and Androxal. If you want to take a position before the trial results are reported, I would recommend waiting a couple weeks for some of the diluted shares from the warrants and stock offering to get sold, and see where the share price is at that point before jumping in.