Versartis: A Long-Term Buy

| About: Versartis, Inc. (VSAR)


VRS-317 offers a potentially best-in-class dosage schedule, which will translate into a competitive edge.

Versartis has the potential to grab a significant market share of the HGH market.

Versartis is facing a pending catalyst with the release of its clinical data in June from its VERTICAL trial.

In the stock market, it can often be hard to find companies that investors like for long-term investment. Each long-term investment has its risks and its potential for rewards, and the key is to find a company that minimizes its risks while leaving a strong chance for substantial long-term rewards. One such stock is Versartis (NASDAQ:VSAR). Versartis presents a compelling investment opportunity, as it is developing a drug that has the potential to be a best-in-class and capture a sizeable component of an over-$3 billion market for Human Growth Hormone.

Human Growth Hormone

Besides helping sports athletes to perform better (which is obviously not the intended use of HGH), Human Growth Hormone has many legitimate medical uses. Some of these medical uses include HGH deficiency, muscle-wasting diseases including HIV and AIDS, and children born small for their age, just to name a few. These legitimate medical uses have created a rather substantial market for synthetic HGH (which is the medical version of Human Growth Hormone). The problem with Human Growth Hormone is that it currently must be administered daily through injection. This causes obvious problems for doctors and for patients, as patients are more likely to miss doses of HGH, which lowers the overall efficacy of the treatment. The market for HGH products is predicted to get even better from its current $3 billion standing, as by 2018, it is predicted to reach a whopping $4.8 billion.

Versartis' Solution: VRS-317

Versartis is attempting to come up with a solution to the myriad of problems associated with modern HGH delivery. Should these solutions be successful, Versartis will be well-positioned to capitalize on a growing market for HGH. Versartis is developing the drug VRS-317. According to the company's website, VRS-317 is designed to provide better compliance for patients, as it can have up to monthly dosing, as well as to provide enhanced administration as well as fewer side effects associated with HGH treatment.

VRS-317 would clearly provide many benefits if it is able to successfully get through clinical trials. The following diagram will help to make the status of VRS-317 clear:

This diagram from Versartis' website makes the status of VRS-317 clear. VRS-317 is currently in a Phase I/IIa trial in pediatric patients. This trial is, according to the most recent quarterly filing, fully enrolled. In fact, buried in a recent press release, investors are able to figure out when Versartis will present its phase 1/2a data in pediatric patients:

"On June 23, 2014 at the Endocrine Society/International Congress on Endocrinology in Chicago, Versartis will present a poster of the complete pediatric GHD Phase 1/2a VERTICAL clinical trial results."

The data from the clinical trial would be an important binary event for investors. This will be one of the first hints that investors get as to how well the drug works in pediatric patients, which will be important for investors as the drug progresses through the other stages of clinical trials. One of the most important things that investors will learn from the trial is the optimal dose of VRS-317. In the current trial, VRS-317 is being evaluated in weekly, semi-weekly, and monthly dosages. Obviously, investors would like to see the monthly dosage be a possibility heading into Phase IIb and Phase III clinical trials. However, even the semi-weekly or weekly dosages would still help to provide advantages for VRS-317 that investors will not find in the currently-approved Human Growth Hormones.

Investors will more importantly get an idea as to the efficacy of the treatment. The primary endpoint for the trial is to measure the height velocity of the patients over a time period of six months. This will help for investors to get an idea of what the efficacy of VRS-317 will look like. This is very significant, as it will hint as to what investors can expect from the Phase III registration trial of VRS-317; according to the most recent quarterly report (already linked above), the Phase III registration trial will likely have to look at mean height velocity over a 12-month period. If this is indeed the case, the Phase II trial will give investors a very good idea of how VRS-317 will be able to perform in the larger and more expensive Phase III trial. Investors will get a better idea of the primary endpoint and how the Phase III trial will be conducted after Versartis completes its discussions with the FDA and the EMA regarding the design of the Phase III trial. At this moment, investors will have a clear picture of the path forward in pediatric patients. It is important to note that it is not likely (unless Phase IIa completely blows the current treatments out of the water regarding efficacy) that VRS-317 will only have to prove similar efficacy to currently-approved products and will not in any way have to prove superiority. This is important, as it helps to make it easier for Versartis to clear the hurdle for approval. Another interesting pathway forward is that if Versartis believes that its product in terms of efficacy is superior to currently approved products, it could conduct clinical trials just showing non-inferiority, and then later after the initial approval of the product, conduct clinical trials showing superiority to current drugs in terms of efficacy and as such try to get the label for the drug expanded to include that notice that Versartis tested VRS-317 against other treatments and was shown to be superior, or at the very least, ask the FDA to allow for Versartis to mention this to doctors when it is trying to convince them to prescribe the drug.

The clinical results to-date have been good. VRS-317 already successfully completed a Phase I trial. Among important highlights from the trial is the fact that the company found that once-monthly dosing was the optimal dose of the product. Remember, if there is a similar finding in the VERTICAL trial, it will be very important for investors. Even more importantly, though, the Phase I trial showed that the drug was well-tolerated, with the primary adverse effects being primarily "mild and transient". The safety of the drug is important, as it would provide a much more convenient dosing schedule for patients, so if the adverse effects are similar to currently-approved HGH products (or, as the company claims, even potentially less side effects), it will help to put doctors at ease prescribing the drug. Unfortunately, the Phase I trial was not designed to measure the efficacy of the drug, which enhances the importance of the Phase I/IIa ongoing trial.

The fact that we don't even have the clinical data yet for use in pediatric patients will make it hard to predict the development timeline for VRS-317. Regardless, I am determined to try (please note these are my estimates, and that actual results/company guidance could meaningfully deviate from my predicted development timeline). Given that we will soon have results for the Phase I/IIa trial, I am predicting that Versartis will probably spend the rest of the year in talks with the EMA and FDA regarding the potential design of the Phase III trial. Versartis will probably complete the design and initiate the trial (and maybe get an SPA from the FDA?) by the end of the first quarter of 2015. The issue is that we don't know how many patients the trial will have to enroll. If I want to be very liberal with my timeline, we could predict that enrollment for the trial will be completed by the end of the year 2015. This would mean that you will probably have the clinical data by the end of 2016 or the very beginning of 2017. At this point, the company would have to conduct pre-NDA discussions with the FDA and the equivalent discussions with the EMA. I would predict that this takes until the end of the 1st half of 2017. The company will probably file the NDA at the latest by the end of 2017. With this in mind, you will probably have a PDUFA date of 9 months after the filing of the NDA, which would put as at the end of September 2018 for approval. If everything goes according to plan and the company obtains approval, the drug should be on the market by the end of 2018, beginning of 2019. This means that my estimate is that VRS-317 is probably 3 or 4 (maybe even 5) years away from the marketplace.

There should be a question that readers are asking right now: Wait a minute, a lot of what I heard about was regarding pediatric patients, what about adult patients? Well, obviously, Versartis is not planning on just leaving adult patients out of its development plan. The company is planning on resuming the development of VRS-317 in 317 adult patients in 2015. This will also help to be a major catalyst for the company upon the completion of its development plans for adult patients. This will help to provide a catalyst for investors while they are waiting for the Phase III trial results of VRS-317 in pediatric patients. If VRS-317 is successful in adult patients, it will further expand the market potential for the product, and therefore be very important for investors.

The potential market for HGH products

As I mentioned above, the market for HGH products is only expected to grow, and by some estimates, be $4.8 billion by 2018. Currently, the HGH market is rather fractured, with 7 different approved products. In the global HGH market, there are three very important markets that Versartis will have to focus on for its revenue. Currently, the United States generates 39% of the worldwide sales of HGH, Europe represents 37%, and Japan represents 21%. This leaves the rest of the world with approximately 3% of the market. With this in mind, it is important to note that Versartis is planning on seeking clinical approval in all three of the major markets. It is also important to note, that Versartis is planning on initiating the development of VRS-317 in pediatric patients in Japan. As I mentioned before, after the completion of the VERTICAL trial, Versartis will conduct discussions with both the EMA and FDA regarding the Phase III programs for VRS-317 in Europe and the United States.

Currently, the market for HGH products is largely dominated by some very large players. Some of the notable players in the HGH market are Pfizer, Sandoz, and Novo Nordisk. Obviously, these are not all of the big players within the global HGH market. These large players will likely be beneficiaries of the growing HGH market, and will be large competition for Versartis, should VRS-317 obtain FDA approval.

Under the market section, it is also important to note that by my projected 2018 timeline, that there will likely be other approved HGH products. This means that the market will be further saturated, and it is likely that some of the current large pharmaceutical players will try to update their products. It is also a possibility that there will be new indications for HGH products, which would help to further expand the market. Obviously, the more treatment options that there are, the more that Versartis is going to have compete against. It is important to note that according to the press release that I cited above, VRS-317 is the only monthly HGH treatment currently in development. This means that if Versartis is able to quickly progress through clinical trials, it should maintain one of its key marketing advantages, and thus still allow for VRS-317 to grab a significant amount of the market.

Other Pipeline Product

While this article has primarily focused upon the potential for VRS-317 and the potential benefits of VRS-317, it is important to note that Versartis does have another product in the pre-clinical stage. Should it progress through the pre-clinical stage, it will add another set of catalysts that will run parallel with the development of VRS-317. This will help to deepen Versartis' pipeline, and while VRS-317 is going to be the main focus of the investment community, if the pre-clinical product is promising, it could also help to lower the potential downside if VRS-317 is for some reason unsuccessful in clinical trials, as Versartis would have another product to fall back on. Unfortunately, as investors, we do not know very much about the pre-clinical product and are not even able to speculate what it is intended to treat. Regardless, it will help to provide some sort of value for shareholders, should it progress to the human testing stage.

Financial Position

When considering any long-term investment, it is important to note the financial position of the company. No investor wants to take a long-term position just to see their stake constantly diluted. With this in mind, it becomes necessary to look at the financial position of Versartis in order to see how a long-term investment might be diluted.

According to the most recent quarterly filing, the net cash used in operating activities was approximately $5.8 million. This is important, as it gives us a basis to draw down from and from which we can try to make predictions about the future use of cash by the company. Most of this cash was used in research and development activities. It is important to note, however, that this is not necessarily indicative of the amount of cash that will be used going forward. It is likely that going forward, the company will be forced to expend much higher amounts of cash for its clinical trials, as the Phase III trials would be much larger and thus much more expensive than the currently conducted Phase I/IIa trial. Also, should Versartis choose to continue development in adult patients as well, the expenditure of cash would accelerate even more.

However, while $5.8 million sounds like a large amount of money, it is important to note that by the end of the quarter, Versartis had approximately $204.9 million in cash and cash equivalents. This would suggest that the company, due to its recent IPO, has a very large pile of cash that it is sitting on. Due to the fact that we do not know the design of the Phase III trial, it would be a futile effort to try to predict the costs associated with the trial. Regardless, for the next year at least, it looks as though it is very safe for investors to assume that they will not be diluted, and as we have more information regarding the Phase III program and the other clinical trials that are planned by Versartis, investors will have to update the planned cash runway of the company.

There is the possibility that Versartis could in a non-dilutive way increase its cash reserve prior to the need to dilute. The most obvious would be if Versartis is able to successfully partner VRS-317. Should it partner the product, it is very likely that it will receive an upfront cash payment. Also, if it partners the product, it could try to get its partner to pay for the clinical trials (which would further lower the amount of cash that Versartis expends each quarter). It is not yet clear if this is the path which Versartis wishes to take for VRS-317.


VRS-317 provides the potential for a much more convenient dosing schedule for its drug. This would provide for Versartis to have a competitive edge in a growing HGH market. Versartis' other product may provide investors with currently unexpected returns. Investors may have to wait a while, but when combined with the clinical catalysts along the way and the potential for a product to gain a large amount of the HGH market, it appears as though Versartis is well-positioned for long-term investment. Investors will have more information as VRS-317 continues to progress through its clinical development and through its ultimate catalysts. While the development timeline for the drug remains in question, the large cash reserve for the company and the potential for VRS-317 should put investors at ease. Overall, Versartis is worthy of a long-oriented investment.

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

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