Aurinia Pharmaceuticals: Opportunity In Focus

| About: Aurinia Pharmaceuticals (AUPH)

Summary

The company is likely to run up in price ahead of the release of its 48-week data, which is related to its proof-of-concept study.

I will marshal evidence for why I think that this equity will provide for a profitable swing trade.

The evidence that I provide can be placed into five categories: the company's science, the capital structure, the current valuation, price action, and the risk vs. reward.

Lastly, I look at the idiosyncratic risks to the trade.

Aurinia Pharmaceuticals (NASDAQ:AUPH) will be releasing 48-week data related to its proof-of-concept study AURA-LV, and it will be releasing 48-week data related to its biomarker study AURION. The final 48-week readout of the data will be coming out in the first quarter of 2017. I assert that this catalyst has the potential to cause a runup in the stock price, and is hence a strong swing trade candidate.

The Science

The company potentially has a giant hit on its hands with Voclosporin. The drug is intended to increase complete remission rates for individuals that suffer from lupus nephritis. Lupus nephritis is an inflammation of the kidneys that is caused by systematic lupus erythematosus.

Aurinia has already released the eight and 24-week data relating to its AURA-LV study. The AURA-LV study is designed to see if Voclosporin has the potential to deliver statistically significant results that are equal to or better than the current standard of care when it comes to speed of remission and overall remission rates. Furthermore, the other key purpose of this study was to determine which dosage of Voclosporin will advance to a pivotal Phase 3 study. Voclosporin (23.7 BID) is the optimal dose that the company will advance to its Phase 3 program.

Eight and 24-week data showed that 23.7mg BID of Voclosporin demonstrated statistical significance across all efficacy measures. Furthermore, the p value scores are extremely strong across all measures of efficacy. The only p value that was on the higher side was the primary outcome measure: "Higher complete remission (CR), or renal response (p=.045)". However, it should be noted that AURA-LV is the first global clinical trial in active LN to meet its primary endpoint. Also, the population group of the study is considered to be comprised of individuals that, as a whole, are sicker than any other population that has ever been studied relating to lupus nephritis.

Aurinia Pharmaceuticals potentially has a huge hit on its hands because Voclosporin has the opportunity to be the new standard of care for lupus nephritis. Voclosporin, when added to the current standard of care of mycophenolate mofetil, can potential improve every single area of critical need, which includes: control of active disease, rapid disease control, lower steroid burden, impact on extra-renal disease, and convenient treatment regimen. The current standard of care, for the best complete remission rates, relies on cyclosporine, which has numerous negative externalities associated with it. Voclosporin is a structural analog of cyclosporine that is designed to give a similar, if not better, immunosuppressive activity but with a better safety profile. Essentially, Aurinia Pharmaceuticals just has to deliver similar results to the current standard of care to overtake the market, given that less steroids are involved and you get rid of cyclosporine, and early indications suggest that this is in the company's future. Lastly, the company will also be releasing data related to its biomarker study called AURION.

The Lupus Foundation of America estimates that the direct healthcare cost to patients in 2008 was $12,643 and the loss of productivity costs are estimated at $8,659. The likely costs of Voclosporin are between $50k and $100k a year given the nature of the disease and dynamics of the current competitive landscape. It is fairly easy to see how the company, if absolutely everything goes right, could reach a billion a year or more in peak sales.

The Capital Structure

A big reason for why I like this as a swing trade is due to the fact that not only can an individual have confidence in the results that are soon to come, but the major risk of large dilution just took place. The offering caused an abundance of pessimism given the fact that the price of the deal was cut so far from the then prevailing market. I can understand the frustration, but the deal appears to be fairly typical given the fact that the company was looking for a large cash infusion and it was not going to do it through the establishment of a new ATM facility. Also, it's not surprising to see this company get a "raw" deal given the position that it is in and the size of the offering. Furthermore, seeing as this is a swing trade, I'm not concerned about the long-term financial demands or constraints of the company. All I care about is that the largest shoe to drop, namely dilution, has happened and the stock is now forming a base at new levels.

However, with that said, it should be noted that there are 6,388,887 warrants with an exercise price $3 a share, which could act as some resistance as the dynamics of the buying and selling pressure change above the $3 level. Lastly, warrants can be used to offset large and aggressive short positions that would likely not be engaged in under different circumstances. Lastly, it is my personal contention that this company should seek a large cash infusion through either selling off their rights to a market like Europe, or strike up a partnership because the company will certainly need more money going forward.

Current Valuation

The current valuation plays a large role in why I think a runup can occur. It's hard to imagine that the weighted probabilities of the possible outcomes would leave you with a net present value under $200 million for Aurinia Pharmaceuticals given the time table to FDA approval, but the current valuation stands at only around $120 million in market capitalization. I could see a double from these levels upon a great 48-week readout, but it is my contention that the market capitalization, given its low levels, should rise in anticipation of positive results. I personally think this company has been perennially underpriced because its lead candidate is a recycled drug, it's a small Canadian company, and large cash raises seem to always be looming.

Past Price Performance

My last piece of support, which I will offer in this article, has to do with the visceral upside that this stock has been known to engage in. This fact becomes apparent to any individual that looks at the chart of Aurinia and reads the coinciding news cables. I think that this occurs, not only for the specific reason at the time, but also because of a larger issue that this stock does a poor job at price discovery. Poor price discovery is a lot like leverage, it works both ways. I see a company that potentially has a drug that could be generating hundreds of millions by 2020, has just had a larger than usual cash raise, positive results are likely imminent, and this stock has been known to rip to the upside when optimism and hope takes control. Furthermore, the $2 to $2.20 is a five-year historical bottom so you have a strong sell signal if you choose to just speculate and not simply go long.

Risk Reward

My sell signal is at $2.20 given the charts and my current cost basis. The next major resistance is at $3 and I could see $3.5 given the fundamentals, so let's take the average of $3.25. At the current $2.4 level you get a $4.25 upside to downside ratio. I believe sound speculation starts from the premise of only engaging in situations where the payoff is 4 to 1 or greater and the probability of the upside occurring is at least slightly more possible than the downside alternatives. Aurinia Pharmaceuticals looks to be a solid speculation given the preponderance of the evidence. Lastly, I have no intention to go long on this stock, but I think the bulls, all things being considered, have a stronger case than the bears.

Idiosyncratic risks that could derail the trade

The largest risk that I see to this trade is that the equity simple stays range bound until results are released. I could also see a speculator getting caught off guard with a post-market release of less favorable than expected results. Furthermore, financial instruments such as warrants, pent up selling pressure at higher levels, and a lack of risk appetite could act as a cap on the upside, which will only be broken by the deliverance of positive news.

Disclosure: I am/we are long AUPH.

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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