On February 6th, the nano-cap Novelion Therapeutics (NASDAQ:NVLN) experienced a solid surge in share price following its announcement of their licensing deal with Recordati Rare Diseases for exclusive commercialization rights to JUXTAPID in Japan for the treatment of homozygous familial hypercholesterolemia "HoFH". This surge in share price occurred on normal trading volume and didn't appear to grab a large amount of attention from the market.
I was surprised by the market's lackluster response to Novelion's announcement. Not only will NVLN receive an upfront payment but is also entitled to milestone payments and royalties on quarterly JUXTAPID sales in Japan. I expected a nano-cap biotech closing an agreement of this magnitude would generate some more hype… especially since the $25M upfront payment is greater than the current market cap of ~$23M.
Prior to the press release, I was monitoring NVLN for a change in the charts for a technical trade. The stock was trading very flat, so I decided to keep waiting. After the press release, I watched in anticipation of possible analyst coverage and some opinion articles on the company… nothing. This caused me to search for answers to why this stock has been avoided like the plague. After doing some research, I discovered the company had recently been in trouble with the U.S. Department of Justice, FDA, and the SEC. I felt as if I dodged a bullet, but I returned to charts to make a final judgment to either keep on the watch list or to run. I couldn't decide…was I looking a huge opportunity? Was I looking at a toxic stock?
I had to dive deeper into NVLN and finally determine what I was going to do. I aim to share what I discovered about the company, its drugs, its mistakes, and the market's valuation. Ultimately, I intended to lay out my game plan for NVLN for 2019.
Novelion Therapeutics is a biopharmaceutical company committed to developing treatments for patients living with rare metabolic diseases. Novelion's goal is to develop and commercialize these transformational therapies that could significantly alter the treatment paradigm for patients that are living with these rare diseases, including diseases related with low leptin, such as low-leptin associated obesity. The company has a global presence and an established commercial portfolio, including MYALEPT (metreleptin) and JUXTAPID (lomitapide). Although Novelion is the public company, it is their operating subsidiary, Aegerion, which possesses most of the company's assets and executes the majority of the operations.
JUXTAPID is an FDA-approved, microsomal triglyceride transfer protein inhibitor designated as an assistant to a low-fat diet and additional lipid-reduction treatments, to reduce LDL cholesterol, total cholesterol, apolipoprotein B, and non-high-density lipoprotein cholesterol in patients with homozygous familial hypercholesterolemia "HoFH". In addition to the U.S., JUXTAPID was approved in Japan back in 2016. Furthermore, JUXTAPID was approved Europe in 2013 and was licensed to Amryt in 2016 for commercialization in Europe.
MYALEPT is an FDA-approved leptin replacement therapy intended to treat symptoms triggered by not having sufficient leptin in patients with generalized lipodystrophy "GL". The company is exploring MYALEPT for FDA indications in partial lipodystrophy "PL", congenital leptin deficiency "CLD", hypoleptinemic metabolic disorder, hypothalamic amenorrhea, and non-alcoholic steatohepatitis "NASH". In Europe, MYALEPTA is already approved for both GL and PL.
On February 6th, Novelion Therapeutics announced that its subsidiary, Aegerion Pharmaceuticals, Inc. had entered into an exclusive licensing agreement with Recordati Rare Diseases Inc. for the commercialization of JUXTAPID in Japan. In addition, Aegerion granted Recordati the right to be first to negotiate for commercialization of any new indications for JUXTAPID in Japan.
In return, Aegerion will be given a $25M upfront payment and an added $5M upon transferal of the JUXTAPID marketing authorization to Recordati. In addition to the upfront payment, Aegerion is to receive an extra $80M in total commercial milestone payments to become payable to Aegerion starting at the end of Q1. These payments will continue for each $70M escalation in cumulative net sales up until cumulative net sales in Japan reach $700M. Furthermore, Recordati will similarly pay Aegerion a 22.5% royalty on net sales of JUXTAPID on a quarterly basis.
History of Underperformance
Novelion was once a promising company (Aegerion) with visions of becoming a leader in the rare disease space. Back in 2013, Aegerion had grand ambitions for its recently approved drug JUXTAPID. The share price made huge gains concomitantly with the anticipation of huge profits. Well, 6 years later, the stock's valuation has deflated ~98% off its 2013 high. Looking at the weekly chart since 2013 (Figure 1), we can see the share price has ended each year lower than the last.
Figure 1: NVLN Weekly (Source Trendspider)
What happened? I believe most of the fundamental concerns emanate from Aegerion's decision to go after a rare disease, which comes with a plethora of major hurdles. However, it is often the final hurdle of getting patients, physicians, and payers all to accept the drug and its pricing. If any of those parties do not find the drug or pricing to be favorable, the drug's ability to capture a large percentage of the market will be greatly diminished. Aegerion might have cleared that hurdle, but I don't think it was a clean pass. Unfortunately, JUXTAPID costs ~$250K per year and is not covered by every major insurance plan. This can make it difficult for patients to remain on JUXTAPID or even initially obtain it. Considering HoFH is rare disease, losing one patient due to lack of insurance coverage or prior authorization means a loss of $250K in annual sales. Just that point alone can explain the rise in high expectations but also the drastic fallout. It could only take a few JUXTAPID patients to beat or miss expectations.
I believe the major issue is Aegerion's ruling with the DoJ and the SEC about the company's sales activities and disclosures related to JUXTAPID capsules. The former Aegerion CEO Marc Beer resigned after saying on an October 2013 episode CNBC's Fast Money that "patients are going to die of a cardiac event, either a stroke or a heart attack, if we don't have them on therapy." Subsequently, the FDA issued a warning letter to the company explaining that those comments were "misleading" because it suggested that JUXTAPID could reduce cardiovascular events and prolong life, which the drug lacks approval for.
Aegerion agreed to pay a fine of $40M, which is allocated over five years with outstanding amounts accumulating interest at 1.75% per year. The settlement payments are subject to acceleration in the event of JUXTAPID or MYALEPT being sold. In addition, the company also pleaded guilty to two misdemeanors; one pertaining to the marketing of JUXTAPID with inadequate directions for use and the other for the failure to act in accordance with the Risk Evaluation and Mitigation Strategies "REMS" for JUXTAPID.
Continued Downside Risk - Debt
As with most nano-cap biotech companies, Novelion and Aegerion have a significant amount of debt with little cash to handle those debts. The recent commercialization deal will help the company's ability to pay off some bills and keep the doors open. Still, it has an oversized debt of about $411M and is expecting 2018 revenues to be $130-140M.
Back in November, they entered into a new secured financing facility with certain funds managed by Athyrium Capital Management and Highbridge Capital Management, LLC.
The facility consists of a $50.0M loan that was funded to Aegerion. $22.5M of the $50M loan was used, on behalf of Aegerion, remove Aegerion's 2% convertible notes that are due in August 2019. In addition, about $21.2M of the proceeds from the financing was used by Aegerion to pay off the loan entered in March 2018, and $3.5M of the facility were used to repay a piece of the loan by Novelion to Aegerion. The remaining ~$25.3M will be used by Aegerion for general purposes.
As a result of this financing, Novelion had about $412M in debt. This debt consists of $50M of loans that accrue interest at a per annum rate of 11% and mature on February 15, 2019, conditional on extension to June 30, 2019, as defined above, $36.8M of loans owing to Novelion that accumulate interest at 8.0% interest and mature on July 1, 2019, $22.5M of loans that accrue interest at 2% per year and mature on February 15, 2019, subject to extension to June 30, 2019 as described above, and $302.5M of convertible notes that accrue interest at 2% per year and mature on August 15, 2019.
Did you get all that? It is not an easy read, and the transferring of cash and debt from one party to another does not make a clean map in my mind.
Luckily, the company recently notified Highbridge and Athyrium they elected to take the debt extension from February 15th deadline to June 30th. Obviously, this was needed since the company did not have the $72.5M to pay it off. Although the Recordati didn't provide a huge upfront payment, it did contribute a few million to both the Novelion and Athyrium/Highbridge loans.
Another debt the company has to pay is the remaining $32.8M (as of the end of Q3) outstanding DoJ/SEC settlement payment. This payment plan does not contain extensions or refunds. The company has to pay on the due date.
Will the company be able to pay off all that debt? The company anticipates generating $145-160M in 2019 revenues if the company continues to experience the same expenditures of $29.5M per quarter that would equal about $118M in 2019. Investors could expect some of the debt being covered, but I am still suspicious if the company has the current capacity to pay at the moment.
Another issue is the $302.5M in convertible notes are might be hitting the stock in August of 2019. However, Novelion and Aegerion engaged Evercore and Moelis, respectively, to explore and advise the companies on all available financial and strategic options, such as a restructuring of Aegerion's outstanding convertible notes, a sale or merger of Novelion or Aegerion, or the sale or other disposition of certain businesses or assets, including territorial licensing deals.
Continued Downside Risk - Cash Position
At the end of Q3, Novelion had consolidated cash position of approximately $27.4M, including $13.7M from Novelion and $13.7M from Aegerion. After the November financing, Novelion and Aegerion are anticipated to have approximately $15.7M and $37.5M, respectively, which, when consolidated, is about $53.2M.
When adding in the Recordati payment, we have to dive into the details of loans and other owed parties. Based on the terms of the company's bridge credit agreement with Athyrium and Highbridge, $15M of the upfront payment from Recordati will be paid to the Aegerion, and 42% of the remaining net cash proceeds will be paid to Novelion, which then will use those funds to repay a portion of the outstanding intercompany loan, and 58% of the remaining will go to Athyrium and Highbridge to repay a portion of the outstanding loan.
In addition, the company's current license agreement with the University of Pennsylvania entitles it to 15% of the $25M upfront payment, as well as 15% of the marketing authorization transfer milestone and any subsequent sales milestone payments received from Recordati.
What is the current cash position? By adding the $53.2M from November and the $15M from Recordati, we get ~$68.2M. Let's assume the company experienced the same net loss as Q3 of $24.8M. That would give us about $43.8M in consolidated cash and cash equivalents. Not a huge cash position but is still larger than NVLN's current market cap. Regrettably, the overhanging debt has a large percentage of that cash already accounted for, which might continue to suffocate the pipeline progress.
Continued Downside - Regulatory Action
Other downside risks arise from regulatory delays and failures. Although the company has received regulatory approvals in multiple countries for MYALEPTA, the company is still planning on potential label expansion for JUXTAPID and MYALEPTA. Of course, that would require more funding, which we can see is already an issue.
Another regulatory issue is the company's past judgments with the FDA and their condition for Aegerion to go into a Corporate Integrity Agreement. The "CIA" program requires the company executives to be responsible for strengthening and supervising compliance efforts. When reading over the document, my overall takeaway message is the company can't slip up in any FDA process for 5 years.
Is NVLN Worth an Investment?
With recent market conditions, I have been looking for some opportunistic buys that were a victim to the end of 2018 sell-off but has been a laggard in the recent market rebound. The initial step in this process is to filter through charts and find these stocks. I had found NVLN chart a few days prior to the recent news release, and it gave me a mixture of signals. I did not feel the pressure to make a decision at the moment and decided to sit on it.
Upon the press release, I felt the pressure to update my analysis of the charts.
Looking at the weekly chart (Figure 2), we can see the strong sell-off in November, but the share price appeared to trade flat leaving 2018. That flat trading of belt holds caught my attention because it appeared that line was going to lead the share price out of the current downtrend. After the press release, we can see the price looks as if the share price tested one of these downtrend lines but has yet to break out of the pattern.
Figure 2: NVLN Weekly (Source Trendspider)
It does look as if the daily chart (Figure 3) leads to a similar analysis of the weekly. However, we can see the impact of the recent news and helped the share price rise above the 50-Day moving average and is now sitting in limbo between it and the 100-Day moving average. The daily RSI is an indicator to take note of in the coming days as the share approaches the overbought area on the RSI. Normally, the stock experiencing a strong sell-off as it enters in the overbought area, into the bargain, the stock should see some resistance as it approaches the 100-Day moving average. Therefore, I will be holding off on a possible position in the near-term due to these technicals.
Figure 3: NVLN Daily (Source Trendspider)
However, the hourly chart (Figure 4) does provide me with a target area for entry. If the share price remains in this area, I will wait for the moving averages to converge on the share price. If the price holds above, I will consider a possible entry.
Figure 4: NVLN Hourly (Source Trendspider)
My next step is determining the correct metric for valuation for the company and see if the market has mispriced the stock. Looking figure 5, we can see NVLN is trading at a discount considering its price/sales and forward P/E. Even with the overhanging debt, I would expect the share price to be trading significantly higher than 0.18 price/sales. The current biotech sector's average price to sales is about 5x at the moment. Again, I get mixed signals. Initially, it looks like a buy, but then again, the share price has been at these levels or lower for months with the same valuation. Don't we expect opportunistic buyers to take advantage of these prices?
Figure 5: NVLN Values (Source Seeking Alpha)
I feel as if the market does not have any confidence that the company can find a way to pay off their debts and have enough cash to progress their pipeline. Honestly, I can see why many investors would stay away from NVLN, at least at the moment. However, is the risk/reward skewing towards a buy?
The company's history isn't exactly unadulterated but it does have some notable highpoints that show its ability to execute in certain areas. One of which is Aegerion's ability is to license and acquire high margin therapeutics from respectable origins. Indeed, JUXTAPID was developed by UPenn, while MYALEPT came from AstraZeneca (AZN).
Both JUXTAPID and MYALEPT could deliver potential opportunities for the company in the coming years including expanded global sales and usage. If the company can seize these opportunities, we could witness rapid growth from a dormant company.
Another developing story is how the company's 2018 cost reduction plan might potentially lead to the company becoming cash flow positive in Q2 2019. Not only would this mean the company has the ability to start paying back some of that debt but it could also indicate the potential to start moving forward on their pipeline that has been stagnant mostly due to lack of funds.
In light of these points above, it looks as if the company has made the right moves to reestablish a case for progress. While this potential has not overcome the negative sentiment surrounding the stock, it shows that management is not giving up and is trying to reinstate optimism around the company.
So, what is my NVLN game plan for 2019? I am going resolve to my initial objective of looking for a trade. Despite the potential of reaping the prospective rewards of a turnaround, I don't want to buy into a sinking ship.
I will regularly reconsider the potential for long-term investment throughout 2019. I believe 2019 will reveal if Novelion has the potential to turns things around as the company expects to become cash flow positive in 2019. If the company can handle its debt payments and is able to reignite the pipeline, I will be more than happy hop onboard. If the company fails to execute on these actions, I will continue to trade this on technical indicators until its destiny is clear.
I intend to find an entry in the coming days or weeks. Once I have established a position, I will look to hold until Q1 earnings report where I will make a decision to sell or hold till the following earnings report.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NVLN over 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.