Reata Bardoxolone Trial Success Likely, But Still Just A Hold

Summary

• Reata Pharmaceuticals is readying for its first potential FDA product approval and launch.
• Lead candidate bardoxolone should report Phase 3 data in 2019.
• Hold; risks are too high at current price to recommend buying.

Reata Pharmaceuticals (NASDAQ:RETA) is a late clinical stage biotechnology company with a chronic kidney disease therapy due to release results later this year. I last wrote about it in Reata Pharmaceuticals A Buy On Bardoxolone Data back in February 2018. The stock price then was $26.73 per share. Now [close of May 22, 2019] it is $91.35. In this article I reevaluate Reata and argue that at the current price it is just a hold, at least until we see a positive outcome to its Phase 3 trial.

Here is now the stock price has unfolded in the past 3 years:

Data by YCharts

Lead indication: Bardoxolone for Chronic Kidney Disease caused by Alport Syndrome

Alport Syndrome is a rare genetic disorder that causes kidney disease, leading to death. The mutant gene causes the production of a mutant collagen. Bardoxolone is an Nrf2 activator that normalizes mitochondrial functions. In chronic kidney disease this can restore balance, reduce inflammation, and reduce fibrosis. In Phase 2 trials bardoxolone data indicated it is safe and effective, increasing the filtration rate significantly. The Phase 3 CARDINAL trial completed enrollment. Top line data is expected before the end of 2019. Full data would be reported after that at a science conference, followed by submitting the drug for approval by the FDA.

Bardoxolone has orphan drug status for this indication, which will mean orphan drug pricing. The exact pricing will not be announced until after FDA approval, if that occurs. Revenue might be significant, but that depends on pricing, the exact label, and adoption by doctors.

Because it works on a very fundamental level, if it helps with Alport Syndrome, there is a good chance that it will help with other diseases, and not just of the kidney.

Bardoxolone for Pulmonary Arterial Hypertension and ADPDK

PAH, or Pulmonary Arterial Hypertension, is a relatively common disease of aging, with several therapies already available. However, it has numerous specific causes and subtypes. Phase 3 topline data for bardoxolone for CTD-PAH (connective tissue disease associated pulmonary arterial hypertension) is expected in the first half of 2020. Enrollment was proceeding as planned as of the Reata Q1 2019 results conference. Reata estimates that about 30% of PAH patients have underlying CTD and so could benefit from bardoxolone.

Source: Reata

ADPKD, or autosomal dominant polycystic kidney disease, is another genetic disease that destroys the kidneys, leading to death unless a kidney transplant is successful. It is also in a Phase 3 trial, but that is just getting underway.

Omaveloxolone

Omaveloxolone for Friedreich's ataxia, another rare genetic disease, is in a Phase 2 registrational trial, MOXIe, with enrollment completed. Topline data should be available in the second half of 2019. Earlier data was positive. Granted EU Orphan Drug status in July 2018.

Cash and Cash Burn

Per Q1 2019 results, Reata had $313 million in cash at the end of that quarter. During the quarter expenses were $36 million. Expenses are expected to increase as the company prepares for commercial launches. Given that revenue ramps are sometimes slow, I would not be surprised if there is a stock offering to raise more cash if topline results are positive. But there may be enough cash to get through the all the data points and, if they are positive, FDA approvals.

Valuation and Conclusion

If bardoxolone fails to achieve its endpoints for the Phase 3 CKD trial we can expect an immediate, dramatic fall in the stock price. It will make investors believe the drug is also likely to fail for PAH and ADPKD, though that is not necessarily so.

The data on bardoxolone has been very good so far, but humans are very complex organisms. Phase 3 trials enroll a larger number of patients than Phase 2 trials, which could cause problems to show up, or show that prior positive Phase 2 results were false positives.

If the CKD trial is successful, the stock may not rise that much, it could even fall. It already has a market capitalization of $2.75 billion. The emphasis will shift to projections of revenue and earnings. It will take months to get an FDA decision. Then the ramp of revenue will depend on doctors, hospitals, and insurance payers. Uncertainty will reign until solid numbers come in.

Given all that, I do not see much to be gained from accumulating RETA at the current price. That could change if the price dipped due to volatility, rather than from negative results. Also, presuming FDA approval in the first and then later indications, and then good commercial adoption, in the long run, say in 3 years, the stock should go higher.

On the whole I am calling it a Hold, unless you don't mind the short-term risk and have a long-term investment strategy.

Disclosure: I am/we are long RETA. 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.