Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant. - Warren Buffett
As much as I enjoy a good comeback story like Rocky Balboa, I'm highly enthused when I elucidate a successful turnaround stock. A firm that successfully comeback usually delivers multiple fold profits for investors. Peter Lynch stated that turnaround stories are lands of multi-baggers. The comeback kid in this research is La Jolla Pharmaceuticals Company (LJPC). For most of 2018, La Jolla shares were beaten to near oblivion as the stock shed roughly 70% of its value in half-a-year. I'm not surprised by the magnitude of the decline because of the financial market's mood is like a pendulum: it swings to either extreme optimism or grave pessimism.
Figure 1: La Jolla stock chart (Source: StockCharts)
In the ebbs and flows of market emotion, the tide is turning in favor of La Jolla. As a homing call to the market bulls around the world, La Jolla reported the robust interim data for its phase 2 trial of LJPC-401 today. Like the annual bull run in Pamplona Spain, market bulls rushed through the gate to the 92% rally in one trading session. Notwithstanding, there are strong fundamentals to galvanize the rally. Only in the land of bioscience equity would you find this phenomenon. In this research, I'll present a fundamental analysis of La Jolla and provide my expectation of this successful turnaround in the making.
About The Company
As customary, I'll deliver a brief corporate overview for new investors. If you are familiar with the company, I suggest that you skip to the subsequent section. Headquartered in San Diego California, La Jolla is focused on the innovation and commercialization of novel synthetic medicines to serve the unmet needs of life-threatening conditions. As depicted below, the company is brewing a portfolio of approved as well as developing therapeutics. Powering the commercialized asset is Giapreza. It is FDA approved on Dec. 21, 2017, for the management of dangerously low blood pressure (hypotension) due to vasodilatory shock (despite fluid and vasopressor therapy).
Figure 2: Therapeutics pipeline (Source: La Jolla)
Giapreza For Hypotension
Several months into approval, La Jolla commenced Giapreza commercialization in the U.S. soil. Since the entry into this land of golden opportunity, Giapreza has been generating modest yet increasing sales. Though I'm not betting the barn on Giapreza, its launch status cemented the fact that La Jolla can bring its drug to the market. In bioscience investment, a medicine can be hyped as the "magic cure" for deadly conditions. To investors' dismay, the excitements are eventually evaporated into disappointment as the drug reports subpar clinical results. It's either that or the company is unable to gain the nod from the regulatory authority to market its medicine. That being said, Giapreza commercialization is the "prima facie" that La Jolla is capable of generating positive data, gain approval, and launch its drug.
Following the tailwind of Giapreza is the crown jewel of the pipeline dubbed LJPC-401. The therapeutic design of LJPC-401 is strategic because it is essentially a synthetic formulation of hepcidin. As a protein-based hormone, hepcidin is known for regulating the absorption and distribution of iron in the body. In a nutshell, hepcidin prevents excessive iron build up in vital organs like the heart and liver.
Figure 3: Hepcin metabolism (Source: ScienceDirect)
Currently, in the Phase 2 investigation, LJPC-401 is pitted in two trials for its efficacy and safety against "iron overload." True to the old adage, too much of anything can be lethal. And, a dangerously high level of iron in the body certainly induces organ damage. In medicine, we docs refer to this condition as hemochromatosis. And, LJPC-401 is put to the test of truth (i.e. clinical trial) for hereditary hemochromatosis and the blood disorder beta-thalassemia.
Phase 2 Data For LJPC-401 In Hemochromatosis
As the reigning pipeline champion, LJPC-401 demonstrated stellar interim data for its Phase 2 study in patients suffering from hereditary hemochromatosis. In the said investigation, the patients were randomized to receive either LJPC-401 or a sugar pill (i.e. placebo). At the 16-week analysis, 60 patients are already randomized. Remarkably, the primary study endpoint (i.e. TSAT change from baseline) was met with extremely high statistical significance. The clinical perspective is also sound.
Figure 4: Phase 2 study of LJPC-401 (Source: ClinicalTrial.gov)
Accordingly, patients who took LJPC-401 enjoyed the remarkable 42% TSAT reduction versus a meager 6% for patients on the placebo. Of note, transferrin saturation (i.e. TSAT) measures how much iron is absorbed in a carrier protein coined transferrin. Therefore, a higher TSAT percentage translates into more iron in the blood. Conversely, a TSAT reduction signifies an iron normalization. Since the p-value for the TSAT reduction is less than 0.0001, it's far below the 0.05 cutoff for statistical significance on a 95% confidence interval. Therefore, the 42% TSAT improvement is real. When you read statistical data, it pays to assess the p-value. A value of less than 0.05 entails that the results are real rather than a random occurrence.
Another way of determining whether a therapy works for hemochromatosis is how often a patient necessitates the bloodletting procedure, phlebotomy. Despite its barbaric nature, phlebotomy still has its place in modern day medicine. In other words, there are too much irons in the blood associated with hemochromatosis that clinicians have to get rid of some of the blood. After all, a lot of irons are stored in the red blood cell's hemoglobin.
On this front, patients on LJPC-401 only need 0.06 phlebotomy per month versus the much higher 0.41 for those who consumed the sugar pill. This represents a 6.8X improvement. Interestingly, the procedure count is less than one because it's a calculated average from 60 people. Again, the p-value is quite low at 0.003, thus indicating statistical significance.
Moreover, the drug was well tolerated. Looking at the overall results, I strongly believe that LJPC-401 will deliver strong outcomes for its advanced trial in the future. Ultimately, it'll be FDA approved. Amid its therapeutic prowess, LJPC-401 will most likely replace phlebotomy as the standard of care. Though there is the other iron-chelating therapy deferoxamine (Desferal), it's reserved for a particular subset of patients.
Just as you would get an annual physical for your well-being, it's important to check up on the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the 4Q2019 earnings report for the period that ended on December 31. As follow, Giapreza sales registered at $4.2M compared to $3.5M for the same period a year prior. This represents a 20% year-over-year (YOY) increase. While the sales metric is not substantial, it signifies that La Jolla can generate increasing revenues. For Fiscal 2019, the company expects to deliver $24M to $28M in Giapreza sales.
That aside, the research and development (R&D) for the respective periods came in at $27.5M and $26.9M and thereby pinpoints a slight increase. A significant amount of capital is committed to the development of LJPC-401. As a rule of thumb, an R&D increase for a bioscience stock can be viewed positively: the money invested today can translate into blockbuster profits in the future. After all, you have to plant a tree today in order to enjoy its fruits.
Additionally, there was $45.9 ($1.73 per share) net loss versus the $38.5M ($1.74 per share) decline for the same YOY comparison. Given that R&D only increased slightly, I'm not surprised by the 5.7% improvement in bottom-line earnings. Though 5.7% is nothing to boast, the fact that a young grower is able to increase its earnings is quite encouraging.
Figure 5: Key financial metrics (Source: La Jolla)
Regarding the balance sheet, there were $172.6M in cash and equivalents, thus underlying an 89.9% increase from $90.9M last year. The huge improvement is made possible by $109.8M net proceeds generated in an offering made back in March last year and $124.3M royalty financing. Pitting against the $43.4M quarterly operating expense (OpEx) rate, there should be adequate capital to fund operations into 1Q2020 prior to the need for additional financing. However, the company might raise cash after a big rally.
On the subject of dilution, I observe that investors usually shy away from a public offering. Contrarily, I prefer a young bioscience company to raise capital this way rather than incurring substantial bank debts. Short-term bank debts can be recalled anytime that can prompt a company to file a Chapter 11. The key to a public offering is to execute it when the shares are trading high.
Though I do not mind a public offering, it's important for you to determine if you are holding a "serial diluter." A firm that uses dilution as a "cash cow" will render your investment essentially worthless. As the shares outstanding increased from 22.1M to 26.2M for La Jolla, my rough arithmetics yield the 24.2% dilution. At this rate, La Jolla easily cleared my 30% dilution cutoff for a profitable investment.
Despite La Jolla's strong prospects, a turnaround story is a highly risky investment. At this point in its life cycle, the main risk for La Jolla is if the company can continue to post positive clinical endpoints. The most important clinical trial reporting relate to LJPC-401 for hereditary hemochromatosis. If the drug failed to post advanced results, it's quite likely that La Jolla will tumble over 50% and vice versa. Similar risk also applies to LJPC-401 for beta-thalassemia. That aside, there is the concern that Giapreza might not be approved by the EMA in June. Like most small bioscience company, there is a real chance that La Jolla might not enjoy strong commercialization of LJPC-401 without a partner. The other consideration is if the market for iron overload is robust.
In all, I maintain my buy recommendation on La Jolla Pharmaceutical Company with the five out of five stars rating. La Jolla is a Cinderella biotech that is overlooked by the market. As Giapreza is approved and launched, there is concrete evidence that the company can achieve a similar feat for other pipeline assets. The recent robust Phase 2 data of LJPC-401 is a testament to the company's ability to deliver. And, I expect this crown jewel to generate positive advanced trial data and ultimately be approved. Last but not least, the upcoming EU approval of Giapreza should help boost revenues above $28M next year.
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