Don't fail to consider time as well as price in buying a true growth stock.
- Phillip Fisher
If you've followed my research, you'd realized that I often discuss bioscience investment themes. By figuring out the recurring phenomena, you gain a profitable advantage over the market. The theme that I'd like to cover today is that a partial or even full clinical hold is an opportunistic time to build shares in your favorite company. Unless something terrible happened like patient death, most clinical holds will be removed. Usually, a hold is placed due to either a procedural protocol, minor safety concern or manufacturing defect. As such, it's a matter of when rather than if a hold will be removed. Nevertheless, the market despises any clinical hold and thereby severely punishes the stock. Interestingly, the shares tend to rally vigorously in the coming weeks or months.
A prime example that epitomizes the aforesaid phenomenon is Regenxbio (NASDAQ:RGNX). As news of a partial clinical hold on RGX-314 hits the market, the shares receded significantly in the deep south. Adding further injury to the insult, concerns relating to the China trade war and to drug pricing clobbered the stock to a deep bargain far below its true worth (i.e., intrinsic value). In this article, I'll present a fundamental update on Regenxbio, while focusing on RGX-314 development and the latest earnings report.
Figure 1: Regenxbio chart (Source: StockCharts)
As usual, I'll deliver a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Operating out of Rockville Maryland, Regenxbio is engaged in the innovation and commercialization of gene therapy to serve the unmet needs in retinal, metabolic, and neurodegenerative diseases. The therapeutic strategy is to administer a single gene therapy injection to alter the disease course and thereby improve its outcome.
Figure 2: Therapeutic pipeline (Source: Regenxbio)
Leveraging wisdom learned from previous setbacks in adeno-associated virus (“AAV”) vector for gene delivery, Regenxbio is now advancing the next-generation AAV under the NAV platform. As a non-enveloped DNA virus, AAV is designed to transfer the correct genes to target cells for treating an underlying medical condition. With the correct genes in place, the disease course is progressively reversed.
You might think that all these talks are too good to be true. Be that as it may, there's solid proof in the pudding to the success of NAV and gene therapy. As of October 31 this year, fifteen out of twenty partnered companies advanced their NAV drugs into a clinical trial for a broad range of diseases. The fact that a large number of firms invested in NAV is a testament to its quality. These are votes of confidence from the brightest minds across 20 different organizations.
As I alluded, the gene therapy for spinal muscular atrophy ("SMA") dubbed Zolgensma is already marketed, thus generating increasing revenues for Novartis (NVS). Zolgensma works superbly for the progressively lethal condition, SMA. In other words, patients who took the said drug are essentially cured. Notice how I used the word "essentially cured" rather than cured, because treating rare genetic diseases isn't as straightforward as treating an infection. But Zolgensma did a stellar job against SMA. As such, I believe that Zolgensma's success substantially lowered the hurdles for other NAV medicines, especially RGX-314.
As you know, I often refer to RGX-314 as the crown jewel of this pipeline because of its ability to capture a mega-blockbuster market. Accordingly, RGX-314 is being developed as gene therapy to treat wet age-read macular degeneration (wet AMD) in a Phase 1/2a trial.
Back in October, Regenxbio presented interim results for the said study at the 2019 American Academy of Ophthalmology (AAO) Annual Meeting. As I expected, there's no safety concern. Patients taking RGX-314 do not show any significant side effects. Of efficacy, patients in Cohort (i.e., group) 5 demonstrated over 80% reduction in the need for rescued therapy (i.e., anti-VEGF injection). Overall, 75% of the patients didn't need rescued intervention. More importantly, the vision and retinal structure improved. For an in-depth discussion on this topic, you can refer to my previous article.
Unfortunate for shareholders, the FDA recently put a "partial" clinical hold on RGX-314. The hold was unrelated to efficacy and safety. In my view, the FDA simply needs more time to evaluate certain aspects of the delivery system for RGX-314 that is manufactured by a third party. I like the fact that Regenxbio is being transparent with investors and is working diligently with the agency to iron out any kinks. Notwithstanding, the market despises any unpleasant surprise and thereby punished the stock.
Regardless of the temporary market sentiment, there is nothing wrong with RGX-314. Regenxbio is unaware of any issue with the current device. The Phase 1 part of the said study is completed, as it enrolled 42 patients. The reported data is phenomenal. As such, the firm will conduct a regular assessment and safety monitoring for those patients. Only new patient enrollment is being withheld. After all, other subjects already received their one-time injection. According to Regenxbio:
The company is conducting a review of the third-party device components and believes that there are readily available and suitable alternatives for these third-party devices if needed. Regenxbio will continue to work closely with the FDA regarding the potential replacement, testing or modification of third-party devices. As a result of these activities, Regenxbio now expects to initiate the RGX-314 Phase 2b trial for wet AMD and file an IND for the Phase 2 trial in diabetic retinopathy in 1Q2020.
To ensure a broad label, Regenxbio is evaluating an in-office delivery of RGX-314 to the suprachoroidal space. As more developments unfold in this saga, the company will reveal additional details of this plan early next year. Looking ahead, I strongly believe that the partial hold will be removed soon. And, there are 70% chances that RGX-314 will deliver robust data, gains FDA approval, and ultimately becomes a mega-blockbuster.
I estimated that, at minimum, RGX-314 will generate $1 billion sales (i.e., 25% of the competing drug, Eylea). Right now, Eylea is garnering over $4 billion in annual sales for Regeneron (REGN). Five years from now, Eylea will lose patent exclusivity. You're correct if you're thinking that Regeneron must be eyeing a replacement for Eylea. There's certainly a motivation for Regeneron to buy out Regenxbio for RGX-314 ownership. Furthermore, there's the powerful NAV platform for Regeneron to launch a vast number of gene therapy.
Aside from the pipeline advancement, it's important for you to assess the financial development. Just as you would get an annual physical for your well-being, it's important to check 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 analyze the 3Q2019 earnings report for the period that concluded on September 30.
As follows, Regenxbio procured $14.7 million in revenues, compared to $5.3 million for the same period a year prior. Of that figure, the bulk came from $9.2 million in royalty payment derived from $160 million Zolgensma sales. Of note, Regenxbio is also able to receive $80 million in milestone payment from AveXis as Zolgensma achieves the cumulative $1 billion revenue mark.
In my view, the 177% year-over-year (YOY) increase is not significant because the revenues are only $14.7 million. However, the small revenue from Zolgensma royalty serves as a validation of the efficacy and safety of Regenxbio's NAV Technology. If Regenxbio succeeds in RGX-314 commercialization, the revenue will be much higher, because that's direct sales rather than royalty payment.
That aside, the research and development (R&D) for the respective periods registered at $35.7 million and $18.5 million. The higher R&D spending is related to the clinical advancement of various molecules. I view the 93% R&D increase positively because the money invested yesterday can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruit.
Additionally, there was $34.6 million ($0.94 per share) net loss versus $19.2 million ($0.56 per share) decline for the same comparison. On a per share basis, this underlies a 67.9% widening of net loss. Since Regenxbio is rapidly expanding, it's logical that the bottom line would hurt. You might be concerned about that fact. However, I'm not worried at all. On the other hand, if Regenxbio's pipeline is already maturing, yet the company still suffers from a bottom line deterioration, I'd drop this stock in a heartbeat.
Figure 3: Key financial metrics (Source: Regenxbio)
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth cycle-dependent." At this point in its life cycle, the biggest concern is whether the FDA will remove the partial clinical hold on RGX-314. If this development is halted, Regenxbio would lose the bulk of its value. Be that as it may, I strongly believe that the partial hold is temporary. It'll be lifted in a matter of months. That aside, the other risk is whether other assets (i.e., -121, -111, -181, and -501) can generate positive data. If they fail, Regenxbio will likely tumble over 30%, and vice-versa.
Of note, I ascribed only a 35% risk of a negative clinical binary for all franchise assets because of the sound underlying science of NAV and the success of Zolgensma. I'd like to point out that there is no guarantee when it comes to bioscience innovation and investing. Consequently, Zolgensma and other gene therapies might fail to deliver blockbuster sales due to their slow rollout and the nature of personalized medicine.
In all, I maintain my strong Buy recommendation on Regenxbio with a five out of five stars rating. With Zolgensma already in commercialization and generating increasing revenues, I strongly believe that good days are ahead for Regenxbio shareholders. The temporary partial hold on the crown jewel RGX-314 will be lifted in the next few months. Thereafter, the Phase 2b trial of RGX-314 for wet AMD and the filing of an IND for the Phase 2 trial in diabetic retinopathy will start in 1Q2020.
In the next few years, RGX-314 will be approved with a broad label that includes in-office usage. And I believe that being a blockbuster is the final destination for this drug, as it'll dominate the $10 billion retinopathy market. Better yet, the ultimate fate could be a complete acquisition by Regeneron to replace Eylea.
Though I have not focused on other pipeline molecules, they are progressing at a rapid pace. You can read up on them in the 3Q2019 report. NAV's partnered programs are also advancing rapidly. Despite the latest difficulty, I believe that when you look back years from now, you'll realize that Regenxbio is one of the biggest investment opportunities in your lifetime.
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Disclosure: I/we 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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