Rigel Pharmaceuticals (NASDAQ:RIGL) is currently selling an FDA approved drug for an unrelated immune system disorder, Tavalisse (fostamatinib disodium hexahydrate), which could also be a safe and successful treatment for severely-ill patients suffering from COVID-19. It is already in Phase III trials, with help from the NIH and some of the biggest research hospitals in the world. Phase II trials went exceptionally well in a limited number of patients.
Rigel's stock has been under accumulation in the past year on the potential this drug may help in the pandemic. And if variants (mutations) in the virus continue, it's entirely possible in another 6-12 months today's vaccines will not be able to fully contain COVID-19 spread in humanity. We may be fighting a long-term battle each year during the winter months, similar to the influenza virus situation. If this is our reality, hospital treatments for the severely ill will become our lifesaving last line of defense. Tavalisse could be one of just a handful of proven clinical treatments with FDA approval later in 2021 or early 2022.
The good news is the company has significant sales from Tavalisse for its original indication, before any COVID-19 treatment revenue appears, and several other promising drugs are under development, through research, testing and clinical trials. Eli Lilly (LLY) made a payment of $125 million earlier in the year to Rigel for an exclusive license in the development of the company's RIP1 inhibitor program. Rigel could be on the verge of new avenues for growth in sales and income the next 6-18 months. For more in-depth analysis of the drug pipeline, Seeking Alpha's biotech expert Bret Jensen posted a worthwhile article last month here.
Image Source: Company Website
The reason I have been willing to make an investment in Rigel, a company operating at a small loss in 2020-21, is the incredible upside of its only approved drug as a potential COVID-19 immune system treatment for patients struggling in the hospital. If the FDA approves it for emergency use soon, or full regular approval during 2022, it could explode the roughly 44,000 individuals currently prescribed the medication globally ($61 million in product sales during fiscal 2020).
Image Source: Company June Presentation
The March Q1 period included a sizable earnings beat from the Eli Lilly payment. The company held $196 million in current assets like cash and receivables against $137 in total liabilities. Revenues have doubled the last two years, and are projected by Wall Street analysts to double again the next 4-5 years, without any help from COVID-19 related sales. Below are 5-year tables of future estimated income per share and total revenue statistics. In a best-case scenario of widespread acceptance and use of fostamatinib as a COVID-19 treatment, 2025 estimates of operating results could easily be pulled forward to 2022-23. In other words, I am thinking company sales of $300 million and EPS of $0.50+ could be approaching in 12-18 months.
Below is a chart of the company's 5-year history on price to trailing sales and tangible book value. Today's valuation is well within a normal band, standing at 5x sales and 8x net hard assets, while the company moves from a research & development outfit to a growing pharmaceutical sales concern.
Again, if Rigel's drug is approved for use in COVID-19 patients, and the pandemic returns this fall/winter as mutations spread, a stock quote of $4 is far, far too low. Perhaps a multiple of 4x revenues and 20x EPS would be more appropriate, which could quickly create a stock price closer to $10.
In relation to the big diversified pharma/biotech industry leaders trading closer to 4.5x sales and 27x EPS, Rigel could still be a bargain at $10, if a bull run of investor interest in the company is approaching on a COVID-19 drug approval. Plus, several other drugs under development with larger partners could come to market down the road and support a long-term price advance well above $10 over 2-3 years.
I have drawn an 18-month chart of daily price and volume changes below. The quote has risen +34% faster than the S&P 500 over the last year and a half, circled in green. And, after a period of consolidation from its $5.50 price in February, the stock has regained its 50-day and 200-day moving averages (with both in uptrends today). The initial stairsteps supporting another leg higher in price have appeared in May-June, likely the result of the Q1 earnings release full of good news.
In terms of my favorite momentum indicators, the Negative Volume Index reached a 10-month high last week (marked with a red arrow), and has performed in a very positive fashion since the February quote peak. My read of this measurement is plenty of buying on low volume days has been part of the supply/demand equation. Plus, On Balance Volume readings have zigzagged to a new "multi-year" high in June, marked with the blue arrow. Clearly, money is flowing into the stock, as rising trends in both NVI and OBV highlight a greater number of buyers than sellers on high and low volume up days, against only limited liquidation volumes on days closing down in price. It is quite possible, the two momentum indicators are "leading" price higher, in a healthy technical fashion.
I rate Rigel a solid Buy, with or without new COVID-19 treatment sales. Existing product revenues are expected by Wall Street to grow 20%+ annually into the foreseeable future. New drugs under development will serve to diversify and greatly expand the company's revenue stream. The Eli Lilly payment has given Rigel a nice cash cushion to fund operations for several years (the company has not engaged in a major dilutive share offering since 2018). Small cash burn in 2021-22, is projected to turn into positive cash flow by 2023, assuming new COVID-19 related revenue does not materialize. In addition, the stock valuation currently does not appear overly expensive or to be discounting any help to shareholders from the potential of an important pandemic treatment option. The risk/reward proposition seems to be heavily skewed in favor of bulls.
What could go wrong? Basically, the biggest risk to an investment in Rigel is drugs in the pipeline fail to get approved for use by the FDA. If the larger Phase III study for COVID-19 treatment does not deliver the same positive results of the smaller Phase II study, or a number of adverse reactions are observed, the benefits of the drug may not be worth widespread use. There are also no guarantees the rest of the pipeline will make it to your local pharmacy, despite the optimism of collaborators and industry titans like Eli Lilly.
One final bullish argument to make is Rigel could quickly become a takeover candidate if Tavalisse is approved for COVID-19, as a lifesaving treatment with few side effects. Another company like Eli Lilly that understands the value of Rigel's forward pipeline, could seize on the COVID-19 approval process (before or after an FDA panel announcement) and try to purchase the company for less than $10 a share in 2021.
I own a minor position today, with covered calls sold on the stake to hedge downside risks and return upfront some of my initial purchase capital. I am considering doubling the position next week. Because of Rigel's small size and more speculative setup, I suggest readers keep the dollar amount invested at or below a typical position weighting in portfolio designs.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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Disclosure: I am/we are long RIGL. 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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