Following Ultragenyx Pharmaceutical Inc (NASDAQ:RARE)'s January 31 IPO, several banks initiated coverage RARE yesterday with BUY ratings with price target $80+. RARE is definitely red hot now, capturing one of the hottest biotech investing themes - orphan drug/rare disease. I agree that RARE is a good company, and Dr. Emil Kakkis and his team definitely have a ton of experience in orphan drug development. The 5 (if exclude UX004 rhPPCA) clinical programs are diversified and decent. But the stock is too expensive. In this article, I will explain why the stock is too pricy by discussing my modeling assumptions. I will also have deeper dive to each of its clinical program in my future post.
How much does it worth?
My DCF and risk adjusted NPV give an average of $40 for RARE. 2 parameters affect the model the most: what the peak revenue is for each of the program; what the probability is of gaining FDA approval for each program. A third less important criterion is timeline for product launch and reaching peak revenue. For the discussion purpose, I disregard UX004/rhPPCA program since it is much earlier than the rest of the clinical programs.
- KRN23 (UX023) for XLH: Peak revenue ~$600M
KRN23 is a human monoclonal antibody which binds and reduces the biological activity of fibroblast growth factor (FGF23) to increase abnormally low phosphate levels in patients with X-linked hypophosphatemia, or XLH.
According to company S1, US pediatric patient population is 3000, and adult patient is 9000. I assume max penetration for pediatric is 60%, and for adult is 20% due to less severe medical need. Assume price per patient per year is ~150-200K. World marketing and sales share with partner KHK.
- rhGUS (UX003)for MPS 7: Peak revenue ~$80M
Recombinant human beta-glucuronidase (rhGUS) is an enzyme replacement therapy for the treatment of mucopolysaccharidosis 7 (MPS 7, also known as Sly Syndrome).
According to S1, there are up to 200 patients in the developed world. Assume max penetration of 85%; price $400-500K per patient per year due to its ultra-orphan status.
- Triheptanoin for LC-FAOD (UX007): Peak revenue ~$200M
Patients with long-chain fatty acid oxidation disorders (LC-FAOD) have a deficiency that impairs the ability to produce energy from fat. Triheptanoin is a medium-chain triglyceride of three seven-carbon fatty acids designed to provide substrate replacement for fatty acid metabolism and restore production of energy.
According to S1, 2000-3500 patients are in US and RARE has already individually identified 1300 patients worldwide. I assume US max penetration is 25%, and rest of the world sales is 60% of US sales due to less newborn screening to identify patients. Assume price is $150-200K per patient per year.
- Triheptanoin for Glut1 DS (UX007G): Peak revenue ~140M - 350M (depend on if patient base assumptions)
Glucose transporter type-1 deficiency syndrome (Glut1 DS) is caused by a mutation affecting the gene that codes for Glut1, a protein that transports glucose from blood into the brain.
According to S1, there are 3000-7000 patients in US and RARE has individually identified 200 patients worldwide, including 80 in US. I assume there are 3000 patients overall. Penetration is less than 10% in the first 5 years, and max penetration 25% depending on the success in patient identification. Price is $300-350K per patient per year due to the low identifiable patient number initially.
- SA-ER for HIBM (UX001): Peak revenue ~$250-300M
SA-ER is an extended-release, oral formulation of sialic acid. It is being developed for the treatment of hereditary inclusion body myopathy (HIBM), which is also known as GNE myopathy. HIBM is characterized by severe progressive muscular myopathy, or disease in which muscle fibers do not function properly.
According to S1, 300-400 patients are in US and 1200 to 2000 worldwide. Assume max penetration is 85%. Price is ~300K per patient per year due to its ultra-rare status.
Probability of success
Based on historical clinical trials success rate from DiMasi, I manually adjust each of the success rate based on currently released clinical trial data and clinical trial recruitment status, etc. Base level assumptions for orphan drug development are: Phase 1 success rate 70%, Phase 2: 50%, Phase1/2 success rate ~40%, Phase 3 ~70%
- KRN23 for XLH
Current stage is doing Phase 1/2. Assume Phase 1/2 success rate 40%, and Phase 3 70%.
- rhGUS for MPS 7
Current stage is Phase 1/2 ongoing. 2014 Feb released positive outcome data for 1 patient in the study. Assume Phase 1/2 success rate 50%, and Phase 3 70%.
- Triheptanoin for LC-FAOD
Current stage is Phase 2 ongoing. 2014 Feb reported the enrollment of first Phase 2 patients. However, it was stated in S1 that RARE planned to start Phase 2 study of 20-30 patients by end of 2013. I down-grade its Phase 2 on-time success rate to 30% due to delay of enrollment. Phase 3 is 70%.
- Triheptanoin for Glut1 DS
Expect to start Phase 2 early 2014 but RARE has not yet releasedenrollment result. Assume Phase 2 success rate 40%,and Phase 3 70%. Assume product launch will be one year later than the rest of the programs.
- SA-ER for HIBM
Currently in Phase 2 with 47 HIBM patients at 24 and 48 weeks. Data readout was anticipated by end of 2013 according to company S1. I down-grade Phase 2 success rate to 30% due to delay of announcing trial result. Phase 3 is 70%.
Timeline for product launch
For my models, I use very optimistic assumptions in which RARE will use year 2014 to finish Phase 1/2 or Phase 2 programs. In 2015, RARE will finish Phase 3 for the clinical programs except Triheptanoin for Glut1DS, which will be one year later. So the product launch for RARE's clinical programs will be as early as 2016.
For valuations, DCF and risk adjusted NPV are used to calculate the net present value of risk/success-rate adjusted free cash flow or net income of the aformentioned clinical programs. Discount rate of 15% is used for both valuation methodologies. With these assumptions, RARE is worth $40.
Please feel free to comment. In the future, I will have a deeper dive for RARE's clinical programs.