I’ve been pleased with how Ra Pharmaceuticals (RARX) has navigated the clinical program changes over the last 12 months. The stock is up 138% since I wrote a positive piece on the stock (though I have watched the stock deliver the gains from the sidelines), mostly based on positive phase 2 results of zilucoplan in generalized myasthenia gravis (‘gMG’) patients and the company pivoting away from PNH, where Ra’s candidate has weak prospects of competing with Alexion’s (ALXN) Soliris and Ultomiris. And unlike PNH, I believe Ra can compete effectively in the gMG market where Alexion has not established its dominance and where the addressable market for zilucoplan will be much larger than it is for Alexion, which went for the relapsed/refractory gMG patients.
Source: Seeking Alpha, first article on Ra Pharma
Ra recently further pivoted away from Alexion-dominated indications by announcing plans for a trial in patients with immune-mediated necrotizing myopathy, a condition where terminal complement activation is said to play a key role in the pathophysiology of the disease.
In this article, I provide updated thoughts on Ra Pharmaceuticals – while I am generally constructive on the stock and its long-term upside potential, I think there is an overall lack of value-creating catalysts in the near-term and Ra is trading at a somewhat high valuation relative to the state of the company’s current pipeline.
Ra makes the right decision to move away from PNH
Ra recently announced that it is going to prioritize the development of zilucoplan in generalized myasthenia gravis ('gMG') and other neuromuscular indications and not pursue further development in PNH. I think that’s the right decision since zilucoplan’s data in PNH was not as good as Soliris’ or Ultomiris’ and the convenience of a daily subcutaneous injection is probably not something worth sacrificing efficacy over. In my mid-2018 article, I suggested this could be a nice-to-have indication but that I would not invest in Ra if it were the only indication the company is targeting. I also suggested gMG is the actual gold mine for zilucoplan and Ra and definitely worth pursuing.
So, while the decision not to pursue PNH removes one of the potential long-term growth drivers for Ra, I think it’s a good decision and that the company is better off pursuing indications where Alexion doesn’t have dominance in.
Zilucoplan to proceed into a phase 3 trial after phase 2 success
The phase 2 study of zilucoplan in gMG was actually the one that drew my attention last year. Based on the same mechanism of action of zilucoplan and Soliris and Soliris’ positive phase 3 results and approval in gMG, I thought this study would succeed. And it did. Zilucoplan has demonstrated positive results in gMG patients and those results look similar and/or better than Soliris’ phase 3 results.
Source: Ra Pharmaceuticals presentation
And the positive results were achieved in a broader gMG population – while Soliris was tested in relapsed/refractory gMG patients, Ra did not limit enrollment to just this small part of the population but went after the whole uncontrolled population. And the market size difference is significant – approximately 30,000 patients in the United States would be the addressable market for zilucoplan versus 3,000 to 6,000 patients for Soliris.
However, the small addressable market has not hurt Soliris’ uptake and gMG has been Alexion’s best Soliris launch to date.
Source: Alexion presentation
Management talked about the potential advantages of zilucoplan over Soliris that may have led to the generally better-looking results for the higher dose that will be tested in the phase 3 study (though I would caution against making cross-trial comparisons). The main advantage could be zilucoplan’s size – the molecule is 40 times smaller than Soliris and as such, can potentially enter places where Soliris can’t.
Based on the positive phase 2 results, I believe the probability of success in the phase 3 study is high (80%) and am maintaining my annual sales estimate range of $500 million to $1 billion, which translates into a present value of at least $23 per share and up to $50 per share based on $1 billion in annual sales, and means Ra is trading above my conservative valuation on zilucoplan in gMG. At this moment, I am not considering taking a position in Ra due to the overall lack of catalysts in the following quarters and the stock trading above my conservative valuation.
Management did not provide guidance on pricing yet as it’s too early but based on their comments on other existing treatments (such as IVIG and PLEX) and their projected annual costs in excess of $100,000 per year, I believe zilucoplan will likely be priced around $200,000 per patient per year or slightly higher. This means zilucoplan would need to treat 2,500 to 3,000 patients per year to get to $500 million in annual sales and 5,000 to 6,000 patients per year to get to $1 billion. Based on Alexion’s success to date in a significantly smaller population and zilucoplan’s convenience advantage (a once-daily, 5-second subcutaneous injection versus bi-weekly intravenous infusion for Soliris), I think zilucoplan can at least hit the low end of that range.
Ra expands efforts in the neuromuscular area – the start of phase 2 trial of zilucoplan in patients with immune-mediated necrotizing myopathy in 2H 2019
Ra recently announced plans to start a phase 2 trial of zilucoplan in immune-mediated necrotizing myopathy (‘INMN’). The study is on track to start in 2H 2019 with topline results expected in 2H 2020. Like gMG, INMN is a neuromuscular disease “similarly characterized by autoantibody-mediated complement activation and tissue injury” and the company believes it provides a strong rationale for the evaluation of zilucoplan.
INMN affects more than 15,000 in the United States, EU and Japan and there are no currently approved therapies. This is a smaller addressable market than gMG, but it’s not as nearly as competitive and could leave more room for zilucoplan. The phase 2 study will enroll 24 patients in a 1:1 randomized, placebo-controlled fashion and the treatment period will be eight weeks. The primary endpoint will be change in creatine kinase (‘CK’) levels from baseline to week eight.
It is not clear to me how this study will read out as there is no prior proof of concept with a C5 inhibitor and the trial’s primary endpoint is a biomarker, not a hard clinical endpoint, so, I am not sure whether the market will respond well to the results even if the primary endpoint is achieved. But I do think this is a good direction for Ra, as it is likely going to be first to market in this indication and have more of the market to itself instead of competing with Alexion and other existing and emerging therapies in gMG.
As I noted earlier, the main reason for not taking a position in Ra is the overall lack of catalysts in the next few quarters and not enough of a valuation cushion since the stock is trading above my conservative valuation of $23 per share. I prefer taking a position where the stock is below the low end of my valuation range. The gMG phase 3 trial will start in 2H 2019 and is unlikely to report results before 1H 2021. The phase 2 study in INMN patients has not started yet and will not report results before 2H 2020 and the results may not move the stock meaningfully if all we see is a biomarker change (and there is, of course, the risk of the trial failing).
Ra is well capitalized – the company ended Q1 2019 with $191.6 million in cash and equivalents and this should last into Q1 2021. Ra also has an active $100 million at-the-market offering which I think the company will utilize in the following quarters in order to further strengthen the financial position.
Another risk, in the long run, is competition. Alexion's Soliris is significantly ahead of zilucoplan in gMG, and though I noted the potential differentiation, Ra may fail to capture the desired market share in the gMG or other markets.
And Alexion is not the only competitor, there are other therapies in development for gMG, with most promising results coming from the FcRn antibody class, where, Alexion is again one of the potential competitors following the acquisition of Syntimmune, and other potential anti-FcRn products are being developed by argenx (ARGX), Momenta (MNTA) and UCB (among others). And while these products are being developed as intravenous infusions, most of them will eventually be developed as subcutaneous infusions, which will eliminate the convenience advantage of zilucoplan. And zilucoplan has one drawback as compared to these competitors – assuming similar efficacy and no convenience advantage, potential zilucoplan patients need to receive meningococcal vaccines as C5 inhibition increases the risk of meningococcal infections.
Ra is moving in the right direction and has upside from current levels, but I am staying on the sidelines for now due to the overall lack of catalysts in the next 12 months or so and the stock trading above my conservative price target of $23 per share. Longer-term, there is more to look forward to – Ra is developing small molecule C5 inhibitors, an extended-release version of zilucoplan (as opposed to the once-daily subcutaneous injection), and zilucoplan itself has potential in many other indications beyond gMG and INMN. I would consider taking a position in the low to mid-teens even if we take the lack of catalysts in the near-term as I think there is decent long-term upside based on zilucoplan in gMG alone even under conservative assumptions.
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Disclosure: I am/we are long ARGX.
Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.