Repros Therapeutics (RPRX): Reasons for Optimism
On July 29, a piece moved on Motley Fool entitled, "Why Repros (RPRX) is Poised to Pull Back." The story is here http://www.fool.com/investing/general/2013/07/29/why-repros-therapeutics-is-poised-to-pull-back.aspx?source=itxsitmot0000001&lidx=1
RPRX, the site's editors noted, had received the lowest possible rating as calculated by the 75,216 active entries in the simulation. It quoted zzlangerhans, who as of today is ranged 175 in the competition:
A year ago I did some in depth research on Repros and concluded that at a share price of [$9.00] the stock was untouchable. I couldn't impeach their science but the company had a long-standing pedigree of misrepresentation dating back to their days as Zonagen. ...
I stood on the sidelines and today the stock stands at double where it was when I drew my prior conclusions. This comes despite a couple of notable setbacks: a data issue in the ZA-301 trial of Androxal that might be grounds for an eventual CRL, and the FDA refusal to permit the company to move directly to a phase III trial of vaginal Proellex for uterine fibroids. I think Repros has benefited from the recent forgiving mood of the market toward the biotech sector in general, but all pendulums eventually swing. A market cap of [$370M] doesn't seem like a lot compared to some other frothy companies, but I'll make a measured bet that Repros has gotten a little ahead of itself.
I am a participant in the same game, using the name Kvedarna, and (as I write this) ranked 650th, not as high but still enough to be within the top one percent. For comparison purposes, during the period of his entry, zzlangerhans has outperformed the S&P by 4,975%, while I have outperformed it by 5,966%. His individual picks have outperformed the index 82 percent of the time, while mine have outperformed it 61 percent of the time.
A couple of reverse splits hitting today have disrupted the true scores; when CAPS editors adjust for them the difference is about 2,000 points.
Here is why I disagree with the zzzzzzman:
Several years ago, Repros' valuation rose sharply when it was one of several firms working to bring to market an ED drug. Had it not sold stock at the expanded valuation, the company then known as Zonagen, might have passed from sight.
The cash balance established in that underwriting allowed the firm to live, tendering in a Dutch auction for many of its shares and leaving just enough in the till to begin work on two pieces of IP: Proellex, which appears to resolve symptoms of uterine fibroids and endometriosis, and Androxal, which acts in the male endocrine system to restart the body's natural production of testosterone.
Note that neither the Motley Fool piece or zzlangerhans attempts to put a potential valuation on either drug. A Bloomberg/Business Week article http://www.businessweek.com/articles/2012-05-10/are-testosterone-drugs-the-next-viagra in 2012 pegged the market for testosterone replacements at $1.6 billion and growing sharply.
A year old report by Global Industry Analysts, Inc. (www.prweb.com/releases/hypogonadism/test...) asserts that the testosterone replacements market will grow by 2017 to $5 billion.
The 10(k) from Auxilium (AUXL), which produces Testim, identifies AndroGel from Abbott (ABT), Axiron (LLY), and Fortesta (ENDP) as key competitors in the space. It pegs at $2.2 billion the sales of testosterone replacements in 2012.
The link to AUXL's filing is here www.sec.gov/Archives/edgar/data/1182129/....
Repros' Power Point displays (available here reprosrx.com/investors_events.php) suggest that it both boosts testosterone count and avoids ugly side affects of drugs which simply add more T into a man's system. These side affects appear to include shrinkage of the testes and reduction in sperm counts.
Here is Wikipedia's summary of potential adverse side affects:
Adverse effects of testosterone supplementation include minor side effects such as acne and oily skin, and more significant complications such as increased hematocrit which can require venipuncture in order to treat, exacerbation of sleep apnea and acceleration of pre-existing prostate cancer growth in individuals who have undergone androgen deprivation. Another adverse effect may be significant hair loss and/or thinning of the hair. Exogenous testosterone also causes suppression of spermatogenesis and can lead to infertility. It is recommended that physicians screen for prostate cancer with a digital rectal exam and prostate-specific antigen (PSA) level before starting therapy, and monitor hematocrit and PSA levels closely during therapy.
A three year old Business Week/Bloomberg story noted
In what may become one of the most sought-after lifestyle drugs since the introduction of Pfizer's (PFE) Viagra 14 years ago, new testosterone drugs from Eli Lilly (LLY), Abbott Laboratories (ABT), and other drugmakers are hot. www.businessweek.com/articles/2012-05-10...-viagra
The link is here en.wikipedia.org/wiki/Testosterone_replacement
If the ultimate purpose of treating Low-T were simply to improve Get-Up-And-Go, the regulators probably wouldn't be as favorably disposed. There is data, however, coming directly from RPRX, that repairing the body's faltering testosterone production may succeed in treating or preventing obesity, and, thus, diabetes. If this proves out in clinical trials, demand for the drug may be even higher than presently optimistic projections.
This is from the company's website:
We believe Androxal® is highly differentiated from currently marketed testosterone treatments or those treatments in late stage development because it is an oral therapy and it treats the cause of secondary hypogonadism, which is inadequate pituitary hormones. We believe that by treating the cause of secondary hypogonadism, Androxal® also has the potential to maintain reproductive status and potentially improve overall metabolic profiles.
In addition, the Company continues to consider the potential for use of Androxal® as an adjuvant therapy in hypogonadal men with Type 2 diabetes. The Company has an active IND open with the Division of Endocrine and Metabolic Products at the FDA for this indication. We believe there may be an association between the restoration of normal pituitary function and improvement of metabolic conditions such as Type 2 diabetes. Research has been published which demonstrates that increased insulin resistance, a characteristic implicated in Type 2 diabetes, is associated with the onset of secondary hypogonadism.
If all outstanding issues were behind the company, valuation would be in the billions, rather than hundreds of millions. These issues include a legal challenge to the company's patent rights, a challenge mounted by Dr. Harry Fisch of New York and recounted with glee by The Street.com. A good summary of their position is here http://www.thestreet.com/story/11999214/1/repros-worried-about-validity-of-its-androxal-patent.html?puc=yahoo&cm_ven=YAHOO.
Recently, Repros has gone to court seeking once and for all to quash the Fisch challenge. Having spent millions of dollars, worked with the FDA and been awarded a series of patents, the company feels itself on solid ground.
Even if we assume that Fisch does have a valid claim, let's also assume that since he has apparently never spent anything conducting trials, dealing with the FDA, dealing with setbacks, at road's end he ends up with one or two percent of the company. A great deal of money, but not enough to change the investment thesis about the stock.
You may have thought earlier that I would have the arrogance to ask whom you would trust, the player at the top end of the first one percent (zzlangerhans) or myself, the player towards the bottom end of the top one percent. No, that is not the question.
My question is: Whom would you trust in the matter of Repros, zzlangerhans or the fund management group at Baker Brothers in New York. There is head to head data for this comparison:
Insider Monkey.com describes things this way:
Let's look at the top five picks held by the fabulous Baker Brothers:
At number one is Pharmacyclics, Inc. (NASDAQ:PCYC). Of the 450 hedge funds tracked by InsiderMonkey, Baker Brothers Advisors is the largest holders of the biopharmaceutical company with 11.4 million shares. Pharmacyclics, Inc. 's flagship cancer treatment drug, Resonate, just enrolled its fifth test patient, triggering a fourth $50 million milestone payment obligation from Jenssen Biotech, part of Johnson & Johnson and a partner in the drug's development. The stock also benefits from a price/earnings ratio of only 56x versus the industry average of almost twice that. For the 4Q of 2012, revenue soared 1908% while R&D costs were only 35% of revenue.
Zzlangerhans also has a history with Pharmacyclics. According to his CAPS scorecard, ZZ sold (short) Pharmacyclics at $2.56 on 12/08/09, buying to cover on 5/17/13 at $77.68. It is now $111.73. It was an underperformance against the averages of 2,886%.
My next question relates to the intellectual property and patents. In June, Repros closed on a secondary issuance of stock totaling 4.3 million shares in a transaction headed by BofA Merrill Lynch.
Here is the question: On whose judgment would you prefer to rely, bloggers at The Street.com, or the corporate finance due diligence team at Merrill Lynch? As long as we have raised that subject, what do you think are the chances that major institutional holders alongside Baker Bros. listed here http://finance.yahoo.com/q/mh?s=RPRX+Major+Holders have staffs capable of doing this sort of due diligence work?
Not much has been written lately about the value of Proellex, the drug to treat and cure female reproductive issues. As all too many women can attest, there is presently no fully acceptable pharmacological solution to fibroids and endometriosis. Surgery has issues which I would rather not go into, here or elsewhere.
Suffice it to say that if the FDA gives its approval, demand for the drug will be substantial. Furthermore: incidence of fibroid tumors is greater among African American women than whites or Asians. Just imagine what notice might be gained if Oprah Winfrey or Michele Obama might choose to become its spokesperson.
It does make sense to address one of the problems which occurred in Proellex development, and how the firm adapted. In earlier testing of the product, RPRX tried a series of dosages. Efficacy, it emerged, is evident even at the lower doses. However, use at the higher levels was found to trigger potentially dangerous liver enzymes. http://markets.ibtimes.com/ibtimes/news/read/10568739/repros_therapeutics_announces_amendment_of_nih_proellex%C2%AE_license
First, the data indicates that efficacy is achieved even at 5mg or 10 mg doses, compared with the 25mg and 50mg doses used in earlier studies. That liver problems emerged should not have been totally unexpected, as over usage of such over the counter products as Advil or Motrin can cause the same liver problem. Not a reason to ban Advil or Motrin from pharmacy shelves.
Second, it was in response to the liver risk that RPRX began development of the vaginal delivery product. If no pill goes through the digestive system, no stress is placed on the liver.
In sum, I am long RPRX. I believe the testosterone drug may one day have revenues of over $1 billion, and that the fibroids/endometriosis drug may have revenues of several hundred million. The IP would fit nicely into portfolios at any number of Big Pharma companies, and as the products are de-risked, bids for Repros will emerge.
Viagra is made by Pfizer (PFE); Levitra by (BAYRY), (GSK) and Schering-Plough (SGP); and Cialis by Ely Lilly .
Fully diluted on June 30, 2013, there were 23 million shares outstanding, giving the company a valuation of about $460 million. When it was a lower price with fewer shares, the stock was such a micro-cap that mutual fund managers couldn't own it. Even a $2 billion fund would need $20 million of stock to buy, which as lower the valuation went became less and less plausible.
If testosterone replacement really is a $2 - to $5 billion market, and if Repros truly has a more effective mechanism than any of the current players, the IP involved should be worth minimum $1 billion and perhaps $4 - to $5 billion. The company may not get sold for that, but there is a solid basis to valuations with ten digits to them.
Repros came into being years ago with a third tier underwriter (best left unmentioned), an ED drug which failed, and a mini-microcap status. It I-banking now done by BofA Merrill, its shareholder list replete with blue chip fund managers, and its clinical trials proving out what may be very valuable IP, it is light years ahead of the marginal enterprise bloggers like to make fun of.
A $1 billion sale with 25 million shares would be $40. A $2.5 billion sale with 25 million shares would be $100.