Investors expected Aurinia Pharmaceuticals (NASDAQ:AUPH) to announce positive results from an important phase 2 study in late January 2019, so much so they drove shares up 36% in the four weeks leading up to the data release. The results ended up being mixed, with the drug candidate failing to show statistical significance in the primary endpoint and Wall Street sent shares 20% lower over the next week.
However, the mixed results for this particular trial and its primary endpoint may not be as important as the smart money thinks it is. Couple that bit of nuance with the fact the business has successfully managed its cash position and expects to announce phase 3 results for its lead clinical program in late 2019, and there may be an intriguing opportunity here. Is Aurinia Pharmaceuticals a buy?
A look at the pipeline
Aurinia Pharmaceuticals is developing a compound called voclosporin as a potential treatment for three different ailments. The lead indication is lupus nephritis, for which the drug candidate is currently being evaluated in a phase 3 trial that's expected to wrap up in the fourth quarter of 2019. Investors have high hopes.
A phase 2 trial in lupus concluded with impressive remission rates for patients taking both low and high doses of voclosporin. In fact, the results were the best ever reported from a clinical trial for lupus, which has most analysts expecting peak sales in excess of $1 billion per year. A successful outcome in the ongoing late-stage trial would surely hand the company a larger market cap than its current $520 million valuation. Of course, most other late-stage trials for experimental lupus treatments have failed, serving as a reminder to investors that nothing is guaranteed.
Voclosporin is also being evaluated in an ongoing phase 2 trial for focal segmental glomerulosclerosis (FSGS), a rare disease affecting the kidneys, and in an ophthalmic formulation for treating dry eye syndrome. The latter is what had investors so excited heading into late January, with reported results somewhat mixed.
The company tested voclosporin against Allergan's former blockbuster Restasis in various FDA-accepted endpoints for dry eye treatments. Aurinia Pharmaceuticals reported that the drug candidate failed to demonstrate statistical significance in the primary endpoint of drop discomfort, as both voclosporin and Restasis demonstrated low discomfort scores. It's important to note that this objective is not based on safety or efficacy, but rather tolerability.
The secondary endpoints in the mid-stage trial were based on efficacy -- and voclosporin achieved statistical significance compared to Restasis. Nearly 43% of patients taking the drug candidate achieved a clinically meaningful improvement of tear production, compared to just 18% taking Restasis. Similarly, the drug candidate outperformed the control when it came to reducing damage to eye cells (measured by fluorescein corneal staining) -- this time by a factor of 10.
Nonetheless, analysts appeared worried over the inability of voclosporin to beat Restasis at patient comfort. While it would have been better for eventual labeling claims to have nailed the primary endpoint, individuals suffering from dry eye syndrome might be more interested in the effectiveness of treatment rather than tolerability. Therefore, it's more important for the drug candidate's ultimate success for efficacy to hold up in the upcoming phase 3 trial.
By the numbers
A review of Aurinia Pharmaceuticals' income statement and balance sheet shows that it has done a pretty good job keeping expenses in check and maintaining a healthy cash balance.
Through the first nine months of 2018, the business reported an operating loss of about $40 million, compared to $34.5 million in the year-ago period. Things will surely get worse before they get better, as at least one ongoing phase 3 trial requires a significant increase in R&D expenses this year.
That said, the business should be able to fund operations for the foreseeable future. Aurinia Pharmaceuticals exited the third quarter of 2018 with $139 million in cash, cash equivalents, and short-term investments.
In a best-case scenario, the company would announce positive phase 3 results for voclosporin in lupus at the end of 2019, then take advantage of a higher share price with a share offering. That would result in more capital being added to the balance sheet and less dilution for shareholders, compared to conducting an offering without positive results in hand.
Of course, investors shouldn't neglect to consider the worst-case scenario, either, which would involve failure or a surprising uncertainty (a new safety or efficacy concern) in the phase 3 trial. By that time, Aurinia Pharmaceuticals would have burned through nearly half its cash position as of September 2018 and its future would be much more uncertain, especially since voclosporin is its only pipeline drug.
Does Aurinia Pharmaceuticals belong in your portfolio?
Aurinia Pharmaceuticals might be one of the most high risk/high reward development-stage pharmaceutical stocks for 2019 as everything hinges on the results of its ongoing phase 3 trial for voclosporin in lupus.
If the binary event wraps up in favor of the company and its shareholders, then the $520 million company figures to be worth quite a lot more. If the outcome is less certain or an outright failure, then Aurinia Pharmaceuticals probably doesn't deserve even a $520 million market cap.
This makes the stock much too risky for me, although investors who are aware of the consequences of failure might have a little fun with a small position in the company leading up to the fourth-quarter 2019 data release. Just don't get carried away.