Shares of UroGen Pharma (NASDAQ:URGN) fell over 19% on Wednesday and another 12% on Thursday after a short-seller published an article on Seeking Alpha arguing that the company was overvalued at a market cap of $730 million. There were two main arguments.
First, the short-seller thinks the company's lead drug candidate, UGN-101, is only likely to earn marketing approval for a part of the overall patient population it aims to treat. Second, the company's second leading drug candidate, UGN-102, will not be able to replace the standard-of-care, first-line treatment option.
Considering shares of the clinical-stage pharma have fallen 33% in the last five days, are the shorts right about UroGen Pharma? Here's what investors need to know.
What's at stake?
UroGen Pharma has developed a reverse thermal hydrogel technology called RTGel to deliver drugs to difficult-to-reach places, such as the urothelial tract. A reverse thermal hydrogel works as it sounds: It exists as a liquid at a low temperature (example: room temperature) and becomes a viscous gel at a higher temperature (example: inside the human body). When RTGel is formulated with an active drug ingredient, a routine outpatient procedure can place a therapeutic hydrogel at the site of a tumor that would otherwise only be accessible via surgery.
The company has developed UGN-101 as a treatment for low-grade upper tract urothelial cancer (LG UTUC). There are no drugs approved for the disease and an estimated 78% of patients have to have a kidney removed as part of treatment. There are about 6,000 new cases of LG UTUC diagnosed in the U.S. each year.
UGN-101 demonstrated a complete response rate (CRR) of 59% in a phase 3 clinical trial and, after receiving Breakthrough Therapy designation from the U.S. Food and Drug Administration (FDA), is expected to earn marketing approval in the first half of 2020. It could generate peak annual sales of $500 million and sharply reduce treatment costs while improving outcomes for patients.
Similarly, UroGen Pharma is developing a therapeutic hydrogel drug candidate, UGN-102, as a treatment for low-grade nonmuscle invasive bladder cancer (LG NMIBC). An estimated 80,000 individuals in the U.S. have LG NMIBC, making the market opportunity significantly larger compared to the lead drug candidate.
The standard of care for LG NMIBC is surgery followed by treatment with a drug that was approved more than 15 years ago. UroGen Pharma thinks UGN-102 could become the preferred first-line treatment option if the drug candidate delivers a high CRR that proves durable, meaning patients that achieve a complete response maintain that for months and years after treatment.
Is the short-seller right about UroGen Pharma?
The short-seller article on Seeking Alpha argues that UGN-101 will only be approved to treat LG UTUC with tumors that cannot be operated on. That would effectively cut the market opportunity in half. The article presents a table from the company that shows the 59% CRR only applies to patients who have unresectable tumors -- except that's not what the table says.
The table has two columns: one showing CRR and complete response durability for all 71 patients evaluated in the phase 3 clinical trial, and a second column breaking out the results for the 34 patients who had inoperable tumors. It just so happens that both the overall patient population and the subset achieved an identical CRR of 59% and a 12-month durability of response of 84%.
In other words, the short-seller appears to have misinterpreted the data collected to date. UGN-101 clearly benefits LG UTUC patients with resectable and unresectable tumors.
The short-seller also argues that UGN-102 is unlikely to replace the standard of care treatment -- surgery followed by an adjuvant drug -- for LG NMIBC. That could be true. For instance, the latest results, released just before the Seeking Alpha article was published but not included in the article (there's a lag between writing an article and publishing it), might raise the level of concern among investors.
In a phase 2a clinical trial, UroGen Pharma reported that UGN-102 achieved a CRR of 86% in 22 patients who received an 80 mg dose. In the ongoing phase 2b trial, the drug candidate has achieved a CRR of 63% in 30 patients receiving the same dose. The current study is only halfway complete and the latest results are still relatively good, but they may not be enough to make UGN-102 a first-line treatment option. Investors will need to see that the drug candidate results in durable responses over the long haul -- an area where it could outcompete surgery as the standard of care.
This appears to be an overreaction
It's easy to overlook UroGen Pharma. The company is developing drug candidates in a niche field of oncology and that don't have blockbuster potential (read: the ability to achieve at least $1 billion in annual sales). As a result, the stock isn't heavily traded and isn't discussed in all the buzzy conversations about immunotherapies or cellular medicines. That also makes the recent short-seller argument have an outsize effect on the share price.
That said, the two main conclusions of the short-seller article aren't airtight. UGN-101 can clearly treat the full population of patients with LG UTUC, while there isn't enough data (namely durability of response) for UGN-102 to draw conclusions about its market potential in LG NMIBC. Given the potential for the lead drug candidate and with marketing approval pending in the first half of 2020, investors could make a strong argument that UroGen Pharma is actually undervalued at a market cap of less than $600 million.