It's been a busy October for Reata Pharmaceuticals (NASDAQ:RETA), which kicked things off Oct. 10 with the announcement that it would end its nine-year partnership with AbbVie (NYSE:ABBV). This move allows Reata to reclaim the exclusive rights to two drugs in late-stage clinical trials, as well as next-generation drugs that use the same mechanism. Days later, Reata surprised much of Wall Street with positive results from a pivotal clinical trial for omaveloxolone (omav) as a treatment for Friedreich's ataxia, a neuromuscular disease with no approved treatment options. The stock surged 60% following the announcement, adding roughly $1.5 billion to the company's valuation.

While the euphoria of the positive clinical results from omav sets in, investors new to the company must evaluate where Reata can go from here and whether the valuation remains compelling.

Pills & money on scale

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Reata regains exclusive rights to drug candidates from AbbVie

Reata is paying AbbVie $330 million to reacquire the rights to bardoxolone methyl (bard), omav, and all next-generation Nrf2 activators. In 2010, Reata licensed to AbbVie the ex-U.S. rights for bard, as well as the worldwide rights to omav and the Nrf2 activators. This month's move returns all worldwide rights to Reata, except in certain Asian countries where Kyowa Kirin Ltd. has development and commercialization rights for bard.

Reata will pay AbbVie $75 million this year, followed by payments of $150 million in June 2020 and $105 million in November 2021. Once all this is paid, Reata will not owe any future milestones or royalties on bard; management has agreed to pay a low-single-digit royalty to AbbVie on omav and certain next-generation Nrf2 activators.

Positive clinical trial results for omav

Reata hailed the positive results of a pivotal clinical trial for omav in Friedreich's ataxia, a debilitating disease usually diagnosed in children that causes patients to become wheelchair-bound and ultimately shortens their lifespans. Patients receiving omav demonstrated a statistically significant improvement in neurological function after 48 weeks of treatment compared with those receiving placebo, setting the stage for the company to file for regulatory approval. Reata estimates that there are 22,000 people worldwide with Friedreich's ataxia, including 5,000 in the United States. Currently, no approved treatments exist. 

Renegotiating debt financing

In June 2018, Reata borrowed $80 million from Oxford Finance and Silicon Valley Bank, a subsidiary of SVB Financial (NASDAQ:SIVB). That agreement calls for a second tranche of $45 million to be available to the company upon the success of either the pivotal trial with bard in Alport syndrome or the omav clinical trial in Friederich's ataxia. Management has renegotiated with both lenders to increase the next round to $75 million while reducing several fees. Now that the positive results are known, Reata can use this capital to pay AbbVie.

Can Reata afford to go it alone?

As noted above, the renegotiated term loan provides access to $75 million, which can cover the payment to AbbVie. In the second quarter, Reata reported more than $240 million in cash on the balance sheet, and in less than a month, third-quarter results will provide an updated financial picture.

Reata has reclaimed the driver's seat for all of these drugs, meaning that next year it may be filing for approval for both omav and bard. Submitting a drug for approval and preparing for commercial launch are expensive undertakings, but following the success of omav, Reata should be in a position of strength for raising capital soon. As for bard, the pivotal trial tracked by the renegotiated loan should report results before the end of the year. If they're negative, this may dampen investor enthusiasm and Reata's valuation. If they're positive, Reata can more easily raise more money if necessary.

The AbbVie license agreement hints that Reata will be raising additional large sums of capital, noting that if more than $200 million is raised, Reata will pay AbbVie $25 million, to be deducted from the final milestone due in 2021. This gives us a hint of the amount of capital necessary to advance these compounds to the market.

What next?

Results should be out by year's end on the pivotal phase 2/3 bard trial, which deals with Alport syndrome. This progressive condition, affecting as many as 60,000 in the U.S., results in end-stage kidney disease and currently has no treatment. Investors who have been focused on the outcome of this trial (bard has been Reata's lead program) may find comfort in the fact that bard and omav work through a similar mechanism to target inflammation.

Reata isn't slowing down in 2020. The company will forge ahead with regulatory filings for approval of omav in Friedreich's ataxia while simultaneously preparing for a commercial launch. And if the results of the bard trial are positive, Reata may end up doing double duty. Filing a New Drug Application for the first time is quite an undertaking for any biotech company, and doing two at once is practically unheard of.

For investors, the quick money has been made for now. The buyback agreement with AbbVie prevents Reata from licensing these drugs in the first 18 months following the deal, so don't be on the lookout for a quick flip. Most likely, Reata will raise additional equity. There may be pressure on the stock until that happens. The final near-term risk is the outcome of the bard trial. However, for long-term holders, Reata looks like a company that could have one or two blockbusters heading to the market at the end of next year or by early 2021.