Clinical-stage biotech Radius Health (NASDAQ:RDUS) headed for Wall Street back in 2012, hat-in-hand, expecting the exciting prospects of its potentially best-in-class experimental osteoporosis drug would land it a strong IPO.
Instead, for two long years, the company went begging. The company removed itself from the IPO queue twice, citing poor market conditions. When its IPO finally happened in 2014, the stock ended up deeply discounted, with 6.5 million shares selling for $8 each, well below expected pricing. But then, in one of those crazy turnarounds that keep investors on their toes, Radius Health headed straight for the stratosphere. By the end of the year, the company had become the top-performing IPO in 2014 in postpricing performance, according to The Wall Street Journal.
The gains kept coming, as the company moved toward unveiling results from a 2,400-patient Phase III trial involving a biologic designed to improve bone density. Two successful follow-on offerings occurred, and the stock is now at 48.20, almost a 500% gain from its initial IPO.
We all know the kind of seductive appeal this kind of stellar performance can pack, but is this biotech still a good bet? Or is the risk/reward ratio for this speculative company skewed against investors at this point? As the saying goes, past performance is no guarantee of future results, so before we get caught up in the enthusiasm, let's look more closely.
Is this stock set for further lift-off?
Radius Health reported Q4 earnings a few days ago, on March 10. Radius has no products on the market, so the company's pipeline is its growth driver, with several important milestones lined up for 2015. The most significant of these is that Radius appears well positioned for FDA approval of its lead osteoporosis treatment candidate, abaloparatide-SC.
Final data on the drug's ongoing Phase III trial should be out by midyear, and management said plans are on track to file an NDA when it arrives. If all goes according to plan, good results could reignite Radius Health's stock in coming months. The commercial opportunity is huge, as osteoporosis is a major health problem.
An estimated one in five women suffer from osteoporosis in the U.S. Men are not immune, although the disease is twice as common in women. According to the National Osteoporosis Foundation, the systemic disease can lead to "bones becoming susceptible to fractures, especially those of the spine, hip, and wrists, which can result in extreme pain, and in some cases even death."
Most treatments for osteoporosis -- biphosphonates such as Fosamax, Actonel, or Boniva -- improve bone density and curb bone loss. By contrast, abaloparatide-SC, which is a synthetic peptide of parathyroid hormone-related protein, actually stimulates the growth of new bone.
While that difference makes it an exciting drug, it's not unique in the market. Abaloparatide-SC already has a major competitor in rival drug Forteo, from Eli Lilly & Company (NYSE:LLY), which also promotes the growth of new bone. The FDA approved Forteo in 2002.
Radius' drug is pitted against Forteo in its current Phase III ACTIVE trial. As you can imagine, since the drug is being compared to its most likely major commercial competitor, a lot of eyes are glued on the results.
Data presented at the 97th Annual Meeting of the Endocrine Society of 18-month fracture results was promising. It showed that abaloparatide-SC demonstrated as much as an 86% reduction in vertebral fractures in postmenopausal women with osteoporosis, as tested against placebo.
So far, so good. But compared to the vertebral fracture results for Forteo, the data wasn't nearly so impressive. In the ACTIVE trial, Forteo also showed good results -- an 80% vertebral fracture rate reduction compared to placebo. Abaloparatide did show greater increases in bone mineral density at the hip, neck, spine compared to Forteo, and the drug was well tolerated, with only minor side effects reported.
In other words, Radius can breathe a sigh of relief, but it's certainly not time yet to break out the champagne. Regulatory review of Radius' drug requires a full 24 months of fracture data, which won't arrive until the second quarter of 2015. After that, the drug faces further hurdles, including regulatory review and successful commercialization.
Still, if abaloparatide-SC makes those leaps, the drug could well become the market leader in its category. In fact, market leadership should be almost a sure thing if Radius succeeds with its follow-on transdermal (i.e. skin patch) version of the drug. Forteo requires daily injections, so the patch would provide significantly greater convenience to osteoporosis patients. That program is already in midstage development.
While therapies for osteoporosis are Radius' major focus, the company also has an investigational compound for the treatment of metastatic breast cancer. That drug is headed for Phase I, while the same drug (in much lower doses) is currently in a Phase II trial for treating hot flashes without the side effects of hormone treatments.
What is the major risk?
Cash burn can be a significant risk for an early stage biotech, as the product-less company is typically operating on stockholder equity funds and borrowed capital. But for a clinical stage biotech, Radius is a rarity -- a cash-rich company. With a market cap of $1.5 billion, as of Dec. 31, the company held $105 million in cash, cash equivalents, and marketable securities, and in a public offering in January, it raised an additional $158 million. Management said that should carry it through the fourth quarter of 2016, when it expects a commercial launch of its drug.
In terms of earnings, Radius Health's loss also came in narrower than expected this quarter. The Street expected a loss of 59 cents per share, which the company beat by four cents. For Q4, the company showed a net loss of $18.0 million, or $0.55 per share, as compared to a net loss of $12.5 million, or $44.87 per share for the three months ending Dec. 31, 2013. The net loss per share calculation includes the impact of the conversion of Radius' convertible preferred stock into common stock from initial public offering in June 2014, according to Radius Health's management.
For the full year, Radius reported a net loss of $62.5 million, or $4.04 per share, as compared to a net loss of $60.7 million, or $203.91 per share for 2013. Once again, the net loss per share calculation includes the impact of the conversion of Radius' convertible preferred stock into common stock.
Radius has seen growing short interest recently. From Jan. 30 to Feb. 27, it rose almost 800,000 shares, or 46%. The increase doesn't particularly alarm me in the absence of other issues, as shorts marching into a stock can be no more than a symptom of herd mentality on Wall Street, and it can even propel a stock upward, as shorts rush to cover. But another issue does worry me. Radius has a history of turnover at the top, which is not a good sign. In its latest shift, AstraZeneca's former head of strategy, Robert Ward, was recruited as Radius' new CEO at the end of last year.
Right now, I see the major risk for this stock coming from competition. When you invest in a small biotech, you really need to know the forest you're working in. Rarely mentioned in analyst coverage of Radius is that rival drugs are breathing down its neck. Specifically, one of the most promising drugs in Amgen's pipeline is a treatment called romosozumab, which was tested against Forteo in a Phase II trial.
Results showed that Amgen's drug was significantly more effective than Forteo in rebuilding bone density in the lumbar spine. The drug is now being tested in a global, 10,000 patient Phase III trial with top-line data expected in 2016.
Investors with an appetite for high-risk are very enthusiastic about Radius, and there's justification for more upside, as the company appears to be within spitting distance of a major market opportunity. But Radius's fate is tied at the hip to its bone-building compound. Expectations for this booming biotech should be tempered with the realization that unexpected bad news on abaloparatide-SC could crater this high flyer. Will that happen? Time will tell, but meanwhile, it's definitely a stock to watch.