It has been a brutal six months for investors in the biotech space.
The sector is in the middle of its worst bear market since the end of the financial crisis. The major biotech ETFs and indices are down some 40% from their peak levels of just last July. Many small-cap biotech and biopharma equities are down 50% to 75%. The vast majority of these pullbacks are all relating to a change of sentiment on the sector and worries that funding via secondary offerings needed for developmental operations will dry up or become prohibitively expensive.
A lot of "babies" have been thrown out with the proverbial bathwater. Several companies with potentially game-changing developments have been overlooked or ignored in the carnage that has swept over this sector, including Relypsa (RLYP). The company is one of the small stocks being treated unfairly by the market of late.
In normal times, this stock would be trading at double or perhaps triple its current price of just under $13 a share. The company's Veltassa, currently its only commercialized product, was approved in late 2015 by the Food and Drug Administration (FDA) to treat hyperkalemia in the United States. It is just hitting the market. Initial script growth has been solid, doubling its script numbers in February over January.
Hyperkalemia is a disease that involves elevated concentrations of electrolyte potassium, and its symptoms can include malaise, muscle weakness and heart palpitations. This condition can be potentially fatal and frequently is triggered by other medicines.
There are 3 million to 4 million patients in the United States alone with hyperkalemia, the vast majority of whom have underlying heart failure or kidney disease as the approximate cause. Hyperkalemia treatment is projected to be around a $2 billion annual industry.
ZS Pharma, which has a competing treatment for hyperkalemia and is considered its main value, should get approval in a few months. It's anticipated that this "ZS-9" drug will be on the market within six to nine months. ZS Pharma was bought out by giant drug firm AstraZeneca (AZN) for $2.7 billion last November. The second-biggest drug maker in the world believes ZS-9 can reach peak annual sales of $1 billion for treatment of hyperkalemia. This purchase confirmed the large potential for treatments for this condition. ZS-9 is not on the market yet, but has a Prescription Drug User Fee Act (PDUFA) date with the FDA in May, but the approval decision might be pushed back to the summer to await additional safety data.
Both drugs appear to have different advantages, based on trial results. ZS-9 seems to be slightly faster-acting. Relypsa, however, has the first-mover advantage. Its Veltassa does better with patients with hypertension or periphery edema, a good part of the hyperkalemia population. Veltassa was issued with a "black box" warning that it can bind with other drugs and make them less effective if taken within six hours of each other. ZS-9 might get its own black-box label in regard to patients with hypertension or periphery edema when approved.
It should be noted that Relypsa just completed a Phase I drug interaction, or DDI, study that showed extremely favorable results as far as binding to other drugs. This should make the FDA label even more irrelevant to prescribing physicians, especially if these results are repeated in Phase II and III trials.
Relypsa has added some 300 employees recently, including just under 150 sales representatives to market the new compound in the United States. Outside the country, the company is partnering with the Swiss company Vifor Fresenius Medical Care, which paid Relypsa $40 million up front for the privilege. Relypsa could also earn just over $100 million in additional sales if it hits certain milestones. The company will also receive up to 22% of sales in royalties. Veltassa is expected to be in the European market by early 2017.
Given Veltassa's initial sales and potential, Relypsa's current market valuation of under $575 million is extremely conservative, especially since the company has over $250 million in net cash on its balance sheet.
But what has hurt the stock is the freezing of the credit markets due to the chilly attitude toward the biotech space of late. The company will eventually need to raise additional funding to support the rollout of Veltassa, as it expands its sales force and puts the compound through additional trials.
Although some investors may be concerned about the credit crunch, Relypsa does not need the funds immediately. I think the company will wait a few months to allow conditions to improve. Investors will have a better picture of the company's prospects as Veltassa's sales accelerate and ZS-9 receives approval.
At that point, I believe Relypsa will be able to raise funding at a much more favorable term than is currently available. A large non-dilutive debt deal like the one Merrimack Pharmaceuticals (MACK) did late in 2015 would seem possible at that point. Given the potential of Veltassa and the large premium paid for competitor ZS Pharma, a buyout also remains a possibility.