Description

Thesis:

BioCryst (BCRX) is a small cap biotech with a drug (BCX7553) for hereditary angioedema (HAE) that is commercially non-viable. While there is a small chance that BCX7553 is approved by the FDA later this year for acute attacks of the disease, it will never gain more a minuscule share of the market. Bulls are overestimating the odds of FDA approval for acute attacks and the longer-term potential of the drug in the prophylactic indication. Once people fully realize that BCRX is iron pyrite and not gold, and that the best-case scenario is an expensive drug launch against vastly larger competitors with superior products, BCRX will be a penny stock, leading to 75%+ downside.

A very brief overview of hereditary angioedema and the current market:

HAE is a terrible disease that thankfully affects very few people (perhaps 1 in 10,000 to 1 in 50,000). It is a severe swelling disease that is chronic. This swelling is caused by a genetic defect that can result in blood vessels releasing fluid into the body. In extreme cases, the swelling can get so severe that the airway passages are blocked and cause suffocation.

Since the underlying disease can be so severe and the condition is chronic, it’s a lucrative indication for pharma companies that target rare diseases with so-called orphan drugs. As is typical for orphan drugs, that market come with high margins and limited pricing pressure compared to other indications. In 2017, J.P Morgan estimated there are c. 10,000 HAE patients in the United States, which should support ~$2bn of high-margin sales in 2020.

Due to these factors, the HAE space is a highly competitive one and there are currently two main players (Takada and CSL) who serve the market. There are seven FDA approved products for HAE: https://www.haea.org/pages/p/ApprovedTreatments with Takada owning  Takhzyro, Cinryze, Firazyr, and Kalbitor, while CSL competes with Berinert. There is also generic competition entering as Firazyr goes off-patent in the second half of this year.

Some of them are for acute attacks, while others are used prophylactically to prevent swelling episodes from occurring. Currently, all approved HAE drugs are administered via injection or by IV, although two other companies aside from BCRX are working on oral treatments: Kalvista (KALV) and Attune Pharmaceuticals (private).

How does BioCryst stack up?

So, how is BCRX’s offering going to do in this lucrative but competitive space? It’s the first oral treatment to read out, which could make it more convenient.

All the current HAE drugs are quite effective, but Takhzyro is the best comparator for BCRX. Takhzyro is a preventative HAE therapy that is administered via injection, and when taken every two-weeks, lowers the rate of HAE attacks by 87%. When taken monthly, the HAE attack rate was lowered by 73%.

In comparison, BCRX ran a large and well-powered pivotal trial that achieved statistical success: http://ir.biocryst.com/static-files/45948ef9-0869-4d0a-a485-71afc2c783f7

However, statistical success and commercial relevancy are not the same thing. The two different dosings of BCX7553 in the trial reduced attacks by 30% and 44% respectively, a far cry from the efficacy of Takhzyro.  

Furthermore, none of the Secondary Outcomes (largely relating to quality of life) were statistically significant (this was only mentioned on the conference call discussing the results). Worse yet, there was the possibility of minor safety issues, as one patient had to discontinue taking BCX7553 due to an abnormal liver function test:

Bulls will agree that these numbers don’t match up well compared to Takhzyro. This is the reason BCRX stock is down ~50% since they released the trial results. However, bulls argue that the oral convenience of BCX7353 will overcome the lesser efficacy. I think the FDA will have a great deal of concern over approving a drug like that for a chronic and life-threatening disease. However, let’s assume that the bulls are correct, and that the FDA looks past the sub-par efficacy, the lack of improvement of quality of life, and the potential liver issues, and instead decides to approve BCX7353 because a twice-a-day oral pill is more convenient than a once-a month injection.

In that best-case scenario, BCRX is faced with launching a sub-par product against two entrenched industry players, who will both be very motivated to keep the valuable and scarce HAE patients on their current drugs. In addition, BCRX will be faced with financing a second Phase III pivotal trial for BCX7553, this time in the prophylactic indication and which could read out in the second half of 2020. There is no reason to think that this trial will be any more of a success, as it is the same drug in the same population. All of this is going to be very expensive, so let’s now look at the BCRX balance sheet:

At first glance, this doesn’t seem too bad, and BCRX likes to boast that they have a runway into 2020. But what then? Cash utilization will only go up if BCRX is running another Phase III trial and preparing to launch BCX7353 commercially. Furthermore, the Senior Credit Facility is no panacea, as it bears interest at LIBOR +8%, and comes with significant restrictions:

Note 5 — Senior Credit Facility

On February 5, 2019, the Company entered into a $100,000 Senior Credit Facility with an affiliate of MidCap Financial Services, LLC, as administrative agent (the “Second Amended and Restated Senior Credit Facility”). Borrowings under the Second Amended and Restated Senior Credit Facility will be available in three tranches, with (i) the first tranche comprised of $50,000 funded at closing, which includes $30,000 of proceeds that were deemed rolled over from the outstanding principal amount under the Company’s prior credit agreement, (ii) the second tranche to be comprised of $30,000, and (iii) the third tranche to be comprised of $20,000, with the second and third tranches to be funded upon the completion of certain contingencies related to the Company’s development activities of its product candidates and the establishment of certain financial covenants. The Second Amended and Restated Senior Credit Facility refinanced and replaced the Amended and Restated Senior Credit Facility dated as of July 20, 2018 (the “Amended and Restated Senior Credit Facility”). The Second Amended and Restated Senior Credit Facility bears a variable interest rate of LIBOR (which shall not be less than 0.5%) plus 8%. The Second Amended and Restated Senior Credit Facility includes an interest-only payment period through June 2020 and scheduled monthly principal and interest payments for the subsequent 30 months. The Company used a portion of the proceeds of the Second Amended and Restated Senior Credit Facility to pay off outstanding amounts under the Amended and Restated Senior Credit Facility and the remainder will be used for general corporate purposes. Under the Second Amended and Restated Senior Credit Facility, the Company must maintain a minimum cash balance of $25,000 of unrestricted cash at all times. Should the Company access the additional second tranche of $30,000 upon satisfying the positive APeX-2 positive data and NDA filing milestone criteria, the unrestricted cash balance minimum increases to $40,000.

https://www.sec.gov/Archives/edgar/data/882796/000117184319003220/f10q_050919p.htm

Given these restrictions, I expect BCRX to issue dilutive capital sooner than later. They have an S-3 shelf Effective from 12/12/17 with $150mn remaining on it.

Finally, although BCRX calls their pipeline robust, it is anything but:

BCRC7353 is, at this point, more of a liability than anything else, and the other pipeline products are all preclinical and will require additional funding. The Supporting Asset Rapivab is an intravenous flu drug, has been licensed out, and brings in minimal revenue. There’s nothing more to this company.

Executive Summary:

BCRX is extremely overvalued due to bulls overestimating the appeal of an inferior but oral HAE drug.

The odds of an FDA approval are very doubtful.

In the best-case scenario, BCRX 7353 is approved and launched into a marketplace dominated by two larger competitors with superior products.

The dynamics of the HAE market are such that each patient is lucrative. The entrenched players will not sit by and allow BCRX to gain any real market share.

BCRX does not have the balance sheet to sustain a drug launch and will have to resort to severely dilutive financing, turning the company into a penny stock.

Catalyst

Failure to win FDA approval.

Dilutive financing.

Commercial irrelevance.