Will Ebiefung

About the Author Will Ebiefung

Will Ebiefung studied finance and accounting at the University of Tennesee. He works as a freelance investment analyst focusing on equities with market caps below $100 million. In addition to writing, Will is a full-time investor focusing on web properties and debt-based securities.

Aurinia Pharmaceuticals Inc (AUPH): Betting on the Home Team

Aurinia Pharmaceuticals Inc (NASDAQ:AUPH) is an all or nothing bet. The company’s future depends on its only pipeline asset Voclosporin, a drug candidate in FDA trials for lupus nephritis. Voclosporin is what is known as a calcineurin Inhibitor, and these drugs work on the interleukin-2 receptors – basically a form of immunosuppression that should be familiar to those who follow the dermatology market and remember Valeant’s drug, Siliq, that works on the interleukin-17 receptors to treat psoriasis.

Voclosporin performed extremely well in its Phase 2 trials and posted the highest remission rate ever recorded in a lupus nephritis study. In data released late last year, the therapy had a complete remission rate of up to 49.4% in the best conditions (48 weeks).

Aurinia Pharmacuticals stock is expected to reward investors through an acquisition of the company or commercialization of Voclosporin. Both eventualities could result in double-digit appreciation in the stock, but Aurinia probably doesn’t have multi-bagger potential because of its already rich valuation.

Valuation of Aurinia Pharmaceuticals

Aurinia Pharmaceuticals is a good example of market efficiency. Despite having only one pre-commercialized asset in a niche market, the company has a market cap of over $550 million – unusually large for a pre-commercialized biotech. Aurinia’s large market cap is the market’s way of saying that it believes Voclosporin’s approval odds are a slam dunk, and the company will probably be bought out by a larger firm or go on to make billion from its drug when it gets approved.

But because Aurinia is already so expensive, the high likelihood of its drug’s approval does not mean the stock is a great value from a risk-adjusted perspective. It’s just like betting on a sports team that almost everyone thinks will win. The likelihood of profiting from the bet is higher. But upside from winning is lower while the chance of losing money is also lower – but in the unlikely event that you do lose, the potential cost of this loss is astronomical relative to the potential benefit of winning.

Aurinia predicts Voclosporin’s annual sales to peak at around $1 billion, and the stock is already worth half that amount. Depending on how risk is discounted for in a DNPV, the stock is pretty fairly valued at its current market cap of $550 million.

Income Statement and Cash Flow

As a biotech without a commercialized drug asset, Aurinia’s income statements are weak. Revenue declined from around $6.12 million in 2012 to $0.17 million in the most recent quarter and will probably end up near zero before Voclosporin is commercialized. However, the top line isn’t a big deal because the market isn’t looking at that.

In terms of SG&A and R&D, Aurinia has kept expenditures remarkably low for a company of its size. This is a benefit of having only one primary asset. All in all, the company posts net loss of a little less than $20 million which is excellent for such large pre-commercialized biotech.

The company’s balance sheet is also good with $202.1 million in cash and short-term investments – this means the company shouldn’t need to rely too heavily on equity dilution to generate the liquidity needed to push Voclosporin through Phase 3 and NDA submission.

Conclusion

Aurinia Pharmacuticals is an efficiently priced biotech. It’s lead candidate, Voclosporin looks extremely likely to win approval, and this means the company will probably get bought out by a larger company. But Voclosporin’s great results have already driven up the stock price of Aurinia, and this may limit future upside while increasing future downside in the unlikely event that the drug fails to get approved.

 

Disclaimer: The author has no position or business relationship in any stock or company mentioned in this article, and he has no plans to initiate. The author is not receiving compensation for this article expect from Smarter Analyst. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.