Description

Mack885 wrote this up in 2020 and buyers were rewarded. Luckily for those of us who missed it, a management misstep resulted in the FDA’s issuance of a complete response letter (denying the company’s request for drug approval) last fall, which sent shares to an extremely low valuation. Though they’ve come back a fair bit, the situation has recently been de-risked and the valuation remains compelling.

Two weeks ago, management outlined a simple and straightforward plan to right the ship. In the days following, Perceptive Advisors, a blue-chip biotech fund that already owned 15.7% of the company, has steadily increased its stake by 10% in the open market.

ALDX is likely to have their drug, reproxalap, approved for use in dry eye disease (DED) in the next 12 months (Ph3 data readout in 6 months) and has signed an option agreement with AbbVie that, if executed, will pay them 1.25X their current EV upfront. Because shares are unreasonably depressed, Reproxalap NPV covers ALDX’s FD market cap at absurdly low estimates of peak sales, and is 2X current MC even at conservative peak sales estimates.

ALDX also has a valuable pipeline, which is free.

In this writeup I cover:

1. Dry eye disease

2. RASP and reproxalap

3. ALDX’s path forward

4. Valuation

5. A brief note on pipeline

DED/Competition

DED is a common condition characterized by a lack of sufficient lubrication and moisture on the eye's surface. It can be caused by factors such as aging, hormonal changes, environmental conditions, certain medications, or underlying health conditions. Symptoms include stinging or burning sensation in the eyes, excessive tearing, sensitivity to light, redness, and blurred vision.

DED is a large market. According to the literature, prevalence in the US is somewhere around 5-6% – or 16 million Americans. First-line patients are treated by their PCP and will typically receive artificial tears (OTC drops).. According to the literature, about 20% of patients do not respond to artificial tears, (~3 million Americans). Current treatments like Xiidra cost $500/month, so even capturing 5% of these patients yields peak sales of ~$1B. Restasis peaked at $1.3B. Xiidra sold about $500M in 2022. Both of these drugs have irritation issues and take a weeks-to-months to start working (compared to basically-instantaneous efficacy for reproxalap).

RASP and ALDX’s RASP inhibitor, reproxalap.

Reactive aldehyde species (RASP) are pro-inflammatory molecules generated by a variety of stimuli (heat, metabolic processes, chemicals, injury) which bind to proteins and interfere in inflammatory signaling pathways. RASP are elevated in patients with DED, and the FDA has officially designated RASP a sign of DED. 

Reproxalap is a RASP inhibitor which has been formulated into eye drops. The clinical data in support of its safety and efficacy are strong. 

Additionally, RASP have been associated with a number of other inflammatory disorders, which ALDX is addressing with its pipeline of next-gen oral RASP inhibitors.

CRL, and reasoning behind it

In November 2023, the FDA issued a complete response letter (CRL; a rejection of ALDX’s application for drug approval), stating the company would need to run an additional trial demonstrating efficacy on symptoms of DED. 

The FDA’s requirements for approval in DED are fairly clear, and laid out in their guidance. I have pasted the requirements below (numbers added by me, to make it easier to reference specific points):

The company did not detail why exactly the FDA found their data package insufficient, but I can speculate. There are lots of data showing that reproxalap works in DED, but the data don’t exactly conform to the FDA’s requirements:

• Per point 1, the company needs two trials demonstrating stat-significance on a sign and symptom. Per point 7, these do not need to be measured in the same trial. 

• ALDX clearly showed stat-sig on signs (point 4) in two large Ph3 trials (reduction Schirmer’s tear test score in TRANQUILITY and TRANQUILITY-2).

• ALDX did not show improvement of symptoms in two large Ph3 trials.

  • In RENEW part-1, ALDX showed a stat-sig improvement on “ocular dryness”, which it called an approvable symptom endpoint (not listed as a symptom by the FDA in point 5, but was used as a symptom endpoint in Xiidra’s successful NDA).

  • ALDX used its very small (16 patients per arm) Ph2 trial results as its second trial demonstrating efficacy on a symptom endpoint. The trial was intended to investigate dosages, not demonstrate conclusive efficacy, hence its small size. ALDX may have thought they could get away with that but apparently the FDA did not.

Path forward

Announcement of the CRL sent ALDX shares down 65%. As the company has disclosed information about their path forward, shares have come back some, but the risk/reward remains favorable. Briefly:

1. ALDX needs to run one more quick, cheap, and easy symptoms trial. 

2. The drug has already performed well in multiple near-identical trials. 

3. The company is running two backup trials in case the first fails. 

Since issuance of the CRL, management has since been in touch with the FDA about what exactly would be needed to demonstrate efficacy on symptoms. After some back and forth on trial design, ALDX has settled on a path forward and has a high probability of resubmitting an NDA later this year that should be successful. 

The company will run an additional Ph3 challenge-trial. Essentially, patients will be put into a dry-eye inducing chamber (dry air, airflow, visual tasking) and take doses of either reproxalap or vehicle. Primary endpoint is ocular discomfort (a symptom, named in point 5 of FDA guidance). The trial will enroll 100 patients and is 90% powered. Trial design below:

Importantly, reproxalap has already performed extremely well in smaller chamber trials on ocular discomfort. Pooling all the data from prior chamber trials, we see a highly stat-sig difference between drug and vehicle (p = .0003) and a clinically meaningful 10 point delta.

Furthermore, the company will run a second dry eye trial and a 6-week field-use trial, measuring symptoms, as well. Beyond the fact that these trials are high PoS, they are fairly cheap, so the company can afford to overprotect itself from failure.

Valuation

In December of last year, after the CRL, AbbVie signed an option-agreement with ALDX (expiry is the earlier of: 1. 10 days after FDA approval of reproxalap or 2. May 2025.)

Exercise of the option would mean:

1. $100M upfront to ALDX

2. $100M to ALDX on approval of reproxalap (or upfront if approval precedes option exercise)

3. $200M in additional milestone payments on undisclosed sales targets

4. Profit split on US sales of Reproxalap (40% to AbbVie).

5. Tiered royalty on ex-US sales.

Without knowing the terms of all milestone/royalty payments, it’s difficult to value reproxalap precisely. Nevertheless, ignoring sales-based milestones and royalties on ex-US sales, the value prop is very compelling – the upfront payment on option exercise alone amounts to 126% of current EV.

Using harsh assumptions on sales force size and cost, I arrive at ALDX’s fully diluted market cap being 100% accounted for by reproxalap NPV at only $300M peak sales. At $500M, peak sales, I arrive at $10/FDshare reproxalap NPV. At $1B peak sales (still ignoring sales-milestones which probably would begin to be triggered), I arrive at $23/sh. As a reminder, Restasis takes months to begin working and peaked at $1.3B. Xiidra takes weeks to work and has negative side effects, and sells $500M.

Added value in pipeline

ALDX’s pipeline is free, and includes oral RASP-inhibitors for other inflammatory disorders. In the interest of time, I won’t deep dive here, but ALDX has shown interesting early-stage data in psoriasis, atopic dermatitis, asthma, chronic cough. A win in any one of these indications would be valuable.

Catalyst

Ph3 results in 6 months

FDA approval in 12 months

ABBV option exercise