Description

Ardelyx is a small cap biopharmaceutical company with a near term catalyst (in 45 days) that could send shares up 30-50% this year, and could eventually be a 6 or 7 bagger.  In due respect, this name was nicely written up in November by Kalman951, but there have been a few updates since then including an unfortunate FDA delay.  We believe now is a compelling time to invest in ARDX and should be worth another look.  ARDX has the biggest near term catalyst of anything in our portfolio at the moment.

Brief Summary

Ardelyx main drug Tenapanor targets high phosphorus levels in patients undergoing kidney dialysis for End Stage Renal Disease (ESRD) (i.e. kidney failure).  One of the main roles of kidneys in our body is to filter minerals from our blood such as calcium, magnesium and phosphate.  High levels of phosphate increase the risk of death and hospitalization.  To deal with this, patients undergoing dialysis take "phosphate binders" which help reduce the absorbtion of digested phosphate.  There are several problems with using phosphate binders to effectivley regulate phosphorus in the blood:  the pills are large and you have to take upwards to 15-20 a day during meals, you have to limit water intake, and can make you sick (nausea, stomach pain, gas, diarrhea etc.).  Due to the burden of these pills, patients are regularly out of balance in their phosphorus levels.

Size of market of Tenapanor for ESRD phosphate treatment

Currently there are about 550,000 dialysis patients and that number is growing about 3-4%.  Approximately 2.7 million prescriptions are made to treat high levels of phosphate in the blood.  

Ardelyx's Tenapanor to control phosphorus levels in patients with ESRD

Tenapanor's approach is very unique to the current treatment of hyperphosphatemia.  Very simply put, unlike binders, which bind to phosphorus in during digestion of foods and are excreted, tenapanor lowers phosphate levels by treating the digestive tract to not allow phosphate absorption into the bloodstream.  There have been 3 statistically significant Phase III studies that show the efficacy of tenapanor and a lot of data that I will not go into here.  In summary, the worst side effects include severe diarrhea in about 4% of patients.  Most noticeably different about Tenapanor's treatment is the significantly lower pill burden than phosphate binders about 8 to 1.  Phosphate binders have a much higher percentage of patients with nausea and vomiting (10-20%) as compared to Tenanpanor (3-4%).  Given the reduced pill burden and better side effects, patients will more likely stick with the prescription of tenapanor over phosphate binders.  The market is ready.  3 out of 4 nephrologists see a need for an improvement over phosphate binders and see tenapanor as an improvement.  Ardelyx has been preparing for the commercial launch and revenues can be realized as early as this year, with major ramps in 2021 and 2022.

IBSRELA- Already Approved by FDA-Waiting to be commercialized

One of the interesting things about analyzing the risk of Tenapanor getting approval for ESRD, is that it has already been FDA approved for Irritable Bowel Syndrome with constipation.  So the safety aspect of Tenapanor should be largely derisked. The IBS-C tenapanor drug is called IBSRELA and currently it sits on the shelf as the focus of the company remains on the treatment of kidney disease.  The company may decide to partner with another company to commercialize this product.  IBSRELA works by reducing the amount of sodium in the colon and small intesting.  This helps cause an increase of water in the digestive system allowing for softer stools and less stomach pain.  In past presentations, management has indicated that this could be a $400-500 million/ year size market for the drug.  IBS-C drug Linzess (sold by Abbvie) does about $1 Billion/year.

4/29 PDUFA Date Delayed-What happened?  What does it mean?

The FDA extended the PDUFA review period by three months on 4/29.  The company explained that as it was working with the agency over package insert (usually a sign that the approval process was near completion), at the "11th hour" the agency asked for additional analysis of the data from the Tenapanor studies.  The company responded to the request within 8 hours, but given that the agency had to review the new information, the PDUFA date was extended to 7/29.  The company's management was obviously surprised, but in light of the resource diversion the FDA has had going not, not totally surprised.  In fact, there has been a number of FDA delays over the past 12 months in other areas of medicene.  On the positive note, this additional request of information was not centered around safety, but more the analysis of how effective tenapanor really is.  Furthmore, this gives ARDX further time to prepare for the commercial launch which is highly anticipated by the nephrologists.

7/29 New PDUFA Date-What to expect

Needless to say, the market did not like the news on 4/29 and the stock traded back down to February/March levels.  We would expect the stock to gravitate higher going into the new PDUFA date and substantially higher after that pending a positive outcome.

Revenue Potential for Tenapanor for ESRD

We estimate that about 75% of dialysis patients use phosphate binders to treat high phosporus levels.  Of that number, we estimate that 65% will be eligible for Tenapanor, and Ardelyx captures 1/3 of that or 125,000 patients.  We estimate that net revenue per patient will be between $5000-6000 or $625-$750mm per year.  Revenue may  take 3-4 years to ramp to that level.  

ESRD CMS Bundle Risk

There is a potential threat that oral drugs for related to dialysis treatment may be bundled into the overall coverage for dialysis patients in Medicare.  This was initially proposed in 2011 but was strongly opposed.  It was brought up again in 2014, got deferred to 2016, and then brought up again and got deferred to 2025.  We view this as threat but not a material threat to the valuation.  First off, there is enough value in treating private pay commercial insurance patients (20% of the market) to justify a valuation multiples higher.  Second, it appears that there is very little support for this initiative as is demonstrated by the delays and finally, the drug bundling would gradually be put into effect over 2 years going into 2027.

Balance Sheet

With $178mm of cash on the balance sheet, the company has enough runway until the middle of next year.  This time period also corresponds to when the company may be coming close to cash flow positive depending on the timing of commercialization.  So the company will most likely need to raise additional capital, but if it does it may not be a major overhang and can likely be done via via their ATM which they have been doing successfully over the past 2 years. 

Insider Activity

There has been some normal automatic insider selling to cover withholding taxes over the past 6 months.  However, the most notable insider transaction was a $1mm purchase by Board member David Mott. 

 Valuation

We feel that over time, ARDX could be a $40 stock, $4-5 billion market cap doing $1+ billion in 2025.  If tenapanor is approved I would think that the value of the company could go to 2X tenapanor ramped sales or $15/share over the next 12 months.

Catalyst

7/29 FDA PDUFA Date