Ardelyx, Inc. is a pharmaceutical company based in Fremont, CA, that specializes in gastrointestinal and cardiorenal diseases. Tenapanor, the company's first-in-class late-stage product candidate, has the potential to become the standard of care for hyperphosphatemia in end-stage renal disease (ESRD).
Tenapanor in hyperphosphatemia
Usually a consequence of uncontrolled diabetes and high blood pressure, end-stage renal disease is a massive problem in the United States. There are over 550,000 dialysis patients, and Medicare alone spends $50 billion per year on this condition. Despite this massive investment of public resources, the median ESRD patient can expect to live only a few years after starting dialysis and be hospitalized more than once in each of the remaining years of life.  Among the many factors behind this dramatically increased mortality among ESRD patients, elevated blood phosphorus levels, also known as hyperphosphatemia, are particularly important. In the table below, you can see that this condition can double the relative risk of death in ESRD patients, which is extremely high compared with the general population to begin with.
Even though the relationship between elevated phosphorus and increased mortality has been known for a long time, most ESRD patients struggle to stay within the safe range. The reason for this is that the only available treatment option, a class of drugs known as phosphate binders, is very difficult to comply with because of the pill load and side effects. Dialysis patients can drink only 32 ounces of fluids per day. This is equivalent to two small bottles or four standard American cups. At the same time, they need to take an average of 20 pills per day, many of them large. To illustrate, the weekly dose of the most-prescribed binder is shown below:
And this is just the phosphate binders. Other oral drugs add up to a similar amount. To make things worse, phosphate binders need to be taken with every single meal, including snacks. To make things even worse, here is the list of side effects of Renvela, a phosphate binder that dominates the market and which used to generate over a billion dollars in annual revenue before going off-patent several years ago: vomiting (22%), nausea (20%), diarrhea (19%), dyspepsia (16%), abdominal pain (9%), flatulence (8%) and constipation (8%). Phosphate binders are no sugar candy, and it is not surprising that half of all dialysis patients are not compliant with their phosphate binder prescription.
Enter tenapanor. For decades, phosphate binders have been the one and only treatment option for ESRD patients. However, this is set to change with the upcoming FDA approval of Ardelyx’s lead product candidate for the treatment of hyperphosphatemia in April 2021. In three separate Phase 3 clinical trials, tenapanor achieved efficacy that was comparable to that of the phosphate binders. At the same time, it demonstrated a significantly better side effect profile, with diarrhea being the only side effect occurring in more than 5% of patients. Importantly, softening of the stool was mild to moderate in the vast majority of patients and can even be considered a positive for some patients as constipation is a common problem in ESRD patients. And potentially even more importantly, tenapanor holds the promise of cutting the pill burden by a huge margin—patients will need to take only two tiny pills instead of ~10 huge tablets every day.
Investment thesis So, what could possibly hold investors back from investing in this breakthrough medicine? The answer is the uncertain reimbursement landscape. Approximately two-thirds of all dialysis patients are covered by Medicare, and almost half of the remainder is covered by Medicaid and Veterans Affairs. In the past, CMS made several attempts to include oral medications for ESRD patients into the dialysis bundle, a single payment that healthcare providers receive for providing dialysis services. And every time, the decision would be pushed back, most recently to 2025. It appears that investors are concerned that Ardelyx’s pricing power would disappear should tenapanor ever be included in the dialysis bundle.
Our thesis is twofold: 1) bundling may be rescheduled yet again or even canceled, and 2) at the current valuation, it does not even matter. First, we are convinced that CMS is not going to shoot itself in the foot. ESRD is a huge expense line for them and a major cause of death and suffering for their beneficiaries. Killing whatever little R&D there is in this field today would make absolutely no sense. Therefore, we expect the regulator to either give up on the idea of bundling altogether or establish clear incentives for providers to cover innovative drugs such as tenapanor. Secondly, even if tenapanor is included in the bundle in 2025, Ardelyx is so cheap today that it does not really matter. A fifth of the US dialysis patient population is covered by commercial insurance. This is over 110,000 patients and counting. Capturing only a third of this market would be more than enough to justify Ardelyx’s current market cap of $0.5 billion. Whatever the exact value of the opportunity in the Medicare-covered population after 2025, we believe it is significantly above zero and represents pure upside for investors.
Valuation In our base-case scenario, we assume that all government-run programs eventually include orals into the dialysis bundle but establish incentives for providers to use tenapanor instead of the binders. For this market, we assume an annual net revenue per patient of $5,000 and a 20% market share. The former figure is barely above the cost of generic binders, and the latter can be thought of as the sickest patients who fail to control blood phosphorus levels even when taking the binders. This adds up to $440 million of revenue per year. In addition, we expect Ardelyx to capture a third of the patients covered by commercial insurance plans and earn a net revenue of $7,500 per patient. This translates into $275 mln of additional revenue each year and a combined annual net revenue of $715 mln.
Even though differentiated biopharma assets tend to be valued at 3-5x peak revenues, we only assume 2x multiple for Ardelyx because of its reimbursement risks. The resulting valuation is $1.4 billion or $15 per share, which 150% above the current price. Importantly, we did not include several additional sources of upside in our valuation. First, we put no value on the commercial opportunity in hyperphosphatemia outside of the US. Secondly, tenapanor has been shown to be an effective treatment for irritable bowel syndrome with constipation (IBS-C) and has already been approved in this indication by the FDA. For now, Ardelyx has no plans to commercialize tenapanor in this indication because they do not have a budget to enter a market of this size. However, it does not mean that potential acquirers would value this opportunity at zero. And lastly, Ardelyx’s RDX013 has demonstrated very promising results in hyperkalemia and is set to enter Phase 2 trials in the near future. To summarize, the US opportunity in hyperphosphatemia alone provides massive upside from the current valuation levels with significant downside protection, and there are multiple ways for Ardelyx to create even more value for its shareholders. This is probably why you can see multiple sophisticated biotech investors among the owners of Ardelyx shares, including New Enterprise Associates, RA Capital Management, Rock Springs Capital, and Deerfield Management.
2020 USRDS annual report
Ardelyx corporate presentation, October 2020
Block, G. A., Klassen, P. S., Lazarus, J. M., Ofsthun, N., Lowrie, E. G., & Chertow, G. M. (2004). Mineral metabolism, mortality, and morbidity in maintenance hemodialysis. Journal of the American Society of Nephrology, 15(8), 2208-2218.
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