Description

Larimar Therapeutics (“LRMR”), formerly a private company called Chondrial Therapeutics until its May 2020 reverse merger into cash-rich shell Zafgen, is targeting a rare disease called Friedrich’s Ataxia (“FA”).  (This stock is usually very thinly traded so this may not be actionable for everyone FYI.) Aside from a path to market that means the company has not yet reported a quarter and may still fly below the radar screen of some investors, what interested me about this situation in particular was the opportunity to invest at essentially the same price as top biotech funds who capitalized the company with $80 million in a warrant-free deal at the end of May.  The FA space is crowded but there is no commercial product yet.   That said, there is at least one program that is ahead of Larimar (in Oct 19, Reata announced plans to file its FA drug with the FDA for approval).  Knowing all that, these funds placed real money behind LRMR’s Phase I program approximately seven months later.  I believe it is because, unlike other compounds to treat FA, the mechanism of action of LRMR’s’ therapy is the basis for many other successful drugs: enzyme replacement.     

Business Description

LRMR is a Phase 1 biotechnology company addressing a rare genetic disease.  Its technology allows it to transport “bioactive” cargo across the cell membrane (i.e. it can take things like proteins that are made in a lab and once delivered in people it can get them into cells intact).  Of course, there are other ways to do this.  Its first compound is targeting a mitochondrial disorder so not only must the protein get into the cell, it then also has to traverse the mitochondrial membrane. Once there, the vehicle is designed to be cleaved off by a natural enzyme and the result is the desired fully functional protein in the desired location.  This is the perfect construct to address a rare genetic disease called Friedrich’s Ataxia.

FA is a progressive disease that is characterized by abnormally low levels of a protein called frataxin.  It is usually diagnosed around age 14 as clumsiness leads to inability to walk with underlying heart damage.  Patients are wheelchair bound in their 20s and life expectancy is only 30 to 50 depending upon severity (death is usually related to the heart damage).  There are 5,000 patients in the US, 10,000 in the EU as well as a cluster of patients in Australia.       

Without running through all of the company’s data, LRMR has definitely shown in mice that it can add Frataxin that gets to the mitochondria and allows its deficient recipients to maintain their gait.  It also showed that hearts are normal shaped (unlike FA hearts) with similar cardiac function to healthy hearts.  While building these preclinical models, it developed an assay to measure frataxin levels across tissues which had been hard to do.  Finally, there were no issues in non-human primate tox studies.  So with all that, LRMR moved into human trials with its compound CTI-1601.  It is running a placebo controlled single ascending dose (n=32 across four cohorts) that converts to a multi-ascending dose study (n=24-30).  The first part of the trial is described here https://www.clinicaltrials.gov/ct2/show/NCT04176991?term=NCT04176991&draw=2&rank=1   The first two cohorts were complete but the company had to pause due to COVID.  It has now begun dosing in its third cohort.  The trial is expected to report out in 1H201 after taking into account the delays.  Note that all patients need to be 18 and older but that FA is often diagnosed before that so there will ultimately be a pediatric study to get the broadest opportunity and to treat patients before there has been several years of degeneration.  

LRMR is the only company using enzyme replacement for FA.  This is the approach that created Genzyme which has a number of protein replacement therapies for rare diseases like Gaucher’s Disease.  Other companies that have played here include Alexion, BioMarin and Shire.  After I painstakingly compiled a list of competitive programs, I found this chart which is very helpful:  https://curefa.org/pdf/research/FAtreatmentPipelineMar2020.pdf  so start there first if you are interested.  Of note, Reata (an excellent company with an amazing story) had a successful Phase 3 in October 2019.  Its compound looked like it was not going to work in the early part of the trial.  It is now filing for approval with the FDA and will likely be the first to market.  Also PTC Therapeutics has a compound in the same category (oxidative stress) that is based on a subgroup analysis of a failed Phase 2 conducted by an earlier company that previously owned the asset.  Oxidative stress is when free radicals build up in cells to toxic levels (see Sean Connery as James Bond about 2:20 into this clip: https://www.youtube.com/watch?v=qOQc3NAsPcI )  which causes damage and the exact mechanism of how this relates to FA is not well understood.  The compounds that are in the lead are trying to remove some of the toxins while the LRMR approach seeks to restore cells to normal functionality.  I can see why this approach would be more attractive.  Biotech investors agree: at the end of May 2020 LRMR raised $80 million in a straight common deal from Cowen Healthcare Investments (the lead), and Acuta Capital, funds managed by Janus Henderson Investors, Logos Capital, OrbiMed, RA Capital Management, and Vivo Capital, along with other healthcare-focused institutional investors. LRMR’s largest investor is Deerfield Management who originally incubated the company.

Valuation

There are approximately 16 million shares outstanding so the current market cap at $11.51 per share is approximately $184 million.  After deducting $119 million of cash, the enterprise/technology value is $65 million.

If the drug works the stock will appreciate a lot from current levels.  Let us assume a market opportunity based upon 15,000 patients and a rare disease drug price of $150,000 which would imply a $2.25 billion market opportunity.  Note that Amicus Therapeutics enzyme replacement drug for Pompe disease costs $300,000.  Even through an enzyme replacement therapy might dominate the market, because it will probably not be the first to market, let us assume an arbitrary low market share of 10%.  So revenues from CTI-1601 could be $225 million.  Genzyme’s gross margin was 70% and Amicus’ is 76% so let’s use 50% since we are assuming a lower price (we do not know what the manufacturing cost will be for LRMR’s drug).  SG&A of $20 million seems excessive but let’s assume that is what is necessary to get to 10% market share.  Ignoring D&A (who needs hard assets?!?) that gives us EBITDA of $92.5 million or with a 25% tax rate  (following conventional wisdom on direction of tax rates in the future) net income of approximately $70 million.  What multiple would one apply? Assuming all cash is spent and shares outstanding increases 50%, 15x after-tax earnings would be a share price of $43.50.  If another trial is required and it takes 5 years that would be a 30% annualized return from current levels.  Of course if the drug was priced at the same level as the Amicus drug with the same margins and it achieved 25% market share then with all of the other assumptions the same the stock would be an even more phenomenal return.   Due to uncertainty and a chance that a approval will come beyond the required timeframe, I have ignored the Priority Review Voucher that could possibly be received upon approval due to the pediatric orphan indication (Bavarian Nordic sold on in December for $95 million for example).  

For reference, when Reata announced their FA data which “shocked analysts” on Oct 14, 2019, the market cap the following day appreciated by $1.7 billion. 

If the current trial does not work, assuming half the cash is spent to get there and there are no other programs, the stock could fall at least to residual cash of approximately $60 million or $3.71 per share.  Ouch. Size appropriately if you can build a position.  Obviously, even generally successful biotech funds cannot predict what Mother Nature will do when something that worked well in a mouse is put into a human (or even if something that works in a small number of humans will work in a larger number of humans).  

Investment Positives

• Enzyme Replacement Therapy is a proven approach that works in other rare diseases.
• Strong signal from biotech funds at current price levels (deal price was $11.88).
• Rare disease pathway suggestive of a more rapid approval, potentially after LRMR’s trial ends in 1H21 but more likely after one more Phase II with a pediatric component.
• Path to market via reverse merger means lower initial profile.
• Technology platform applicable to other diseases.
• Clean capital structure means no share price games involving warrants, a frequent issue in small cap biotech land.
• Well capitalized with $116 million of cash and no debt.  The Company estimates cash will last into 2022.
• Excellent CEO – I met Dr. Carole Ben-Maimon in January prior to the Zafgen transaction’s May close (but after its announcement in December 2019) and was very impressed.

Investment Concerns

• One and possibly two or more therapies ahead for a limited total patient population.  None of them are enzyme replacement therapies however.    
• Though very promising based on past successes, enzyme replacement therapies don’t always work:  https://sanfilipponews.com/2019/01/17/naglu-ert-fails-to-improve-clinical-outcomes-for-mps-iiib-patients/  .
• Pediatric Disease Voucher eligibility could be revoked when another therapy reaches the market first.
• While the platform has value, any other shots on goal have not been established yet, although the company is working on selecting diseases and will hopefully have something to announce before the next trial readout.
• Rare disease drugs are very expensive and could be a target of healthcare reform etc. There was an executive order on drug prices late yesterday that may be applicable to this matter although these types of drugs are still expensive outside the US.   
• Tightly held with limited liquidity although there are days when more than $1m has traded (still a small amount).  

Disclosure 

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst

Trial data in 1H21; additional programs; increased investor awareness