Description

Versartis (VSAR) is a long. Amidst a raging bear market in biotech, I think Versartis offers unique risk/reward. This is a relatively short and simple idea, in as much that biotech can be simple. The heart of the matter is this : A phase III asset with what appears to me to be a very inexpensive valuation. 

VSAR is developing a twice monthly form of HGH (human growth hormone) for children of short stature, suffering from HGH deficiency. VSAR is also working on a once monthly dose of HGH for adults, who are suffering from cardiovascular and/or nuromuscular issues. 

At present, HGH is administered in a daily injectible form, which means that for kids (typically 7-13 years old), the procedure entails an uncomfortable injection every day. The burden of this leads to a large amount of noncompliance, and noncompliance leads to sub optimal results. 

VSAR's drug for children, VRS-317 is in phase III trials, with data expected to be released in Q2 or Q3 2017. In the phase II trial, a doseage of 2.5mg was used, and showed that the twice per month injection attainted the same results (non-inferior), as the current standard of care for HGH today. This was also attained with near 100% compliance, and the the only side effect was pain from the shot at the site of injection.

In the phase III trials, VSAR is actually testing a dosage of 3.5mg, and importantly, the endpoint is non-inferiority to the current standard. What this means, is that the trials does not have to show superiority, merely equivalency. One other advantage to the current standard, is that an auto injector will be utilized, which entails a smaller needle, and does not require refrigeration (similar to an epiPen).

VSAR's adult HGH trials are in phase II, with data to be relaeased sometime in late 2016.

VSAR is also conducting a phase II/III trial in Japan, where deficiency is unusually prevelant and untreated. Data from this trial is expected in mid-2018. 

Mangement appears solid : Jay Shepard, CEO, was CEO of two prior companies who were purchased by Pfizer and Amgen. Those companies are Nextwave and Iiylsa. Senior managment is also comprised of executives who worked in the HGH divisions of Genentech and Novo Nordisk.

The market for HGH in kids is growing slowly, but presently a $2B opportunity. The adult market is approximately $1B, and growing a little more quickly. If VRS-317 receives approval, I see no reason why VSAR should not capture the majority of the pediatric market. If the adult trials also prove successful, it is not a stretch to assume that this could be a $1.5B product.

Valuation : This is really interesting...You have a phase III asset, with important data due relatively soon, on top of a solid phase II trial. Some of you might be more scientific in coming up for a value of this, but to me, a $22mm enterprise value seems like a really interesting opportunity for what could be a multi-bagger. If the trials fail, I suppose you could have a situation like Avalance (AAVL) where you wind up with a negative enterprise value, but the bottom line is, I find it difficult to see how you loose your entire investment, and you just might make many multiples. Based upon the current burn rate, their should be $50-$70mm of cash upon release of the data. 

Approximately 1/3 of the shares outstanding are controlled by Baker Brothers (approx. 11%....BB were considered reigning genius's until 2016), Perceptive (8%), and Fidelity (14%). As a layman, the holder's list of anything biotech related is important to me; not simply "smart" money as is the case with VRX, but money consdered to be expert in life sci/biotech. Not to go too far afield, but this seems like a situation that would also be interesting to the Baupost's of the world. 

Risks : Opko, Ascentis, and Novo are working on a once weekly version, though VSAR should be the first to market, and twice per month is superior to four times per month. 

Catalyst

Phase III in children, and a more stable biotech market.