This article was co-authored by Stepan Lavrouk. Stepan is an investment analyst with Almington Capital.
Radius Health (RDUS) is a small-cap biotechnology company specializing in the development of treatments for osteoporosis and breast cancer. Tymlos (abaloparatide), its only approved drug, got the green-light from the FDA in April 2017. Over the last year, the stock has fluctuated from a high of $48.35 in July to a low of $26.35 in November and, as of writing, is trading at $35.95 – just about where it was a year ago.
So, is this a long-term growth prospect, or has the best already come and gone for Radius?
In this article, we seek to answer that question by looking at the bull and bear cases. Ultimately, we find the Radius story to be fairly compelling in the short-run, but there are significant concerns for its long-term viability in the face of competition in the osteoporosis space.
The Bull Case
Tymlos Storms Ahead
Tymlos is currently approved for the treatment of osteoporosis only for postmenopausal women at high risk of bone fracture, but the company is working on widening the range of illnesses for which it can be prescribed. As outlined elsewhere, the market for the treatment of osteoporosis is estimated to be worth $7 billion, and is projected to expand as the US population ages. Sales have been expanding at a steady pace: $12.7 million over the course of 2017, $7.6 million of which came in the fourth quarter alone.
Potential Riches in the Pipeline
Radius has a number of other drugs in the pipeline. The company is working on getting a transdermal patch version of Tymlos approved. Currently, the drug is administered via injection; a transdermal patch would likely find a wider market. It also has a number of treatments for estrogen receptor positive (ER+) breast cancer, including Elacestrant, a nonsteroidal combined selective estrogen receptor modulator and degrader about to enter Phase 2 clinical trials. While these pipeline candidates are promising, they do not appear to add much to the company’s valuation. However, it is encouraging that management is thinking long-term and not solely focusing on the market for osteoporosis treatment.
Profiting from Amgen’s Stumbles
Radius has benefitted hugely over the last year from the setbacks faced by Amgen (AMGN), which has been trying to bring its own next-generation osteoporosis treatment to market. A late-stage trial for Evenity, Amgen’s candidate drug, revealed high levels of serious cardiac side-effects. The Evenity trial results sent Radius’ shares soaring, going up by over 20%. As we will discuss momentarily, the market for osteoporosis treatment is very crowded, so the importance of competitor failure is magnified. While Amgen is not the only potential threat in the next-generation osteoporosis treatment space, its failure represents a positive sign for Radius’ competitive environment.
The Bear Case
Forteo Holds Pole Position
The foremost challenge facing Radius is stiff competition in the osteoporosis space. The current standard of care is Forteo (teriparatide), which is produced by Eli Lilly (LLY) and has been on the market for more than 15 years. True, Tymlos has a more competitive price tag of about $1,600 per month of treatment compared to $3,200 for Forteo. However, Forteo is approved for the treatment for osteoporosis in men, as well as postmenopausal women, making it a more attractive drug for healthcare providers.
The EU Is Not Impressed
Forteo is approved for prescription in the European Union. Tymlos has not been so lucky. On March 22nd, the European Medicine Agency’s Committee for Medicinal Products for Human Use, or CHMP, communicated a negative trend vote on Tymlos. While Radius has stated its intention to appeal the decision and continue to fight for EU recognition, that will take considerable time.
David vs. Goliath
Scale is also an issue. It is just generally difficult for a small-cap to compete with a giant like Eli Lilly, which benefits from a large sales force and long-standing relationships with physicians and hospitals. Eli Lilly’s resources dwarf those available to Radius, which creates real challenges for the upstart trying to unseat the current standard of care.
Rise of the Generics
Time is another enemy facing Radius. Specifically, Eli Lilly’s patents for Forteo are set to run out in August 2019. Production of generic versions of teriparatide will almost certainly begin soon after that. This is likely to wipe out any edge that Radius may hold with regards to pricing. However, Tymlos has demonstrated slightly greater efficacy than Forteo – and presumably generic teriparatide – so there is a chance it will at least carve out a niche for itself as a better but more expensive treatment. That presents its own challenges, of course, since it is difficult to shift a product from the bargain aisle to the premium section once it is established in consumers’ minds that it is the supposed low-cost alternative.
Investor’s Eye View
It remains to be seen whether Radius will be able to succeed in the face of competition from Eli Lilly, as well as from the inevitable wave of generic competitors. The company will have to do significant groundwork if it hopes to build and retain its customer base in the face of cheap generics coming on the market as early as 2020.
We would like to see sales growth pick up in pace before committing long-term to Radius as an investment. It has to carve out significant market share, or at least appear to be on course to doing so, in the relative near term. If it can secure wider approval, such as for use in men in the US and for anyone in the EU, then its efficacy story might be enough to sustain it even in the face of generic competition down the line. A Phase 3 trial for men with osteoporosis was announced in a press release on March 30th, which is a positive sign.
That said, the stock does present a potentially interesting shorter-term trading opportunity. Specifically, as mentioned before, Radius is appealing the CHMP decision. If the company manages to change the committee’s collective mind, it would likely mean a substantial boost for the stock – we have written about how to trade around various catalysts in the small-cap biotech space here.
Financially, Radius is in decent shape. The company reported a net loss of $71 million for Q4 2017, leaving $430.3 million in cash, cash equivalents, and marketable securities. That represents six quarters of runway, assuming the burn rate is sustained. However, as Tymlos continues to penetrate the market, we anticipate those losses to diminish progressively, and eventually turn to net profits. However, the exact pace of that revenue growth is still an open question, given how short a time Tymlos has been on the market.
Radius is on our watch list, but we are not yet ready to pull the trigger on adding it to the portfolio. For investors interested in a short-term speculative play, there are opportunities, and the company could well track back up as Tymlos sales improve.
Radius is definitely a company worth keeping an eye on.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Article source: https://seekingalpha.com/article/4160257-radius-health-worth-time