Rating Buy on Aurinia Pharmaceuticals (AUPH) stock, target allocation 2%. Upcoming nearest key catalyst: Phase 3 trial (AURORA) for voclosporin in treating lupus nephritis (LN), likely in November. Implied move in the stock price (+/-) 60%. For new entries or adding to existing positions, suggest waiting for few more weeks since the company could raise capital before AURORA trial data. Suggest using covered call strategy using short $10 strike, Dec 2019 exp. Call options to hedge against any unexpected safety issues rising in Phase 3 data. Targeting $8/share.
Lupus nephritis is the involvement of kidneys due to SLE (commonly known as lupus), which may have different grades of severity. Lupus affects approx 500k-1.5M people in the U.S. and approx. 40%-50% may have renal involvement. The current standard of treatment for active flared LN is high doses of iv steroids followed by step down to oral steroids and Cellcept (mycophenolate mofetil) (complete remission, CR only 10%-20% with this SOC). Adding Tacrolimus, another CNI has been shown to increase CR to 40-50% but has the risk of new-onset diabetes. Cyclophosphamide is combined with this standard of care therapy (steroids+cellcept) in severe grade 5 cases.
Aurinia Pharmaceuticals’ voclosporin is a calcineurin inhibitor (CNI), belonging to the same class of immunosuppressive drugs like cyclosporine. It has an advantage over cyclosporine since it is less nephrotoxic and does not need monitoring of drug levels. It also doesn’t have risk of new onset diabetes like Tacrolimus.
In a Phase 2b study, voclosporin showed significantly higher complete remission of 49% at 48 weeks (low dose group which is also the Phase 3 dose) vs. 24% in the control arm (placebo+SOC), p <0.001. CR increased with longer follow-up from 24 weeks to 48 weeks which is a good sign). CR was much higher than the histroical CR for steroids+cellcept (current SOC for mild-moderate LN) (see the figure below for details on AURA trial data).
(from the investor presentation)
Voclosporin has FDA Fast Track designation in treating LN. There was some controversy over mortality imbalance in the phase 2 data (due to increased pneumonia and pulmonary embolism) which was attributed to differences in medical care in some international centres and not related to the drug itself. The stock plunged after phase 2 data on safety concerns despite showing excellent efficacy but recovered after the management's explanation of the safety concerns. A KOL call (academic nephrologist) which I reviewed on Slingshot Insights considered Phase 2 a well-done study and was impressed with the efficacy.
Phase 3 AURORA enrollment has been finished. The management has improved on the Phase 2 design by removing the centers where safety concerns due to differences in medical care were seen. The followup period for Phase 3 AUORA (52 weeks) is very close to the period (48 weeks) where a significant separation between the treatment and placebo arms was seen in Phase 2 at the similar dose level and follow-up period as Phase 3. This increases the probability of meeting the primary endpoint in Phase 3. A longer-term follow-up RCT Phase 3 (AURORA 2, single center study in the U.S., studying longer-term efficacy and safety) in also planned with an additional followup of 2 years after 1 year of treatment in AURORA 1.
I modeled $500M in peak sales (2024) for Voclosporin in LN indication, Using risk-adjusted NPV method, there could be at least 40% upside from the current price based on LN indication alone. Aurinia also has other shots at the goal like voclosporin ophthalmic solution in treating dry eye syndrome, where it has a fair chance of success in Phase 3 trial against Restasis (which is a blockbuster with >$1B in annual sales) after changing the primary endpoint to the Schirmer test, which was also used in Restasis’ pivotal trials.
What are the risks to consider against the bull case?
During my research, I also listened to two KOL calls organized by Slingshot Insights (both academic nephrologists in NYC who treat LN patients regularly). KOLs were aware of voclosporin in LN but expressed some caution regarding repetition of safety issues seen in Phase 2 in the upcoming Phase 3 data (that's why I suggest small allocation of 2% and using covered calls strategy). They would consider using voclosporin in mild-moderate LN patients if FDA approved with clean safety profile and higher efficacy than SOC. For grade 5 LN, they prefer cyclophosphamide with SOC (voclosporin is being tested in mild-moderate LN). They also would like to do a kidney biopsy to rule out any nephrotoxicity due to voclosporin after treating for one year, since serum creatinine may not accurately reflect any CNI-related nephrotoxicity.
Another risk to consider is the ethnicity related variability in the response in Phase 3 (LN is more often seen in African Americans and Hispanic population who have a more difficult to treat disease), although Phase 2 succeeded despite these ethnicity differences.
Another near-term risk is a secondary equity offering by the company before Phase 3 data in November. Although cash reserves seem adequate $131M), quarterly cash burn of $13M, the management’s statement of ‘our priority is to maintain robust capital position at Aurinia’ ahead of upcoming AURORA1 data suggested this (the stock has gone down since the Q2 earnings call last week likely due to this reason).
The biggest risk if holding the stock through the Phase 3 AURORA 1 data in November is an unexpected repetition of safety concerns that happened in Phase 2 (theoretically higher immunosuppression by voclosporin>> higher incidence of infections like pneumonia, which is preventable by antibiotics prophylaxis like bactrim but one KOL mentioned that he reserves it for patients on high doses of steroids as bactrim can cause lupus flare).
In conclusion, I consider Aurinia's common stock worth a small allocation in a well-diversified biotech/pharma portfolio with hedging using options.
This article represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial advisor before making any investment. Investing in equities, especially biotech stocks has the risk of significant losses and may not be suitable for all investors. While the sources of information and data in this article have been checked, their accuracy cannot be completely guaranteed. The risks in this investment have been mentioned above.
I am/we are long AUPH and will enter the above mentioned option trade this week.