I recently noted large insider buying in a beaten down pharma stock, vTv Therapeutics (NASDAQ: VTVT). The insider made a series of large volume common stock purchases on almost a monthly basis this year. With the stock being so beaten down and upcoming catalysts, I decided to take a deeper dive into this stock.
Date of insider buying: May 16, 2019 per SEC filing.
Dollar value of insider purchase: $2.5 million of common stock.
Who is the insider?
A director on the Board, Ronald Perelman. He is a famous businessman and philanthropist with a net worth of $9.4 billion. He is listed as the 49th richest American by the Forbes. He has a history of several successful investments using his holding company, MacAndrews and Forbes and also used investor activism.
Mr. Perelman has been buying vTv Therapeutics’ stock recently and also bought $3 million of stock in February and another $3 million of stock in January this year. He owns 17.8 million shares of the company after the most recent purchase.
Near-term catalyst for the company:
The full R&D pipeline of the company is available here.
The SimpliciT-1 Study, phase 2 (part 1) data for TTP399 in treating type 1 diabetes mellitus, DM is expected in June this year and the part 2 data is expected in Q1, 2020. Phase 1 data will test the safety after one week of treatment while the part 2 will test the efficacy and safety after 12 weeks of treatment. The trial is multi-center, randomized, double-blind, parallel-group design.
Part 1 dose: 1200 mg/day for 7 days (higher than the successful phase 2 trial in type 2 DM mentioned below) but is only testing safety. In the Part 2 of this phase 2 study, 800 mg/day of the drug will be tested for 12 weeks.
TTP399 is an orally administered, small molecule, liver selective glucokinase inhibitor which is being tested for treating both type 1 and 2 DM. Previous attempts to target glucokinase inhibition in type 2 DM were not successful, however, TTP399 has shown early success due to the fact that it selective for the liver. In a phase 2 trial, it has shown proof of concept by significant reduction in HbA1C levels after 6 months of treatment (reduction of 0.9 mg/dl) with acceptable safety (no hypoglycemia, hyperlipidemia, elevation in liver enzymes were seen). Glucokinase inhibition is a novel therapeutic target for treating diabetes since it acts by modulating liver glucose metabolism that maintains a balance between glucose production and consumption by liver. The proof-of-concept has also been shown in animal models in type 1 DM.
In my opinion, the part 1 of the phase 2 study in June is not expected to be a big price moving catalyst since it is only testing safety. However, the part 2 data in Q1, 2020 could be a big price mover since it is also measuring clinical efficacy.
The annual cost of managing DM is $245 billion in the U.S. alone. The target market is approx. 1.25 million adults and children with type 1 DM in the U.S. alone and an additional new 40,000 cases diagnosed every year. Type 1 DM represents approx. 5% of all cases of DM. Since type 1 DM results due to autoimmune destruction of insulin producing cells in the pancreas, the mainstay of therapy is dietary control and intensive insulin therapy. Oral agents like metformin, and GLP-1 antagonists like exenatide have been tested clinically in type 1 DM but their safety and efficacy in this indication is not supported by well-conducted clinical trials. Since there are no other glucokinase inhibitors in the markets in treating DM, TTP399 could address a large target market if successful and could represent an entirely new therapeutic way to treat type 1 DM and could be the first oral therapy to be FDA approved in type 1 DM. Novartis recently received approval for semaglutide, the first oral GLP-1 antagonist in type 2 DM. Oral semaglutide is expected to reach approx. $2.5 billion in U.S. annual sales in 2024. The annual cost of managing type 1 DM is estimated as approx. $6000/year which includes primarily insulin therapy. I expect TTP399 to be priced at approx $3000/year in the base case (similar to Victoza). Insulin therapy in type 1 DM is commonly associated with hypoglycemia (low glucose level) which can even be life threatening. Since type 1 DM is commonly diagnosed when the patient is a child, the administration and titration of insulin therapy becomes even more challenging and required significant time commitment from caregivers. Since TPP399 does not have risk of hypoglycemia, I expect it to be used even as a first line oral therapy (similar to the treatment regimen in type 2 DM where oral agents are used first before insulin therapy). If insulin is required later, it can be added on to TPP399 in type 1 DM and TPP399 combination therapy can help to lower the dose of insulin, thus reducing the risk of hypoglycemia in type 1 DM.
Using my estimates of annual price and the statistics for target market, TPP399 could be addressing approx. $3.75 billion in annual revenue opportunity just in the U.S. alone (from existing cases) and an additional $240M/year in annual revenue per year due to new cases. Pharmaceutical companies usually trade at a price/sales ratio of 4.37 (NYU-Stern data). Compared to this huge revenue opportunity, vTv’s market cap is jut $90 million.
Risks in this investment: This is a speculative high reward, high risk investment. I have just analyzed the market opportunity for TPP399 in type 1 DM while investors are also getting other molecules in the pipeline. In the near-term, the biggest risk in my opinion is limited cash reserves for which the company may need frequent capital raise. I expect them to have approx. $10 million in cash reserves. Long-term debt is $2.5 million. Operating cash use was $5.4 million for Q1, 2019, thus, I expect more equity dilution this year before investors get the key catalyst early next year to cash out their investments.
Prominent institutional investors in the company’s common stock include Sabby Management with $222 million AUM.
In conclusion, I consider this a speculative, but high reward, high risk investment. The stock seems to be forming a bottom and could trade up to approx $3.50-$4 level over next several months which is a resistance. The stock has been running up recently and could pull back to approx. $1.50-$1.60 support. However at its current beaten down level, the stock appears to have asymmetrical upside/downside ratio and showed strength even on a down market day like today. While this company would not belong to my top 20 core long term biotech list, a 0.5% capital allocation is worthwhile as a lottery ticket investment (supported by large insider buying and above target market analysis). I plan to buy half of my position at this level (for a runup to $2 level) and the rest half if we see a pullback to $1.60 level on market correction. My plan is to hold till the above mentioned part 2, phase 2 data for TPP399 in type 1DM in Q1 next year aiming at 2-3x return.
Disclaimer: This article represents my own opinion and is not a substitute for professional investment advice. This article is published for educational purpose. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser 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.
I/we have no position in the securities mentioned but may initiate a long stock position in the next 72 hours.