Receptos (Nasdaq: RCPT) looks even luckier than usual right now. The bleeding biotechnology firm has racked up such mind-blowing gains over the past few weeks, in fact, that even its own executives – who just dumped more than $35 million worth of the company’s highflying stock – must wonder how long its good fortune can actually last.
With its stock price recently exploding into the triple digits, making the company worth a staggering $2.9 billion years before it even hopes to seek approval of its very first drug, Receptos arguably looks priced beyond perfection at this point.
For starters, Receptos now owes more than a third of its lofty valuation to a Phase II study that barely even managed to achieve its primary goal. When Receptos issued a positive update about that ongoing trial a few weeks ago – sparking a wild celebration that expanded its market value by almost $1 billion in a single day – the firm actually provided enough underlying data to reveal that a tiny handful of patients happened to narrowly swing the results in its own favor.
Just pull out that announcement and grab your calculator. Once you complete a few simple equations, you’re bound to arrive at that striking conclusion yourself.
Start with the 199 patients that Receptos enrolled in its “Touchstone” trial, a Phase II study designed to test its leading drug candidate RPC1063 as a possible treatment for ulcerative colitis (UC), and then divide those subjects into three different groups: one for patients who received a “high” 1 milligram dose of the drug; one for patients who received a “low” 0.5 milligram dose of the same medication; and one for those who received an inactive placebo. Assume that Receptos made sure that its researchers distributed those subjects as evenly as possible, with 66.3 patients assigned to each arm of the trial. Now, you can estimate just how many patients actually recovered after taking the company’s experimental drug.
Of the patients treated with RPC1063 during the eight-week induction period of that clinical trial, only 16.4% of those who received the high dose and 13.8% of those who received the low dose – or the equivalent of 10.9 and 9.2 patients, respectively – achieved clinical remission to meet the primary endpoint of that ongoing study. Even so, the high-dose group somehow fared well enough to hit the primary endpoint of the study by achieving “statistically significant” positive results. In the second group, however, the recovery rate – lowered by just one or two patients – fell short of reaching that crucial goal.
Talk about a very near miss!
Who knows if RPC1063 really sent those patients into remission, either? After all, at least some of the patients who received nothing but a placebo actually wound up recovering on their own.
Company insiders have already struck it rich regardless. Unwilling to wait for Receptos to determine whether its experimental UC treatment actually works or not, a crowd of senior executives recently jumped at the chance to hit a surefire jackpot instead.
Earlier this week, nearly half-a-dozen members of the senior management team – including the CEO, the chief medical officer, the chief scientific officer, the chief technology officer and the senior vice president of corporate development – took part in a lucrative insider-selling spree that turned all of them into overnight multimillionaires. The biggest winner by far, Receptos CEO Faheed Hasnain walked away with a gigantic $21.9 million windfall that easily exceeded all of the multimillion-dollar fortunes collected by the remaining four executives combined.
By showcasing the company at a major investment conference right after its leaders executed those lucrative trades -- still unreported to the public at that point -- Receptos basically encouraged investors to buy the very stock that its own executives had just quietly sold.
Not that the actual host of that conference would necessarily care. After landing so much lucrative investment banking business from the company, Credit Suisse has clearly fallen in love with its pricey stock. Like all of the firms that the company has paid to assist with its public stock offerings, Credit Suisse always finds some way to maintain its bullish stand on Receptos, no matter how much its highflying shares happen to cost.
Rolling the Dice
Receptos might just need to raise some extra cash relatively soon, since the company has decided to take an expensive chance that it cannot presently afford. Based upon the preliminary results of its Phase II Touchstone study, Receptos now plans to test RPC1063 on more than 1,000 patients who suffer from UC and still others afflicted with a related disorder (Crohn’s disease) in new trials expensive enough to drain the company’s entire $300 million bank account.
Get ready for another dilutive stock offering.
Even after raising a mountain of cash through a pair of secondary offerings during the first half this year, Receptos estimates that it still might need another $150 million just to complete the Phase III trials that it has already started under the most advanced of its clinical programs. With management pegging the estimated costs of its UC and Crohn’s drug trials at $150 million apiece – and sounding more reluctant to partner with a richer company now that its stock price has flown through the roof – Receptos might feel tempted to tap the capital markets yet again.
Despite a clear invitation to rule out the possibility of near-term dilution last week, after all, Receptos stopped well short of making any promises.
“Regarding financing, as (the CEO) stated and as I think we really wanted to emphasize on this call, we really do have options now,” Receptos CFO Graham Cooper proclaimed during a recent conference call. “We think that the partnering option is more open to us than ever … but we are also feeling pretty confident about our ability to take the program further alone.
“So we’ve kind of taken a step back here to reassess what the strategy is and play this through,” Cooper added. “We have no plans to finance immediately. I think the decision on that will be made in coming months. But we are feeling pretty bullish and pretty optimistic about both options” given the current situation.
Learning a Lesson
Of course, as a veteran CFO in the risky biotech arena, Cooper should know by now just how fickle Lady Luck can sometimes be. Look what happened to the last two biotech companies that invited Cooper into the executive suite.
Geron (Nasdaq: GERN) took such a dramatic turn for the worse when Cooper briefly served as its finance chief that the poor company must have felt like the victim of a wicked curse. Once armed with a promising drug pipeline itself, Geron endured such a relentless string of failures during the final months of Cooper’s tenure that the company wound up abandoning two-thirds of its clinical trials and shedding 40% of its entire workforce. A prominent victim of those massive layoffs himself, Cooper lost his job less than a year after he walked through the door.
Prior to his short-lived career at that company, Cooper spent almost half-a-decade presiding over the finance department at another biotechnology firm that had taken some rather nasty spills of its own. Worth close to $20 a share as a young public company that had yet to crush any hopes, Orexigen Therapeutics (Nasdaq: OREX) soon lost its early bloom and sank into the low single digits over the next couple of years.
After a valiant comeback later proved fleeting, with Orexigen clawing its way back to $10 a share only to lose almost three-quarters of its value the very next day, Cooper finally decided to throw in the towel. Blaming a lengthy commute from his home in San Francisco to his corporate office in San Diego – the very city where he gladly works today – Cooper resigned for “personal reasons” without even bothering to line up another job. Already down to $3.30 a share when its veteran CFO decided to flee, Orexigen continued to spiral even lower in the months that followed, sinking all the way to $1.25 a share by the time it finally managed to hit rock-bottom.
While Cooper waited the better part of a year for his next position to materialize, he had taken such good care of himself when he had the chance that he could probably afford to survive for some time without a regular paycheck. During the first two years that Orexigen traded on the public stock exchange, Cooper cashed out enough cheap stock options to deposit almost $1 million into his savings account.
After Geron ran out of luck (and sent the CFO packing) before he could even try to make another handsome score, Cooper sure wasted no time waiting around for the perfect opportunity to claim his next enticing fortune. Taking part in a major insider-selling spree that would soon look premature, the CFO cashed out millions of dollars worth of dirt-cheap stock options just ahead of an explosive rally that would have allowed him to pocket a whole lot more. When he exercised all of those cheap options -- most of them still unvested a few months earlier -- however, Cooper seriously diminished his available supply by selling more than one-third of his entire stake in the company.
Too bad he can't find some way to magically go back in time.
Or maybe not. Maybe the CFO and his fellow insiders would simply repeat history all over again. Mabye they never dreamed that Receptos might soon report news capable of propelling the stock to such remarkable highs. Indeed, maybe they felt impatient to start booking their lucrative gains for all sorts of reasons that -- even in hindsight -- actually make perfect sense.
Let’s explore some potential motives and see.
Fearing the Worst?
Don't forget: When Receptos decided to test RPC1063 as a possible treatment for UC, the company launched its study without any solid clinical evidence to suggest that its experimental drug -- a novel compound that bears no resemblance to existing medications – could actually relieve that particular disease. So the closer that Receptos came to releasing any data from that risky trial, the more nervous company insiders might have understandably felt.
Even Phase II studies cost a lot of money, after all, and most of them tend to end in failure. A setback like that would obviously come at some kind of a price -- maybe even a sizable one. It might rob the stock of its powerful momentum, at the very least.
Without that force, Receptos might start drifting in the opposite direction.
Accustomed to traveling straight north at record speed instead, Receptos had already racked up massive gains by then – almost quintupling in price since its debut as a $14 stock the previous year – on soaring hopes that RPC1063 might one day become a blockbuster MS drug. Receptos will face a rather formidable competitor (treated almost as an afterthought by the company, for some reason) if it ever enters that challenging market, though. While Receptos likes to trumpet RPC1063 as a safer version of a similar MS drug, the company might want to worry a little bit more about the new bestseller that actually dominates its target market instead.
One of the most valuable drugs that Biogen (Nasdaq: BIIB) has developed since it opened for business more than a quarter-century ago, Tecfidera won approval in March of last year and immediately took the U.S. market by storm. An overnight sensation that surprised even bullish analysts by making such an incredible splash, Tecfidera quickly overcame the generous multiyear headstart enjoyed by Gilenya – a pill that works very much like RPC1063 itself – to become the bestselling oral treatment for MS in a matter of months. With Tecfidera now generating more revenue than any other blockbuster in its crowded portfolio, Biogen will obviously fight to protect that valuable drug from any new rival that even tries to compete on its familiar turf.
The oldest independent biotech company in the world, Biogen has made a name for itself by developing a number of wildly popular MS treatments to become the most successful player in the crowded market that Receptos hopes to eventually enter someday. The company boasts more bestsellers than any other player in that fiercely competitive space, with almost half of the patients who suffer from MS in the U.S. last year relying on at least one of its drugs to control their disease. Well-equipped to defend its newest blockbuster from any future competitive threats, that industry heavyweight has armed itself with both an impressive sales force and years of compelling data that Receptos itself sorely lacks.
Take a look at just how much Biogen has already accomplished ahead of a potential battle with its wannabe rival and then compare that with how much progress Receptos itself still needs to make.
Following successful Phase II studies that began a full decade ago, Biogen enrolled thousands of patients in a pair of extensive Phase III trials designed to test Tecfidera as a new treatment for the most prevalent form of MS and then spent years collecting data that established the drug as both safe and highly effective. After spending half of a decade conducting those elaborate trials, Biogen finally presented its evidence to the U.S. Food and Drug Administration and sought formal approval for Tecfidera as a new oral treatment for relapsing-remitting MS (RRMS) and then waited another year for the FDA to deliver its positive verdict. By the time that Biogen secured approval to market Tecfidera in Europe the following year (a decision rendered just nine months ago), the company had invested almost an entire decade pursuing its new blockbuster drug.
Still not finished with its ongoing research, Biogen continues to monitor more than 1,700 patients who participated in its clinical studies and remain on Tecfidera to this very day. With some of those patients relying on Tecfidera to control their disease for up to seven-and-a-half years at this point, Biogen has clearly gathered a wealth of evidence to support – and protect – its popular blockbuster drug.
Not that Biogen seems terribly worried. Thanks to all of the patients flocking to its new MS treatment, business is booming right now.
“Year-to-date, our market research suggests that Tecfidera is capturing a third of all new patient starts and over 40% of patients switching therapies,” Biogen’s head of global commercial operations declared less than a month ago. “Tecfidera continues to capture share while attracting a broadening set of patients from the MS population.”
Fighting the Odds
Biogen will remain free to expand its growing share of that lucrative market – and solidify Tecfidera as the oral MS treatment of choice in countries around the globe – without any pesky interference from Receptos for quite a while. By the time that Biogen faces any possible competition from its wannabe rival, the company will enjoy at least a four-year headstart that could prove rather daunting for even a well-established player in the notoriously cutthroat MS field.
At this point, Receptos still needs to finish enrolling patients in the first of two major Phase III trials that will take years to complete before the company can even try to seek approval of its competing MS drug. For now, Receptos must rely on the results of a Phase II study involving just 258 patients (one-third of them treated with a placebo instead of RPC1063 itself) as the strongest evidence supporting its hopes for a blockbuster MS drug of its own. Until Receptos tests RPC1063 on far more patients in much riskier Phase III trials – the final resting place for so many once-promising drugs – the company will obviously remain on the sidelines waiting for a mere chance to compete.
Still, let’s generously assume that Receptos breezes through that process with flying colors and ultimately wins approval of RPC1063 as a new oral treatment for MS a few years on down the road. Let’s further assume that Receptos follows through on its obvious plans to market RPC1063 as a safer version of Gilenya, too. Receptos would still face stiff competition from a more popular drug when RPC1063 finally arrived on the market and – with Gilenya set to lose crucial patent protection in early 2019 – the potential threat of cheaper generics just a year or so after that.
Don’t be surprised if Receptos insiders sell a lot more stock before the company even gets a chance to test its luck against those challenging odds. With Receptos trading at record highs above $105 a share – more than quadruple the average price of its 1.9 million outstanding stock options – insiders might feel understandably tempted to keep on cashing out at current levels instead of waiting around for the mere possibility of even more staggering gains.
As recently as last month, after all, some of those insiders clearly felt willing to sell a whole bunch of stock at barely half of the current price. Together, the CFO and several other noteworthy insiders – including the chief medical officer, the chief accounting officer and a pair of boardroom directors who manage venture funds with gigantic stakes in the company – sold enough of the stock the month before it exploded in value, in fact, that they managed to make almost as much (a combined $29.8 million) as those who later sold near the top.
Let’s see who runs out of patience and decides to make the next move.
The CEO still owns an awful lot of stock that he could choose to sell. A few years before Receptos went public, after all, the board showered its leader with 500,000 shares of restricted stock (the equivalent of 7% of the entire firm at the time) and then promised to make sure that all of those shares vested by Wednesday of next week. Even after all of the stock that he unloaded on Monday and Tuesday, he should still own around 300,000 of those shares – worth more than $30 million at current market prices – and enjoy the freedom to dump then (in a matter of days) whenever he likes.
Of course, Receptos itself might just beat him to the punch. As a bleeding biotechnology firm that cannot possibly afford to cover all of its clinical trials, the company will obviously need to raise a lot of money at some point. It’s just a matter of time.
Since Receptos has openly acknowledged the threat of massive dilution – and so many other serious risks – in its own regulatory filings (including the recent quarterly report quoted verbatim below), we’ll end our cautionary discussion on that note and let the company itself take over from here.
- Potential dilution: “The Company had cash, cash equivalents and short-term investments of $333.4 million as of June 30, 2014 … Our existing cash and cash equivalents and our access to funds through our credit and security agreement with MidCap Funding III, LLC (MidCap), will not be sufficient for us to complete advanced clinical development of any of our product candidates or, if applicable, to commercialize any product candidate that is approved. Accordingly, we will continue to require substantial additional capital to continue our clinical development activities and potentially engage in commercialization activities.”
- Risky trials: “Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and previous clinical trials as well as data from any interim analysis of ongoing clinical trials of our product candidates, as well as studies and trials of other products with similar mechanisms of action to our product candidates, may not be predictive of the results of ongoing or future clinical trials. For example, the positive results generated to date in preclinical and Phase 1 and Phase 2 clinical studies for RPC1063 in RMS do not ensure that the current Phase 3 portion of our Phase 2/3 study for RMS or later clinical trials will demonstrate similar results or observations. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and earlier clinical trials.”
- Limited population: “With respect to our clinical development of RPC1063 in RMS, the recent availability of oral therapies such as Gilenya® (fingolimod), Aubagio® (teriflunomide) and Tecfidera® (dimethyl fumarate) may cause patients to be less willing to participate in our clinical trial for an oral therapy in regions in which an oral therapy has been approved … In addition, the relatively limited number of RMS patients worldwide (estimated at 500,000) may make enrollment more challenging.”
- Competitive threats: “Oral RMS therapies in particular represent competition for us, since RPC1063 is being developed as an oral therapy. The first oral treatment for RMS, Novartis’ Gilenya®, was approved in September 2010. In 2013, Gilenya® achieved approximately $1.9 billion in worldwide sales and in the first quarter of 2014 achieved $552 million in worldwide sales, an increase of 31% over 2013 first quarter sales. Like RPC1063, Gilenya® is an S1PR modulator, although non-selective. Whereas Gilenya® is already approved and is currently being marketed, RPC1063 is in the Phase 2 and Phase 3 portions of a Phase 2/3 trial for RMS and will require significant additional clinical development before it will be eligible for approval, if ever. Gilenya® will thus have at least a several-year period, prior to any market entrance by RPC1063, in which to acquire additional brand identity and market share. Aside from Gilenya®, other oral therapies for RMS have recently been, or may soon be, approved. Specifically, in September 2012, Genzyme’s Aubagio® became the second oral therapy approved for RMS, and in March 2013, Biogen Idec’s Tecfidera® became the third oral therapy approved for RMS … In June 2014, Merck KGaA announced that it had reached a mutual agreement with Ono Pharmaceuticals to terminate the license agreement for a fourth program, ceralifimod (Ono-4641), because it did not meet Merck’s criteria for further investment.”
- Established Rival: “Although we believe RPC1063 has the potential to demonstrate differentiation as the best S1PR modulator in RMS, as clinical development of RPC1063 is conducted and trial results become known it is possible that the data will not support such differentiation, whether as a result of the effectiveness of RPC1063 in RMS or as a result of its safety profile. With respect to efficacy, for example, whereas Gilenya® is a non-selective S1PR modulator with activity on four of the five S1P receptors and RPC1063 is by comparison more selective for the S1P1R, it is possible that efficacy for an S1PR modulator benefits from, and is potentially dependent upon, broader activity among the S1P receptors and that RPC1063’s profile will not result in best-among-S1PR modulator effectiveness, or even meaningful effectiveness … In addition, at such time as RPC1063 is approved for marketing in RMS, if ever, the patent protection for Gilenya® may have lapsed, in which case generic treatments of Gilenya® may be available. The competition represented by generic alternatives to or versions of an S1PR modulator, including the expected lower cost of any such generic alternatives, would adversely affect the ability of RPC1063, if approved, to gain market share and otherwise be commercialized successfully.”
- Necessary Edge: “Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make our product candidates less competitive. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful.”
- Choosy partners: “We may seek a development and commercial partner for RPC1063, particularly since the substantial costs of developing an RMS therapy in later-stage clinical trials may otherwise be prohibitive. (However), we do not intend to enter into a collaboration agreement for the development of RPC1063 unless we retain key decision-making, development and/or commercialization rights, and it may be difficult to find a suitable partner willing to share such rights … There are a limited number of potential partners, and we expect to face competition in seeking appropriate partners.”
- Ongoing losses: “We have incurred significant operating losses since our inception in 2008 and, as of June 30, 2014, we had an accumulated deficit of $140.6 million … We expect to continue to incur significant expenses and increasing operating losses for at least the next several years.”
* Important Disclosure: The owners of TheStreetSweeper established a short position in Receptos (RCPT) ahead of the publication of this report and stand to profit on any future declines in the price of the stock. As a matter of policy, however, TheStreetSweeper prohibits the journalists on its editorial staff -- including the author of this report -- from taking any financial positions in the companies that they cover. To contact Melissa Davis, the author of this story, please send an email to [email protected]