This is my first look at Ultragenyx Pharmaceuticals (NASDAQ: RARE), a small biotech with a long name and an active business. Its specific niche of orphan and ultra-orphan diseases presents additional challenges for the company and its shareholders, as I will discuss below.
Ultragenyx has significant reliable sources of income
The initial challenge presented by Ultragenyx is to understand its area of specialization. The following excerpt from the company profile describing its therapies is illustrative:
- Crysvita (burosumab), an antibody targeting fibroblast growth factor 23 for the treatment of X-linked hypophosphatemia, as well as tumor-induced osteomalacia;
- Mepsevii [VESTRONIDASE ALFA]enzyme replacement therapy for the treatment of children and adults with mucopolysaccharidosis VII [Sly Syndrome] and;
- Dojolvi [UX007/TRIHEPTANOIN] for the treatment of long chain fatty acid oxidation disorders [LC-FAOD]…
The FDA first approved Mepsevii in 11/2017. Fewer than 100 cases have been reported in the United States; the worldwide prevalence is estimated at ~1:250,000 births. The FDA awarded it a Priority Review Voucher for Rare Pediatric Diseases [PRV]which he quickly sold to Novartis (NVS) for $130 million.
Shortly after, Crysvita was first approved by the FDA in 04/2018 to treat X-linked hypophosphatemia [XLH]. XLH is a rare (prevalence ~1:20,000) inherited form of rickets for which vitamin D therapy is ineffective. In his latest 10-Q, he estimates that there are around 48,000 XLH patients in the developed world.
Later in 06/2022, the FDA approved Crysvita to treat tumor-induced osteomalacia [TIO]. TIO is exceptionally rare. One article notes that approximately 1,000 cases of TIO have been reported worldwide. Its extreme rarity contributes to the likelihood of misdiagnosis.
The FDA approved Dojolvi for the treatment of LC-FAOD in 06/2020. Ultragenyx estimates that it affects between 2,000 and 3,500 people in the United States.
Ultranyx 10-Q Q2 2022 lists the following disaggregated revenue over its 3 and 6 month periods ending 06/30/2021 and 2022:
Ultragenyx’s interest in Crysvita (KRN23) grew out of a 2013 collaboration with Kyowa Hakko Kirin Co., Ltd. (OTCPK: KYKOY) to develop and commercialize KRN23. At the time, Kyowa Hakko Kirin was completing a Phase 1/2 study in adults with XLH in the United States and Canada.
During its second quarter 2022 earnings call (the “Call”), CCO Harris indicated that Crysvita’s revenue to date gives it confidence to guide Crysvita’s full-year 2022 revenue from $250 million to $260 million. dollars in the territories of Ultragenyx. He further confirmed earlier forecasts of $55-65 million in Dojolvi revenue. He offered no guidance to Mepsevii.
Ultragenyx’s expenses far exceed his income.
Ultragenyx’s balance between revenue from customers and operating expenses is unfortunately skewed. Its quarterly expenses are shown below:
A simple glance shows how its handsome quarterly revenue of around $89 million mentioned above is totally dwarfed by operating expenses of around $231 million. All three expense categories soared in Q2 2022 compared to Q2 2021, cost of sales around 164%, R&D around 36%, general and administrative expenses around 28%. In total, expenditure increased by approximately 36%.
You can’t go to the grocery store without lamenting inflation; the problem seems to have hit Ultragenyx with extra force. CFO Dier’s presentation on the call provides helpful insight into the expected shape of future spending, although it does not provide guidance on spending.
… 2022 is a peak year for us, as we have launched several late-stage clinical programs under license from Evkeeza [Evinacumab-dgnb] completed the acquisition of [GeneTx] and complete the construction of our gene therapy manufacturing facility.
In 2023, we do not anticipate any additional one-time events of this nature or significant capital expenditures and expect general and administrative expenses to decrease from 2022 as we transfer US and Canadian commercialization responsibilities from Crysvita to KKC .
We will continue to invest in our clinical and preclinical programs, as indicated, and the overall net effect across the business will then be a decrease in net cash burn.
The referenced Evkeeza license refers to its agreement dated 01/2022 with Regeneron (REGN) to develop, commercialize and clinically distribute Evkeeza (evinacumab-dgnb) in the United States. The deal was for $30 million upfront with $63 million in milestones.
The acquisition of GeneTx refers to the initial $75 million exercise by Ultragenyx in 07/2022 of its option to acquire its partner GeneTx; GeneTx has just published encouraging interim data from its Phase 1/2 open-label, dose-escalating study of GTX-102 for the treatment of Angelman syndrome [AS].
During the call, there were a variety of questions showing great interest in the AS program. CEO Kakkis did not mince words in expressing his support for this program. He said Ultragenyx was “all in” on it. He enthused:
…the excellent data we have seen in the Phase I/II study to date. It is rare to see a significant improvement in developmental function as we have seen recently. This is something I haven’t seen in 30 years of drug development.
Ultragenyx has a big pipeline and strong liquidity to build it.
Ultragenyx lists its programs in its second quarter 2022 results presentation as follows:
Its four late-stage molecules include its setrusumab (UX143), UX111 (ABO-102), DTX401 and DTX301. Setrusumab is the subject of two studies with estimated completion dates of 2026, so it may be some time before it becomes a revenue driver. DTX301 is also a study whose completion dates suggest it is more likely to be a revenue driver in the medium term than in the short term.
With the estimated primary completion of 04/2023 and the estimated study completion date of 04/2024 for its Phase 3, DTX401 is likely to be a shorter-term factor. As for UX111, during the call, CEO Kakkis hinted that an early filing was possible “based on compelling biomarker data.”
Ultragenyx’s clinical milestone slide (below) from its Q2 2022 presentation shows no clear near-term revenue opportunity:
Regarding the cash with which to grow his extensive pipeline, CFO Dier said the following on the call:
We ended the quarter with approximately $706 million in cash, cash equivalents and marketable securities. Subsequent to quarter-end, in July, we raised $500 million in dilutive non-crowd capital through dilutive non-crowd capital transactions with OMERS Capital Markets for the sale of a portion of our North American Crysvita royalty .
…We are well capitalized with over $1 billion in the bank and we are making operational decisions to phase out spending on our development programs and slow headcount growth in order to manage our consumption.
Ultragenyx appears to be a well-run biotech with a viable plan and proven expertise in its chosen niche of rare and ultra-rare disease therapies. Its chart below illustrates its current appeal to investors:
For Ultragenyx to be more powerful, it needs fuel. For Ultragenyx, the most powerful fuel is new approvals. Its pipeline has no current compelling catalysts. The only molecule looking to offer new revenue opportunities is its ex-US rights to Evkeeza. The slide below from Ultragenyx’s Q2 2022 earnings presentation gives a sense of the opportunity here:
Frustratingly, Ultragenyx barely mentions Evkeeza during the call; certainly, it offers no indication of Evkeeza’s earnings. It is difficult to anticipate that Evkeeza will be able to generate sufficient revenue outside of the United States to make a difference for Ultragenyx anytime soon.
As a result, I view Ultragenyx as likely to generate lackluster trade over the next few years. In a difficult market, I expect its trajectory to continue its pessimistic trajectory.