Aurinia: Commercial Stage Company With Major Headwinds (NASDAQ:AUPH)

Aurinia’s (NASDAQ:AUPH) price movement over the last 12 months seems predicated on 3 things – key management changes, lackluster lupkynis sales, and most importantly, discontinuous whispers of M&A chatter. I say “discontinuous” because the chatter keeps happening, then subsiding. Multiple companies have been named as potential buyers, but poor sales, patent challenges, and then a few quick hires in the C-Suite have challenged the buyout assumptions. Indeed, my previous article on AUPH, written exactly a year ago, was primarily focused on the buyout chatter. One year hence, there’s been no buyout, and the stock is down 80%. What a poor show.

In that old article, I talked about Bloomberg claiming Bristol Myers Squibb was interested in buying AUPH. Nothing panned out. Then I mentioned a “Betaville rare alert” that came out about multiple pharma companies – GlaxoSmithKline (NYSE:GSK), Roche (OTCQX:RHHBY) and Otsuka Pharmaceutical (OTCPK:OTSKF) – being interested in buying Aurinia. I also talked about synergies – “GSK has the other approved LN drug, Roche has a phase 3 candidate targeting LN, and Otsuka partners with Aurinia in Japan and some other Asian territories.” The Otsuka speculation played out through July this year, though nothing has emerged from it yet. GSK actually had to publicly deny reports that it was interested in buying AUPH.

Meanwhile, in November last year, Seeking Alpha noted a slowing down of lupkynis sales:

Following the FDA approval for LUPKYNIS in January, Aurinia has secured over 1,265 patient start forms (PSFs) as of Nov. 03. During the quarter, the company secured 412 PSFs compared to 415 in Q2 2021, when the PSFs grew more than 60% from Q1 2021.

So PFS in Q1 was 260 ish, which jumped 60% to 415 in Q2, but then stagnated in Q3, remaining at 412. While the CEO termed this a slight slowdown and a seasonal variation, this was definitely not great news for AUPH. There was also a mixed shelf offering, which brought down the stock around that time. The impact was somewhat softened by long-term data from the AURORA 2 trial, which showed voclosporin’s benefit in LN patients.

Takeover speculation continued unabated throughout this year. In January, a STATNEWS report, citing Goldman Sachs’ consultation with Biogen (BIIB) for possible M&A, considered Aurinia as one of the takeover targets for Biogen, which it said was considering buying into late stage assets. That speculation, too, did not pan out; however, the stock had a little ride out of it. Indeed, if I was naive, I would consider these takeover speculations a bit of manipulating the market for short spikes.

This up-and-down movement was bolstered by CEO comments in mid-February claiming aggressive sales figures for the quarter, immediately followed by a much more sobering sales guidance for 2022 which brought down the stock. The “aggressive” comment from the CEO, to be fair, was for the ongoing Q4 quarter, while the outlook was for the next four quarters. On Seeking Alpha I read that “on a year-over-year basis, total revenue has slipped ~53%.” Upon checking further, I noted that Q4 2021 revenue was $23.4mn, while Q4 2020 revenue was $50.1mn. While that is, indeed, a 53% fall, what is not apparent is the following:

Revenues were $50.1 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively. The increase of $49.8 million in 2020 was due to the upfront license payment received from Otsuka of $50 million, recorded as licensing revenue in the fourth quarter of 2020.

So that was just a one time revenue. Anyway, at least the guidance difference between the company – $115-$135mn from the company versus street expectations of $178mn – that kind of explains AUPH stock’s subdued behaviour earlier this year.

In the earnings call that quarter, Maury Raycroft of Jefferies attributed some of the reasons behind the poor sales outlook to “discontinuation and adherence challenges.” Here’s how the CEO responded to that question; and his response brings out a very broad problem with LN treatment itself:

Everything from tolerability to patients just not picking up prescriptions, which we are trying to flesh out more. Remember, we’re dealing with primarily a patient population that’s an African-American, Hispanic and Asian female population in the U.S., and we can look to other disease states as analogs to understand that adherence and longer-term compliance are a challenge with that population in general.

I am not sure if there’s ever been a study researching the analogous disease states that can help us understand adherence and compliance as a challenge in that population; however, such a perspective does not bode well for the longer-term outlook for voclosporin sales. According to the analyst, there’s an estimated 25% – 30% patient discontinuations for lupkynis.

The situation has not been helped by a patent challenge from generic drugmaker Sun Pharma. Filed away within their 10-K this year is some detail about this challenge to a key voclosporin patent. The company said “We are currently reviewing the petition and considering our response and next steps,” but a patent challenge from an established generic is always scary.

The IPR or inter partes review challenge was for the 036 patent, which has a term till 2037 and has “claims directed at LUPKYNIS dosing protocol for lupus nephritis used in our clinical trials.” Cantor analyst Olivia Brayer thinks this may hurt takeover potential. As she said, the decision “adds more meaningful risk to Lupkynis’ intellectual property position,” adding “the risk it adds to Lupkynis revenues looking to 2027+, and in our view the bigger readthrough is that an ongoing IPR could take potential M&A off the table for the next 12 months.” Apart from the fact that voclosporin is the second LN drug after GlaxoSmithKline’s Benlysta, this generic challenge, if not concluded satisfactorily for Aurinia, could impact its long-term revenue potential. A determination on patentability, relative to the IPR, is expected on or prior to July 26, 2023.

Aurinia has a number of management changes over the last few months. Top level management leaving in a hurry may indicate a change in ownership; however, quick new hires dampen that speculation. So while the “mutually agreed” sacking of the Chief Commercial Officer indicates a buyout, a quick hiring of three new executive, including a new R&D chief, says otherwise.

Just two days ago:

“Unfortunately, we experienced a slight decline in new patient start forms over the second quarter ended June 30, 2022, which is potentially the result of reduced lupus nephritis diagnoses and patient visits in the quarter,” Chief Executive Peter Greenleaf said.

This caused a guidance cut to $100-$105mn, which, although small, has not helped the stock.

Financials

AUPH has a market cap of $1.08bn and $400 million of cash, cash equivalents, restricted cash and investments as of October 31, 2022. In the previous quarter, the company made $55mn in revenue, which included a $30mn milestone payment from Otsuka for voclosporin’s European approval. Aurinia added 374 patient start forms (PSFs) during the third quarter 2022, as compared to 412 in the third quarter of 2021.

Total cost of sales and operating expenses for the three months ended September 30, 2022 was $65.3 million. This included R&D expenses of $11mn and SG&A expenses of $55mn.

Bottomline

AUPH shareholders have been vocal about the benefits – at least for themselves – of a buyout, for over a year. The reason can be seen in the news, in all that’s been going on at the company – less than stellar voclosporin sales, an entire lack of a viable backup pipeline, and a patent challenge that’s not been going their way so far. I think I will stay on the sidelines.