Ardelyx Looks Cheap But Not Without Risk

This article was co-authored by Stepan Lavrouk, an investment analyst with Almington Capital.

Ardelyx (ARDX) is a clinical stage biopharmaceutical company specializing in the discovery, development and commercialization of small-molecule treatments for gastrointestinal (GI) and cardio-renal diseases. The companys flagship drug, tenapanor, is in late-stage clinical trials. Additionally, it has a number of less mature treatments in the pipeline, for various GI and cardiorenal disorders. Ardelyx has a market capitalization of $269 million and is currently trading at $5.65.

In this article, we evaluate tenepanors prospects and take a look at the companys financial health.

Potential Gold in the Pipeline

Tenapanor is an orally-administered inhibitor of the sodium-proton exchanger NHE3. When ingested, tenapanor blocks the absorption of sodium in the intestines and increases the proton concentration in cells, which reduces phosphate intake. The drug is currently being evaluated for efficacy in treating hyperphosphatemia (a common condition associated with end-stage renal failure in patients receiving dialysis) in a Phase 3 study begun in February 2018. Results from this trial are expected in early 2019.

This will be the second Phase 3 hyperphosphatemia trial conducted by Ardelyx. The first trial lasted for 8 weeks in 2017 and included 219 patients with end-stage renal disease (ESRD). The study met its primary endpoint, demonstrating a significant difference in the change of serum phosphorus between the study and control groups. The company estimates that more than 745,000 people with ESRD on dialysis are affected by elevated phosphate levels.

Currently, the only real treatment for hyperphosphatemia is by the administration of phosphate binders, such as sevelamer. Ardelyx claims that tenapanor is an improvement on existing therapies as it has favorable GI tolerability and significantly cuts down on the number of pills required, a non-trivial concern for ESRD patients who may be taking upwards of 15 pills a day. This second trial will also include an active control group who will receive sevelamer, which should allow us to compare the new treatment with the existing standard.

Additionally, Ardelyx is working on the submission of a New Drug Application (NDA) for Irritable Bowel Syndrome with Constipation (IBS-C) to the FDA, which management expects to be complete by the second half of 2018. A Phase 3 trial (T3MPO-1) in May 2017 achieved statistical significance for its primary endpoint and met 7 of 8 secondary endpoints. However, investors were spooked by the fact that tenapanor underperformed relative to Synergy Pharmaceuticals (SGYP) plecanatide, sending share price spiraling downwards by over 30% in the course of a single day of trading. That said, tenapanor showed better results in a further Phase 3 trial (T3MPO-2), the results of which were made public in October of last year. As with the hyperphosphatemia indication, management are emphasizing the drugs unique mechanism of action as its main selling point.

A Hidden Bargain?

In last weeks earnings call, Ardelyx reported a net loss of $17 million for the first quarter of 2018, compared with a net loss of $28 million for the first quarter of 2017. As of March 31, 2018, the company had $127.4 million in cash or cash equivalents on hand. A rough P/B calculation where market value is $269 million and book value is $129 million (cash plus some additional licensing revenue, minus approximately $14 million in liabilities) gives us a P/B ratio of 2.09.

This would be considered low in most industries, but especially so for the small-cap biotech space, where investors generally price in projected earnings from drugs yet to be approved. Now, obviously this is meaningless if tenapanor does not get the nod from the FDA; however, it does suggest that the market has not yet priced in the possibility of approval, and that we can expect a pop post-approval, or at least a run-up pre-approval. Furthermore, the cheap nature of the stock makes it an attractive target for a buy-out, provided a larger competitor can be convinced that tenapanor has potential.

Investors Eye View

As with many such companies, there is a lot of uncertainty surrounding Ardelyx. Much, if not all, depends on tenapanor getting positive news from the FDA for its NDA for IBS-C and also for hyperphosphatemia, down the line.

That said, we think that the market may be sleeping on this stock, given the upside potential in the case of approval.

Disclosure: I am/we are long SGYP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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