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Message: Positives & negatives

Every investment case contains a mixture of positives and negatives. Considerations when looking at Resverlogix

Significant scientific progress: management has a much greater understanding of the MOA. This will have aided the planning of BOM and should significantly reduce the risk of trial failure. With the addition of Michael Sweeney to the team RVX has employed an experienced person in clinical development.

PIII trial status has been achieved with the EMA and the trial is due to commence shortly. This is a significant positive. But why has 3-point MACE been chosen as the end point? And why has PIII status not been achieved with the FDA? Management need to explain this. Here are my guesses: I imagine the chosen end point has to be agreed with the regulator when setting the parameters of a clinical trial so perhaps this 3-point MACE has been stipulated by the EMA. As for the FDA, my guess is that this is something to do with the complex MOA of RVX. There is so much more DM could talk about when he shows that jigsaw slide on the multi-modal MOA of RVX. This is ground breaking science and is enormously exciting but I suspect it creates headaches when speaking to regulatory bodies about PIII trial design. In the post-hoc analysis what has been the cause of MACE reduction? Is it RCT or reduced vascular inflammation or is it due to a thrombotic or metabolic pathway? Lipids experts say that it takes time for drugs to have an effect on cholesterol. Given the relatively short trial lengths of Sustain and Assure it is more likely that one of the other modes of the MOA was behind the observed MACE reduction (i.e not RCT). If so then this raises the question of which regulatory department at the FDA should be overseeing the trial… perhaps RVX is having an administrative issue?

Does the lack of PIII status with the FDA matter? Perhaps not… currently there is a bill in Congress called the ‘H.R.1455 - Speeding Access to Already Approved Pharmaceuticals Act of 2015’. If passed then this could result in accelerated approval of European drugs by the FDA. If BOM shows positive PIII results under the EMA then RVX would have the option of seeking accelerated approval with the FDA or, if not, perhaps BP would step up and take care of the Transatlantic admin. Unfortunately I am no expert in tracking bills through Congress so it would be helpful if someone else could do the DD on this.

Funding is another significant positive. RVX has succeeded in raising a substantial amount of capital this year. This gives it the necessary funds to complete BOM as well as progress any ODD trials. It is worth noting that the capital raise was done at CAD $2.67, which is a 30%-40% premium to the current share price. Any retail investors concerned about the dilutive effects of this capital raising have an opportunity to offset this dilution by buying additional shares on the open market at a significant discount to the deal price. If you have the funds and believe in the investment case then why wouldn’t you want to do this? (Effectively you are being offered preferential deal terms by the open market to those received by KD and HL).

The Hepalink deal was complex. It is not as valuable as I first thought. The royalty element of the Hepalink deal will not come to RVX. Instead it will pass straight through to Zenith. The only economic interest that RVX has in the HL deal is in the milestone payments. I think the max figure is c.$400m (which is not to be sniffed at) and it still stands that RVX has succeeded in doing one of the largest single drug deals in China (which is in itself an achievement) but for me, the real value in the HL deal is in raising additional capital at a value of $2.67 to complete BOM and any ODD trials. I also think it is healthy to have an additional investor on the register to act as a counterpoint to KD. I am more confident that retail shareholder interests are aligned with management and KD, now that there is another investor on the register (although I recognize the possibility that HL could view their investment simply as a cost of acquiring the rights to RVX in Greater China).

Governance needs to be improved. The Zenith spin and Royalty Preferred Share structure has muddied the waters considerably. Hearing about 2500 new molecules being transferred back to RVX, while positive, serves to highlight the potential governance issues. Management needs to address this if it wants to achieve a credible listing on the Nasdaq.

Capital efficiency is both a positive and a negative. Despite the gripes made by some about DM’s level of pay, the reality is that RVX is running a pretty tight ship. Its cash burn is peanuts compared to many other biotech companies. But this is probably the reason why many of us are frustrated by the missed deadlines. There is only so much a small team of people can achieve. I recall DM’s comments earlier on this summer when asked about why the ODD announcement had slipped; he said that the team had been running flat out with the HL deal and with the BOM trial planning. I have sympathy with this. Whatever the size of the company there always a decision to be made over the size of investment and allocation of resource. In an effort to preserve shareholder value, RVX is trying to do everything on a shoestring. The negative to this is that we should expect missed deadlines. I am sure ODD and NDAQ will happen, the question is when.

Liquidity: this is a negative. I think RVX is in desperate need of a full NDAQ listing, and I would encourage it to raise additional capital when it does so. But I can also see why KD and HL won’t want to be diluted and will continue to run RVX on a budget until we have PIII results from BOM.

Conclusion:

In my opinion there has been real progress at this company over the last 18 months and the share price is nowhere near adequately reflecting this. In fact I think there is a gross disconnect between RVX’s progress and its valuation. Even better, there are lots of positive catalysts on the horizon. DM has stated that wants investors to have lots of news flow while the BOM trial is proceeding. The things I have noted are: analyst day on 25th September, AGM on 30th Sept, potential NDAQ listing in 2016, ODD announcements and trials, publications in respected journals, and further data presentations at major events. The governance structure could definitely be improved (and needs to be) but I don’t think retail investors are misaligned with management and the main shareholders. To my mind it is more a question of timing. I have to admit though, that I do think it would make strategic sense to allow more investors onto the register, to increase the liquidity (and hopefully the share price as well), so that RVX could have better access to capital markets and start to commit some real financial and management resources to speeding up the development of the revolutionary science that is yearning to be appreciated by a wider audience.

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