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Is Aurinia Pharmaceuticals a Buy?

Keith Speights, The Motley Fool

There's good news and bad news for Aurinia Pharmaceuticals (NASDAQ: AUPH) shareholders. Let's start with the good news. The company has had a fantastic 2017, with its stock price soaring more than 120% year to date with less than two weeks remaining in the year. 

Now for the bad news. All of those gains -- and a lot more -- came during the first few months of the year. Since late March, Aurinia has lost nearly half of its market cap. This big pullback resulted primarily from a stock offering that diluted the value of existing shares. But with a new year just around the corner, is Aurinia Pharmaceuticals a buy now?  

Scientist holding test tube with medical icons in foreground

Image source: Getty Images.

Pipeline prospects

Aurinia's pipeline is built on one drug -- voclosporin. The company is evaluating voclosporin in a late-stage clinical study targeting treatment of lupus nephritis. Voclosporin works by inhibiting calcineurin, an enzyme that activates immune cells known as T cells. Calcineurin inhibitors (CNIs) have been found to be effective at treating lupus nephritis and other conditions, but they also have some serious side effects. 

Voclosporin could be even more effective than legacy CNIs, with fewer worrisome side effects. Based on previous clinical studies, Aurinia thinks the drug is more potent and has a better lipid profile than cyclosporine A. The company also thinks that voclosporin has a better glucose profile than tacrolimus. In addition, Aurinia believes the drug won't require therapeutic monitoring because of its more predictable concentration effect and "tight" pharmacokinetics/pharmacodynamics relationship. 

Phase 2 results for voclosporin in treating lupus nephritis were outstanding. Patients taking voclosporin experienced much better progression to partial or complete remission than patients on placebo. Those complete remission results for voclosporin were the best of any major lupus nephritis study to date. 

Aurinia expects to complete enrollment of its late-stage study in the second half of 2018. Because the company received fast-track designation for voclosporin from the FDA, it plans to use a rolling New Drug Application (NDA) process, which speeds up the review process. If all goes well, Aurinia will submit the first part of its NDA for the drug in the latter part of next year. 

The market potential for a safe and effective drug in treating lupus nephritis is significant. It's a very expensive disease for payers. There hasn't been a new FDA-approved drug for treating the disease in over 50 years, which could set up voclosporin quite nicely if its late-stage study goes well. 

Aurinia is also hoping to extend its success with voclosporin in lupus nephritis into additional indications. The company plans to initiate phase 2 studies of the drug in treating focal segmental glomerulosclerosis (FSGS), minimal change disease (MCD), and dry eye syndrome in the first half of 2018.

Financial position

Because Aurinia is a clinical-stage biopharmaceutical company, its revenue is minimal, with significant net losses. As a result, it continues to burn through cash. Of course, if the company burns through too much cash, it will need to bring in more, which would likely result in issuing more shares. That's exactly what Aurinia did earlier this year -- a move that caused the stock price to plunge.

So how does Aurinia look now from a financial standpoint? Thanks to the stock offering in March 2017, the company raised gross proceeds of more than $173 million. As of Sept. 30, 2017, Aurinia had cash, cash equivalents, and short-term investments totaling $182.4 million. 

Clinical trials aren't cheap, though. Aurinia will spend quite a bit to fund its late-stage study of voclosporin in treating lupus nephritis. And the company is adding to its expenses with the planned phase 2 studies next year. Should investors be concerned that another dilution-causing stock offering could be on the way? I don't think so -- at least not for a while.

Aurinia's management team thinks that its cash stockpile should be enough to fund operations, including all of the clinical studies, into 2020. If all goes well with the late-stage study of voclosporin, the company wouldn't need to raise more cash until around the time it hopes to win FDA approval of the drug. 

To buy or not to buy?

Investors considering Aurinia Pharmaceuticals should be aware of the risks. It's possible that voclosporin runs into problems in late-stage testing. The company's future hinges entirely on this one drug.

However, I think the prospects for voclosporin are pretty good. If the drug performs well in the late-stage study and ultimately wins approval, Aurinia could have a potential blockbuster on its hands. The company's market cap currently stands below $400 million. In my view, the risk-reward proposition for Aurinia is favorable at that valuation. I even think Aurinia stock could be dirt cheap at its current price, considering the tremendous opportunity for voclosporin.

The risks are high with this stock, but so are the potential rewards. Overall, my take is that Aurinia Pharmaceuticals is a buy right now.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.