re: Weekly Stock Market Plays/Thoughts - March/April

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but you can still make good money in bio/pharma

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1) Aurinia shares traded up to new all-time highs during the March 13 trading session, closing at $10.50/share on the back of heavy momentum.
2)That same day, management announced a secondary offering, which looks to raise ~$150 million by issuing 22.3 million shares at $6.75.
3)Understandably, the stock sold off from Monday's highs, but the situation for Aurinia has become much clearer going forward, with this dilution behind it.

Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH) has been on a tear of late, soaring to a share price above $10 as of Monday, March 13, after hovering in the $2 to $4 range for several months. The large daily gains have been on the back of multiple positive results and press releases, described in more detail here. This article will focus primarily on the recent dilution, what it likely means for the company, and my takeaways from the situation.

The Offering and Market's Reaction
On March 14, the details of the offering were released. Aurinia is looking to issue about 22.3 million shares at a price of $6.75 to raise approximately ~$150.5 million. The underwriters also have the option to purchase an additional 3.345 million shares at likely the same price of $6.75 for up to 30 days. Assuming this option is exercised, that gives us a total of 25.645 million shares issued raising a total of $173.1 million. The dilution brings the total outstanding share count to ~83.4 million fully diluted, which takes into account the December 2016 equity offering of ~12.8 million shares at $2.25 per share.

Both times management has issued shares to raise capital, a market sell off occurred, and for understandable reasons. Each issuance was below the last day's closing price, however, I view this recent dilution in a much different way.

The December 2016 issuance was done at near all time share price lows, and as a result raised far less capital per share than the current raise. The choice to raise capital back in December was explained as a means to have the necessary cash on hand to get the phase 3 AURORA trial started on time, however, the subsequent CEO turnover and commentary from the new CEO, Dr. Glickman, puts some doubt as to whether it was the right time to doing secondary offerings.

Also, the December offering did not even come close to raising the necessary capital needed to get through phase 3 (management raised ~$28.75 million raised), which was previously discussed as being around $75 million needed for US development costs and another $75 million needed is Aurinia was to develop and license the drug themselves for international sales (Europe and Japan).

From my point of view, the lower amount raised in December seemed like it was done to raise just enough capital to get through the year, and perhaps gave some leeway towards having more negotiating power when discussing things like partnerships and licensing deals since they were now well capitalized for the rest of the year.

However, from my call with investor relations in December, it was repeated that the management team assembled at Aurinia has the experience and intent to pursue independent full development and commercialization of voclosporin. That made both the amount raised and timing a little questionable.

With the recent news of the secondary offering, the picture is a lot more clearer now. You want a management team who values its shares, and therefore looks to give up as few as possible to raise the amount they need to accomplish their goals. That makes issuing at all time highs the sensible choice, versus all time lows. Another point to add is that the idea to issue shares was likely decided well before Monday's close, making the price per share something that was determined prior to the huge run up in share price seen Monday.

Now, Aurinia will have enough capital to get through all of phase 3 for voclosporin development and licensing should the phase 3 trial succeed in the US, and have capital on hand to look into international development/licensing along with additional indication exploration. The amount raised definitely fits well with the idea that management is seeking to independently bring voclosporin to market themselves, at least in the US, and maximize their future revenue potential by solely owning the compound.
In my opinion, it shows Aurinia has a high degree of confidence in their drug, and has a plan to see it through marketing alone. This outlook might not be welcome by some who were hoping for a major partnership or buyout. Although a domestic partnership is unlikely with the news of the offering, a buyout could always be on the table should the premium be high enough.

On the topic of partnerships however, they are not often the best deal for an up and coming biotech for the long term. Although true that a partnership gives both immediate financial relief, capital, and confidence in a drug candidate for a small company, it also strips majority of the upside from the company who discovered the drug. This is because most partnerships are structured in such a way that the majority of future revenues from sales go to the larger partnering company, with low single digit to low double digit percentages of sales going to the junior biotech.
As a result, the smaller company may get a few hundred million in developmental milestones and a small stream of revenues from sales, but they easily lose all that they gained in milestone payments over the course of the first few years by giving up the lion's share of sales revenue.

Future Outlook Unchanged

Back in November, when I first wrote about Aurinia, I did not expect the significant jump in share price to happen so soon. Due to this, I was pricing out a situation where Aurinia issued shares at $2.00 to raise $75 million for domestic development of voclosporin. At that time, this quick estimate gave a total share count of ~82.5 fully diluted and only ~$75 million raised rather than ~$150 million. With future sales potential of over $1 billion per year, and a price to sales multiple of 1, this gave a potential share price of ~$15-18/share in the future.
Today, however, the picture is even better, fully diluted shares did come close to my estimate, but due to the recent jump in share price, the amount raised was double my initial expectations. From my standpoint, the view is better now than it was in November, and most of the financial uncertainty is now behind the company. For more details on upcoming catalysts, please see here.

Summary
With the raise behind us and the risk of dilution cleared up, it will be interesting to see where the share price settles over the next few days. Going forward, Aurinia is well capitalized with high expectations set as they start their phase 3 trial AURORA. Voclosporin looks like a promising candidate for the treatment of lupus nephritis in SLE, and the upcoming conferences should shed additional light on its benefits for treatment of this condition.

Although the risk of further secondary offerings is minimal in the short term, investors need to always remember that success of the company is highly dependent on the success of their phase 3 trial, and be aware of the risks associated with companies developing drug candidates. Trial success is never guaranteed, and neither is marketing approval. Unexpected events can not be ruled out, such as the deaths seen in the phase 2b trial (although unrelated to the drug), which can have a materially negative impact on share price and outlook.

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