ALDEYRA – A JUNIOR BIOTECH TRADING AT CASH

Biotech had one of its worst years ever in 2021.

While the S&P scaled to new heights the S&P Biotech ETF (XBI – NASDAQ) closes the year down some 20% from the start.

Does such bad performance make biotech a great year end tax loss buy?

Maybe, but you have to be a good stock picker and avoid the falling knives.

My subscribers have mostly missed the collapse. We only had a few biotechs in our portfolio and we were fortunate enough to come away winners with most.

As I survey the carnage, one name I used to own, Aldeyra Therapeutics (ALDX – NASDAQ), has caught my attention again.

Aldeyra is a late-stage biotech. Their lead drug candidate, Reproxalap, is in Phase 3 trials in two ocular diseases – Dry Eye Disease (DED) and Allergic Conjunctivitis (AC).

These are big dollar diseases. Both are multi-billion-dollar markets.

Yet Aldeyra recently traded below cash—a negative Enterprise Value! The stock was crushed after Reproxalap missed on the primary endpoint of their Phase 3 DED trial a couple weeks ago.

But a deeper dive into results makes me think it is not over for Reproxalap and DED just yet.

It turns out Reproxalap hit on a secondary endpoint that is a far more common approval path for DED. The drug has shown plenty of efficacy in past trials.

There is also a mountain of data backing up that the drug works in AC. And there are 3 other Phase 2 readouts reporting in the coming months.

That is a lot of moving parts for a stock trading at cash.

While far from a sure thing, the risk/reward is intriguing at cash value. If Aldeyra can grasp success out of clutches of failure, it could make the stock a multi-bagger.

NOT MY FIRST RODEO

I have followed Aldeyra since I first bought it coming out of the March 2020 bottom.  I bought the stock at just over $3, with the idea to buy beat up biotech names that had been clobbered by the COVID panic.

I watched Aldeyra go to $8, put out good news and go to $15. Now the stock was GREAT so why would I sell! Aldeyra had a couple Phase 3 trials and good lead-in results. Positive data on dry-eye disease (DED), a HUGE market, could send the stock to the $20’s. WooHoo am I smart!!!

But then biotech started to suck wind and Aldeyra swooned with the rest of the sector—all year long. Normally I would have a 20% trailing stop loss on a trade like that. But no, this was a good company with a couple potential catalysts that could take it into the $20s.

Sigh. I ended up taking my (much reduced) profits at $6.50 a couple weeks ago—still a double after 20 months—as a year-end clean up.

That turned out to be EXTREMELY well timed.  (I wasn’t very smart, but I sure was lucky!!!) Three days later Aldeyra reported their Phase 3 TRANQUILITY trial results. That was the big miss—and the stock was cut in half the next day.

Now we are a week later, and the stock is trading at just above cash levels ($4 per share).

SHOULD I REVISIT?

Normally when I sell a stock, I don’t look back. My 30 years of investing says it rarely pays me to re-invest after a win.

To break that rule, I need a pretty good excuse.

The biggest reason to take a second look at Aldeyra is valuation–now trading at or below cash.

At the bottom, Aldeyra traded to under a $200 million market cap—but a Negative Enterprise Value; below cash ($225 million at Q3).

Today with the stock a little over $4, the EV—Enterprise Value=market cap – cash or + debt—is just a few million dollars.

Aldeyra’s cash burn is consistent at $10 million per quarter. Taking a forward YE 2022 cash level of $185 million, the market is still not attributing much value to the company.

No future success is priced in at all. But is there value to be found?

Well… maybe. While the TRANQUILITY results looked bad on the surface, the details had one big bright spot.

THE RESULTS

The TRANQUILITY results can be best described as odd. 

The topline was ugly. Aldeyra missed on their primary endpoint eye redness.  It was a bad miss:

Source: Aldeyra Phase 3 TRANQUILITY trial

If that was the end of it, that would be, well, the end of it. BUT… Aldeyra surprised to the upside when they hit on a secondary endpoint: Schirmer test.

Source: Aldeyra Phase 3 TRANQUILITY Trial

The funny thing (or not so funny, if you held the stock into the results) is that between red eye and Schirmer, Schirmer is the more accepted dry eye endpoint for FDA approval.

Going into the TRANQUILITY readout, the bearish take on Aldeyra was that the FDA had not approved a drug based on eye redness. 

Schirmer, however, has been the basis of many drug approvals. It is a measurable test of tears, while eye redness is a subjective evaluation of color.

Aldeyra chose red eye because they had seen strong results in two Phase 2 trials and an Allergic Conjunctivitis (AC) Phase 3 trial.  While they had decent results with Schirmer, they were not as good as red eye.

If Aldeyra had chosen Schirmer from the get-go as their primary endpoint it would have been a big win and the stock would not be at $4.

But now Aldeyra is proposing Schirmer as an alternate endpoint.

Aldeyra is going to move forward in a second phase of TRANQUILITY (called TRANQUILITY-2). They are going to enroll 100 more patients and change the end-point to be either red-eye or Schirmer.

They still need the FDA to sign off of the change in endpoint. If they do, Aldeyra has two shots on goal (either red eye or Schirmers) to get the data they need for approval.

WHAT DO YOU DO NOW?

Do you buy back the stock here, trading a little above cash?

Here are a few things to consider:

1. Dry Eye is notoriously variable
2. Allergic Conjunctivitis
3. Other Phase 2 trials

First, DED is a very tricky trial. 

It is not uncommon for results to vary A LOT – just like we saw here.

This past summer, Aldeyra was part of a panel discussion that included some ophthalmologists. The doctors agreed that there would never be one drug for DED—too much variability.

DED is caused by a whole host of factors. It differs from patient to patient.

In any given trial, the mix of patients can throw off results. Reproxalap is not the first drug to post a big surprise.

Last summer the Canadian biotech Aurinia Pharmaceuticals (AUPH – NASD/AUP – TSX) failed its Phase 3 trial for voclosporin (VOS) in DED. This after posting promising phase 2 results.

Voclosporin gave a 4-week Schirmer test that was hardly better than the vehicle.  Yet a prior Phase 2 study had showed significant Schirmer improvement over two existing first-line drugs, Cequa and Restasis:

Source: Aurinia Pharmaceuticals 2020 Investor Presentation

Even though the Phase 2 results were great, the Phase 3 results for voclosporin were so weak that Aurinia abandoned their ophthalmological program.

The point is, there is a lot of variability in a DED trial. Which means as a stockholder, it is all about risk/reward.

REPROXALAP DOES HAVE GOOD DATA

While TRANQUILITY did not go as planned, Aldeyra does have data showing that Reproxalap works.

The Phase 3 RENEW trial, completed in December 2019, showed efficacy across a broad range of symptoms. An earlier Phase 2 study did as well.

Source: Aldeyra 2019 RENEW Results Presentation

Aldeyra has even done a head-to-head study with Xiidra, a Novartis owned, second-line DED treatment making $400 million in annual revenue.

Reproxalap resolved symptoms faster than Xiidra.

Source: Aldeyra January 2021 Corporate Review

Novartis bought Xiidra from Takeda Pharmaceuticals in 2019 for $4.5 billion.

It is worth digging into how Xiidra was approved.  The FDA approved Xiidra in 2016. But the data was mixed.

Xiidra was tested in one Phase 3 study where Schirmer results showed “no statistically significant difference” with placebo. A second Phase 3 study showed Schirmer that were only marginally better than the vehicle.

Xiidra was approved on eye-dryness score, which is a combined score based on a range of symptoms.

The Reproxalap RENEW trial showed a similar across-the-board symptom improvement. That has to be worth something if the next set of data is as positive as the latest round (on the 2nd endpoint).

Source: Xiidra Phase 3 Data Paper

MORE THAN JUST DRY EYE DISEASE

Aldeyra has other irons in the fire.

For one, there is Allergic Conjunctivitis.

AC is a smaller market than DED, not because less people suffer from it (seasonal allergies is a huge population) but because there are off-the-shelf alternatives.

Still, there is a need for an option for those that can’t find relief with Claritin or Reactine.

The average analyst expects $50 million to $75 million in annual sales from AC. Not the blockbuster that DED is, but still a lot of money.

Reproxalap’s AC results have been very good, actually better than in DED.

The Phase 3 INVIGORATE trial, reported in April, showed across the board statistical significance, including resolving red eye in patients:

Source: Phase 3 INVIGORATE Trial Presentation

There are other drugs in the pipeline. Their ADX-629 candidate has 3 Phase-2 readouts coming out in the next 3 months.

Source: Aldeyra November Investor Presentation

TIMING and PRICE

Aldeyra is all about waiting for the right price.

Buying the stock at $4 or less and you get the pipeline, AC upside and the shots on goal for DED all for basically the cash on hand.

If you start paying too much above that, that comes with the risk of another poor readout.

Remember those ADX-629 readouts could be fails. Or the FDA could kibosh the change in endpoints for TRANQUILITY-2. The stock is not without event risk.

But when a stock like this is trading for ZERO Enterprise Value or less, there’s often a good trade to be had.

EDITORS NOTE–I’ve been following a 15 cent stock for 2 years–and it is finally hitting its stride. After a couple recent contract wins, I’m expecting BIG THINGS out of this highly disruptive tech company. I’ll be putting out a big update on this stock next week. If you want an asymmetric trade for 2022, this is it–CLICK HERE to read my report, and be ready for my update.