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Md Saiful Islam Khan

Ascendis

Price is what you pay. Value is what you get. - Warren Buffett

In biotech investing, you tend to earn the most tremendous profits by investing in companies early in their growth phase. That is to say, you can get multiple-fold gains by picking highly promising clinical-stage innovators. Despite their higher risks, you can manage them by forecasting upcoming big data releases. Now, early product-stage companies can still have more upsides. However, they'll be modest. As such, these companies would be similar to the "cigar butt plays" that Warren Buffett spoke about. While not glamorous, they still have one last puff left.

On that note, I want to bring to your attention a cigar-butt play named Ascendis Pharma (ASND). Asides from its lead drug (Skytrofa) generating increasing sales, the company is advancing its other drug TransCon PTH for hypoparathyroidism. As you know, the company recently encountered a regulatory setback. Whether the company can resolve this situation significantly affects the investing thesis on this stock. In this research, I'll feature a fundamental analysis of Ascendis and share with you my expectation of this intriguing equity.

StockCharts

Figure 1: Ascendis chart

As usual, I'll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the next section. Based in Copenhagen, Denmark, Ascendis Pharma is focused on the innovation and commercialization of drugs to serve the unmet needs in endocrinology and oncology.

Leveraging its TransCon technology platform, the company has successfully launched an approved drug dubbed Skytrofa (lonapegsomatropin-tcgd) to treat pediatric growth hormone deficiency. That aside, there is another promising pro-drug coined TransCon PTH which is under regulatory review for adults suffering from hypoparathyroidism.

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Figure 2: Therapeutic pipeline

As you can see, Ascendis' value is powered by the TransCon pro-drug delivery technology. As you know, I'm not a big fan of pro-drug. Instead, I prefer a completely novel mechanism of action. But here's how it works. You have an active parent drug that is attached to a TransCon "linker."

The binding of the drug to its linker creates stability and thereby prevents its clearance from circulation. Once injected, the linker will be cut at strategic sites in the body to release the parent drugs. After dislodged, the parent molecules kicked in while the linker is being eliminated in the kidneys

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Figure 3: TransCon pro-drug delivery platform

As a once-weekly lonapegsomatropin injection for kids one year or older (suffering from inadequate growth hormone section), Skytrofa is FDA-approved back in August 2021. The key advantage of Skytrofa is that it can be stored at room temperature and has a low-volume injection via a device that lasts as long as 4 years. As you can appreciate, the Skytrofa approval and launch are important for Ascendis because it's a validation of the TransCon drug delivery.

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Figure 4: Skytrofa for pediatric growth hormone deficiency

Over 12 months into the launch, Skytrofa sales have been ramping up significantly. For 4QFY2022, its revenues tallied at 17.1. FY2022 figure registered at 51.1M. Without any label expansion, sales growth should take Skytrofa to at least 100M within the next few years.

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Figure 5: Skytrofa sales growth

To boost sales growth, Ascendis is aggressively expanding Skytrofa labels as well as penetrating into additional markets. Precisely speaking, you can expect the company to launch Skytrofa into the European market in Q3 this year.

As shown below, Ascendis is penetrating Skytrofa into the Asian markets. Furthermore, there are ongoing label expansions for Adult growth hormone deficiency (GHD) plus Turner's syndrome and for achondroplasia. Taking all that together, you can expect this franchise to become a blockbuster in the coming years.

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Figure 6: Skytrofa growth and expansion

In terms of the timeline, you're looking at many expansions this year. Whenever there are multiple catalysts stacked in close succession, the stock usually does quite well. In Q4, you'd have the data release for adult GHD which can give the share price a significant boost.

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Figure 7: Building a leading global growth hormone portfolio

Before we dive into the biggest regulatory catalyst, you should take a look at the underlying science/medicine of hyperthyroidism. Due to either a deficiency or absence of the parathyroid hormone (i.e. PTH), afflicted patients exhibit various symptoms of low blood calcium and high phosphate. After all, PTH facilitates the absorption of calcium and the elimination of phosphate.

As you can see, the lack of calcium reabsorption in the blood causes excessive calcium to be excreted through the urine. Ultimately, low blood calcium (i.e., hypocalcemia) and high urinary calcium (i.e., hypercalciuria) lead to a multitude of symptoms as shown below. They include heart arrhythmia, brain abnormality, respiratory, etc.

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Figure 8: Underlying science/medicine of hypoparathyroidism

Now, conventional therapy focuses on calcium replacement and Vitamin D supplementation for symptomatic hypocalcemia, hypercalciuria, and poor quality of life. While there is some efficacy, you'd still need the PTH to mobilize the calcium and phosphate.

That aside, taking excessive calcium supplement or phosphate binders have its own adverse effects which leads to low compliance and poor outcomes. They include chronic kidney diseases, liver and brain calcifications, cardiovascular complications plus bone damage.

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Figure 9: Current treatment for hypoparathyroidism

As elucidated above, you can imagine that the more efficacious approach is to replace PTH. Back in 2022, the FDA already approved a once-daily injection of PTH coined Natpara. From the Phase 2 (PaTH Forward) and Phase 3 (PaTHway Global and Japan) clinical studies, you can appreciate that TransCon PTH provides an excellent solution for patients. After all, nearly all patients on TransCon PTH no longer need to use conventional therapy. Simply put, TransCon PTH works and it could be a better solution than Natpara.

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Figure 10: Strong TransCon PTH data

Safety-wise, the studies shown above also showed no adverse effects. Moreover, the PaTHway Japan trial demonstrated that TransCon PTH was well tolerated and the urinary calcium level was normalized. As you'd expect, the majority (i.e., 12 of 13) of patients easily cleared the primary composite endpoints (i.e., normalized blood calcium and no longer needing conventional therapy).

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Figure 11: PaTHway Japan's robust results

As you can see, TransCon PTH has the Prescription Drug User Fee Act (PDUFA) set for April 30. In a nutshell, that's the final day for the FDA to issue an approval decision. Like a curve ball, Ascendis recently stated that the FDA issued a deficiency notice on its New Drug Application (i.e., NDA) filing re TransCon for PTH. That event caused the share price to tumble roughly 40%. According to the President and CEO (Jan Mikkelsen),

This notification from FDA relates to their review of our NDA, and since the NDA deficiencies were not disclosed in the letter, we are eager to work with FDA to learn, understand, and address them. This development a month from the agencys PDUFA action date may lead to a delay in the FDAs final regulatory decision on the TransCon PTH NDA. The safety of patients remains our highest priority and, since our NDA submission, no new safety signals have been observed to date in our ongoing TransCon PTH Phase 2 and Phase 3 clinical trials or in our Expanded Access Program (EAP) program and these programs continue unchanged.

If Ascendis can resolve this situation, the company would be positioned to capture a lucrative market. As depicted below, you can see that the annual occurrence of hypoparathyroidism in the USA is only 3K patients. Hence, this makes hypoparathyroidism an orphan (i.e., rare) condition that warrants a premium reimbursement to foster the lengthy and low success rate of the innovation process.

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Figure 12: Hypoparathyroidism addressable market

Given that two doses of a competing drug (Natpara) cost over $10K, you can imagine that its monthly supply would run $150K monthly (i.e., $1.8M a year). And, you can imagine that TransCon PTH would be priced similarly or lower to foster a healthy profit margin. Let's assume some basic calculations at a $1M annual price for TransCon PTH as shown below.

Figure 13: Estimate revenues for TransCon PTH

Just as you would get an annual physical for your well-being, it's important to check the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the FY2022 earnings report for the period that ended on December 31.

As follows, Ascendis procured 51.1M for FY22 compared to 7.7M for FY21. As you can appreciate, Skytrofa's sales contributed to the strong revenue ramp-up. That aside, the research and development (R&D) for the respective periods tallied at 379.6M and 295.8M. While I typically view the R&D increase positively, this is too excessive for such a young company.

Additionally, there were 583.1M (10.40 per share) net losses compare to 838.5 (7.00 per share) net decline for the same comparison. Here, it's a positive sign to see that the company is narrowing its net losses. Nevertheless, the figure here is still quite high.

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Figure 14: Key financial metrics

About the balance sheet, there were 742.9M in cash, equivalents, and investments. On top of the 51.1M in revenues and against the 561.8M annual OpEx, there should be adequate capital to fund operations into 1Q2024. Simply put, the cash burn is high relative to the cash runway.

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main concern for Ascendis is whether TransCon PTH would clear the FDA deficiency to gain approval this year.

Even with approval, there is a significant risk that TransCon PTH would flop in commercialization and have some manufacturing issues like Natpara. Moreover, there is a significant risk that Ascendis' growth hormone franchise won't become a blockbuster. As a young company, Ascendis might grow too aggressively and thereby runs into the potential cashflow constraint.

In all, I issued a highly speculative buy recommendation on Ascendis with a 4.2/5 stars rating. Riding the Skytrofa launch for human growth hormone, Ascendis validated its TransCon pro-drug delivery platform. Sales are becoming increasingly significant. Meanwhile, the company is aggressively expanding sales into new territories and pushing for label expansions.

Now, the key to Ascendis' success is whether the company can resolve the FDA deficiency. That depends on the nature of the deficiency, which is yet to be known. Overall, ASND stock seems like a "cigar-butt" play if you are into product-stage biotech with modest gains.

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