Tunatura/iStock via Getty Images
Tunatura/iStock via Getty Images
Shares of Aldeyra Therapeutics (NASDAQ:ALDX ) have certainly bucked recent weakness in markets and the biotech sector with encouraging year to date performance of +60%. On the other hand, 3-year performance is nearly flat and 5-year period sports a 30% loss.
While I'm not necessarily a fan of the dry eye space (large opportunity but dominated by big pharmaceutical companies like Allergan/AbbVie), it's increasingly clear that reproxalap NDA submission in Q4 for this indication is just a small part of the overall story. RASP modulation represents a novel approach for multiple inflammatory and autoimmune conditions with high unmet need, with additional indications on deck for phase 2 exploratory studies such as Sjogren-Larsson syndrome and chronic cough.
Let's take a deeper look to determine if this novel MOA and multi-faceted pipeline can earn a spot in the ROTY (clinical stage) portfolio.
When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels and get a feel for what's going on. In the weekly chart above, we can see share price spike above $12 after the company reported positive top-line data from the run-in cohort of phase 3 TRANQUILITY study evaluating reproxalap in dry eye disease. From there, shares fell to nearly $2 in summer of 2022 before recently rebounding above $6 as eventual path forward to approval seems increasingly likely. My initial thought is that readers interested in this name would do well to accumulate dips in the near term as share price falls to the intersection of 20 day and 50 day moving averages. Importantly, this appears to have the profile of a multi-year hold as pipeline moves forward across several indications including proof of concept phase 2 studies where we can skeptically imagine that some indications will achieve success while others likely will not pan out.
Founded in 2004 with headquarters in Massachusetts (12 full-time employees, quite the lean operation), Aldeyra Therapeutics currently sports enterprise value of ~$200M and Q2 cash position of $196M providing them operational runway for at least 2 years.
Wainwright healthcare conference webcast is an excellent way to catch up on this story, as my last revisit was in 2018 and much has changed since then. The company is dedicated to developing new therapies for immune-mediated diseases and has 3 different parts, the first being anterior ocular disease (reproxalap in allergic conjunctivitis and dry eye disease). CEO reiterates that NDA in dry eye disease should be filed in Q4 and next year they will complete phase 3 for allergic conjunctivitis (2 approved indications if all goes well).
Second aspect is ADX-2191 (ocular injection of methotrexate which is designed to mimic the vitreous or fluid at the back of the eye). Methotrexate is used intraocularly for a variety of conditions including ocular lymphoma and PVR (proliferative vitreoretinopathy). They've scheduled with FDA the pre-NDA meeting for next quarter, so this product could be on the market as well by next year as well (ocular lymphoma first followed by PVR).
It's quite interesting to consider Aldeyra could have four approved indications within a year or two if all goes well.
Finally, they have a systemic platform (orally administered drug) with same mechanism of reproxalap (RASP inhibition) which is broadly applicable across many immune-mediated disorders. Inhibiting RASP is anti-inflammatory so management thinks of these molecules as "Otezla-like" (perhaps an oversell by the CEO but consider that Amgen acquired Otezla for $13.4B in cash in 2019).
RASP again is a new target and interestingly are not a protein (unlike majority of approved drugs which target a protein, a receptor, enzyme or cytokine). Here is a new paradigm, and RASP is a family of molecules (RASP inhibition akin to turning the volume down and dampening immune response to treat immune-mediated diseases in a broad fashion).
Figure 3: RASP inhibition represents a novel approach
Starting with dry eye disease (DED) and allergic conjunctivitis (AC), these affect tens of millions of people in the US and worldwide. The challenge with DED is that there are not therapies today that work quickly and reproxalap has acute activity within minutes (usually takes weeks or months to see modest activity with current treatments). AC is frequently a problem in fall and spring, and antihistamines are used in a third of patients followed by steroids which cannot be used long-term due to toxicities. Again, reproxalap works fast and is broadly active as observed in clinical studies to date.
Dry eye disease data below shows improvement in symptoms (ocular dryness) and three different signs (versus most companies in the space which choose just one). Ocular redness is particularly important to a quarter of DED patients that have red eyes.
Figure 4: Dry eye disease data package consisting of symptom and three sign endpoints
Almost immediately after dosing, changes in symptom scores (dryness, burning, stinging, etc) can be observed and this is unique versus competitors. Dry eye chamber for trial consists of small room with hot air blowing on patients' faces without humidity (stimulus to allow comparison of drug versus vehicle). Company has also done two head-to-head trials versus Xiidra (one of two novel drugs launched topically in DED space) which show reproxalap works more quickly and avoids common side effects including taste disturbance and blurry vision (keep in mind Novartis bought Xiidra for $3.4B upfront payment back in 2019).
Positive pre-NDA meeting took place and company believes they are aligned with FDA in terms of package to be submitted next quarter. Additionally, they are one pivotal study away from completing AC program next year to be followed by supplemental NDA assuming DED is approved.
Moving on to oral RASP drug candidate ADX-629, they ran three phase 2a studies earlier this year (one in Covid, one in asthma and one in psoriasis). Clear pharmacodynamic activity was demonstrated in small number of patients in each case with most impressive being psoriasis (PASI scores decreasing dramatically over time with treatment).
Figure 5: ADX-629 has activity across multiple phase 2a studies and range of conditions from autoimmune to inflammatory & infectious disease
They followed those POC trials with four clinical trials ongoing or soon to be launched (alcoholic hepatitis, chronic cough, Sjogren-Larsson syndrome and minimal change disease). This represents a nice range of broad opportunities (10M+ chronic cough patients in the US) and ultra-orphan indications (SLS with ~1k patients in the US).
As for ADX-2191, I recall this candidate did not get much attention in prior presentations but that could change in the near term now that they are near to submitting NDA. Ocular lymphoma is a universally fatal disease (cancer metastasizes to the brain) and is almost exclusively treated to date with methotrexate injected into the eye. 2191 is a novel, vitreous-compatible formulation and there are no formulations of methotrexate today specifically designed for ocular injection. Compounding is used today, and the issue here is infection and wrong concentration (high volumes in a closed space is not a good idea). There are 300 to 600 new cases of PVRL diagnosed in the US with median overall survival just under 5 years.
Moving on to PVR, this is a disease where retina comes off the eye (scarring and there is no approved therapy). Methotrexate is an anti-scarring, anti-proliferative drug so it was logical to use in this indication. Endpoint for clinical development in PVR is retinal detachment over 6 months. In image below, initial data shows dots on left as detachment and number of dots diminishes significantly after treatment with methotrexata.
Figure 6: ADX-2191 with promising data in Phase 1b study as reflected in marked decrease in retinal detachment
GUARD phase 3 Part 1 data is due very soon. Market opportunity is substantial across these two indications (OL and PVR) with 4k to 5k patients per year in the US (significant relative to current valuation).
They also have a phase 2 trial for ADX-2191 in retinitis pigmentosa (rare retinal disease leading to blindness and also with no therapy). Preclinical evidence in animals shows methotrexate to be an effective therapy in certain forms (data expected 1H 23).
On April 28th, the company announced that CFO Joshua Reed tendered his resignation (potential red flag) to pursue other career opportunities. As a result, Aldeyra appointed its then VP and Controller Bruce Greenberg to serve in the role of VP of Finance, Interim CFO and Treasurer.
On July 12th, the company announced it achieved primary endpoints in the sequence-randomized, double-masked, vehicle-controlled crossover clinical trial of reproxalap for the treatment of DED. Study drug was statistically superior to vehicle for each of the two prespecified primary endpoints, ocular redness in a dry eye chamber (P=0.0004) and Schirmer test (P=0.0005). Those p values are very convincing, I must add. Also, the secondary endpoint of Schirmer test ≥10 mm responder analysis was also achieved (P=0.0361) though P value was less convincing there. As management noted prior, statistical significance in one sign of DED is the norm, so achieving this in three signs is quite convincing. Reproxalap has been studied in over 1,800 patients, leaving me much more comfortable with safety profile and characterization at this point (somewhat derisked in this aspect). Additionally, as noted prior, reproxalap achieved its desired effect on ocular redness as soon as 10 minutes after dry eye chamber entry and rapid onset could make this a highly desirable asset for big pharma (I doubt the company with its lean structure would wish to go it alone). Lastly, reproxalap was statistically lower than vehicle for the secondary endpoints of ocular dryness (P=0.0068), discomfort (P<0.0001), grittiness (P=0.0001), stinging (P=0.0001), burning (P<0.0001), and itching (P=0.0003) symptoms.
On September 14th, Aldeyra confirmed upcoming catalysts and accelerating clinical momentum that we look for in ROTY. Namely, NDA submission for dry eye disease is still expected in Q4 and results from Part 1 of phase 3 GUARD trial for ADX-2191 in proliferative vitreoretinopathy are still expected in Q3 or Q4. Less meaningful but still relevant catalysts include phase 2 data for ADX-2191 in retinitis pigmentosa 1H 23 and phase 3 results from INVIGORATE-2 study of reproxalap in allergic conjunctivitis at some point in 2023 (guidance has not been narrowed down yet).
For the second quarter of 2022, the company reported cash and equivalents of $196M versus quarterly operating expenses of $17.7M. G&A came in flat at a very lean $3.1M, while research and development expenses rose to $14.6M. Management is guiding for operational runway to the end of 2023, which I believe seems both conservative and realistic (likely we see another equity raise by mid 2023 at the latest). Accumulated deficit since inception of $294.7M is quite reasonable for a company that's been in existence for 14 years and is yet to cross regulatory finish line for its lead product candidate.
On the conference call, management states they are committed to commercializing reproxalap and mentions internal launch as a possibility given limited number of prescribers in the ophthalmic space (I think this is a bluff). To be fair, they also note that partnering is the preferred option for most small biotech companies to take advantage of the leverage and resources of larger players. Regarding the possibility of signing a partnership, they note that there is no other novel, late-stage or NDA-stage dry eye asset available (perhaps they could obtain a very nice upfront payment and considerable economic participation in such a deal).
As for setting expectations on the GUARD trial in PVR, the condition and its complications (retinal detachment) is described as a dark curtain coming down over the patient's eyes in a matter of minutes (losing sight in that eye). From a commercial perspective, this is intriguing as patients are motivated to prevent that from happening again (no one wants permanent loss of vision). Standard of care has re-detachment rate of retina of around 40%, so that's considered to be the bar for comparison and Aldeyra is aiming to achieve statistically significant lower number. As a caveat, the study is underpowered to detect difference of treatment arm versus non-treatment. It is very telling that they are having trouble convincing surgeons to randomize the patient to no treatment given all the data available for methotrexate to treat (I imagine the FDA will be accommodative in that respect).
As for prior financings, January 2021 secondary offering took place at $9.50 per share (representing ~50% upside from current levels and the story has gotten significantly derisked since that time point).
As for institutional investors of note, I consider it a good sign that Perceptive Advisors continues to add to its position and now owns 17% of the company. As for insiders, CEO Todd Brady added to his stake in June and now owns over 1.2 million shares.
As for relevant leadership experience, Chief Development Officer Stephen Machatha served prior in scientific and product development roles at Synageva Biopharmaceuticals (acquired by Alexion for $8.4B), at Cubist Pharmaceuticals (acquired by Merck for $9.5B) and CyDex Pharmaceuticals (acquired by Ligand Pharmaceuticals for $31M).
Moving on to executive compensation, cash portion of salaries appears reasonable for a company this size (low $300k to $500k range). Similarly, stock and options awards do not appear excessive.
The important thing is to avoid companies where the management team is clearly in it for self-enrichment instead of creating value for shareholders, and looking at compensation is one of several indicators in that regard.
As for IP, the company owns 15 US patents and 12 pending non-provisional patent applications not to mention numerous foreign counterparts. Unfortunately, reproxalap's protection via composition of matter patent expires in 2028 (sooner than I would like) though it is possible that the term could be extended up to 5 additional years under provisions of Hatch-Waxman Act. Other patents in portfolio, if issued, could expire between 2026 to 2034.
As for other useful nuggets from the 10-K filing (you should always scan these in your due diligence as many companies like to sweep undesirable elements under the rug), for ADX-2191 the company acquired license via MEEI (Massachusetts Eye and Ear Infirmary) agreement and is on the hook for future sales-dependent milestone payments to MEEI of up to the low seven figures in the aggregate, as well as royalty payments in low single digits in US (also obligated to pay MEEI sublicense revenue received for any agreement inked with third parties with tiered range up to mid-single digits).
To conclude, at current valuation it would seem that the market is more optimistic about Aldeyra's approach to RASP as well as prospects for lead program reproxalap than it was in the past. Still, $200M enterprise value still leaves plenty of room for upside as the company steadily makes progress to (hopefully) getting initial approval in DED where regulatory risk would seem to be on the lower side given convincing data to date across a variety of relevant endpoints (did whiff on ocular redness endpoint in one study though).
I like that the operation is lean and cash burn is relatively low, compared to the cautionary story of Kala Pharmaceuticals (KALA) which comes to mind (tried to go it alone in DED market with Eysuvis launch then gave up and sold rights to the drug for a mere $60M upfront). Aldeyra by contrast, despite management posturing about being able to potentially go it alone, seems to be angling for a partnership that I would see as a much more likely scenario while they retain rare disease indications like PVR for themselves. As I noted prior, one significant con on the IP front is that composition of matter patent for reproxalap expires earlier than I am comfortable with (2028), though again there is room for extension via Hatch-Waxman.
For readers who are interested in the story and have done their due diligence, ALDX is a Buy and I can see the rationale for accumulating dips in Q3 ahead of upcoming data sets and regulatory catalysts.
From an ROTY perspective (focus on next 12 months), I still cannot get over my wariness of the dry eye disease space given increasing amount of competition especially in terms of generic options. Perhaps I will choose to revisit this one in the event that a partnership is inked for DED and AC indications, leaving them with more cash to pursue orphan disease indications which strikes me as their forte and where majority of shareholder value could be created. I also look forward to midstage results from newer exploratory indications so we can get a better idea of the opportunity for RASP inhibition in broader conditions such as chronic cough.
Key risks include additional dilution at some point in 2023, disappointing data whether in pivotal trials as well as exploratory phase 2 studies, negative regulatory decision or setback in regard to DED and especially heavy competition in certain areas they are pursuing such as DED and AC.
The Changing Landscape of Dry Eye Disease
Author's Note: I greatly appreciate you taking the time to read my work and hope you found it useful. While I post research on many companies that interest me, in ROTY (clinical stage) and Core Biotech (commercial stage) portfolios I own just 15 or fewer names in order to focus on stories that are highest conviction for me.
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