Last Month Insiders Bought Over $300 Million Of This Biotech

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Jun 26, 2015

I don’t typically follow biotechnology stocks, but doing a recent search brought up a very interesting situation in this company –Â Ardelyx, Inc. (ARDX, Financial). A clinical-stage biopharmaceutical company focused on cardio-renal, gastrointestinal and metabolic diseases, Ardelyx, like every other biotech was founded by a highly educated and skilled doctors.

Dominique Charmot, Peter Schultz, and Jean Frechet, founded Ardelyx to discover, develop and commercialize small molecule therapeutics that work exclusively in the gastrointestinal (GI) tract to treat cardio-renal, GI and metabolic diseases. At least that’s what the Ardelyx website says. Seems that they have a “proprietary” platform that allows the company to find new drugs, and it has one very promising drug.

RDX022

RDX022 is being developed by Ardelyx to treat hyperkalemia (elevated potassium), a potentially dangerous problem among patients with chronic kidney disease (CKD) and heart failure. There are 3 million CKD cases and more than 600,000 deaths from heart failure annually. This drugs market is very interested in new solutions. Plus the current drug used for high potassium is over 50 years old.

RDX022 is designed with improved chemical and physical properties as well as formulation improvements that would help patients take the drug easier. The company is looking to take advantage of a 505b(2) regulatory pathway in the United States for the drug, allowing it a faster path to approval by referencing the literature and the U.S. Food and Drug Administration’s previous findings of safety and effectiveness of the referenced drug product. If successful it could be in late stage development within a year. Hence, Ardelyx plans to skip phase 2 and start phase 3 trials as early as Q3 2016.

Insider trades

Between the 8th and 12th of June insiders bought $310 million worth of ARDX stock, over 35 million shares. The current market value is $299 million and these transactions, made mainly through a private placement (see below), show a strong vote of confidence into the future of the company’s drugs.

It’s been a tough 12 months for the company. It’s lead product barely beat placebo in CKD study and its partnership with AstraZeneca was ended after more than 2 years. Still, when you see investors pile in like this, you have to take notice and think about the potential that they know something you and I don’t.

Dangers and potential

The stock trades about 150,000 shares a day, and I’ve seen plenty of biotechs fluctuate in the last year, showing 200% gains on some and 80% losses on others. With these it’s hit or miss. Most are just pump-and-dump schemes without real insider buying.

However, some of these insiders helped Ardelyx raise close to $78 million in a private placement document filed June 22 with the SEC. These shares are harder to convert, can have only a small number of sophisticated non-accredited investors, and provide audited financial statements.

These shares cannot be sold for least one year without registration, and my guess is that they will not be placed into the float until a the stock is much higher. By then the diluted float will be around 30 million shares, and the market value will need to be upwards of $500 million to justify the current price per share. However, given the extraordinary valuations of other bio-techs with far less potential (and insider buying), it wouldn’t be farfetched to see a market cap of $1 billion or $1.5 billion accompany a jump to Phase 3 or any other positive study data.

One interesting investor in the stock is Peter Kolchinsky of billion-dollar management firm RA Capital Management. He owns 1.9 million shares, good for a 7.3% stake. Peter is a Harvard grad with a Ph.D. in virology who got his start when Vertex Pharma co-founder Rich Aldrich gave him $4 million in 2001 which he effectively turned into $13 million by 2003.

Conclusion

This could be a great long term play in a market with economic downside protection. If we experience another bear market, and we should all be expecting one in the next 3 to 5 years, this company will actually only trade based on its drug pipeline, giving investors a little safety.