In early March, Rigel Pharmaceuticals Inc. (NASDAQ:RIGL) reported a near miss on revenues for Q4’21, but the stock rallied nonetheless and has continued to run since. The reaction tells us something about the COVID-19 premium built into the stock at current levels, this article takes a look.
Figure 1: Past 12 months of RIGL trading. The stock jumped from $2.51 (close prior to earnings) to close at $3.04 (+21%) the next day.
RIGL’s financial update
With earnings on March 1, RIGL reported net product sales of Tavalisse were $63M for full year 2021, and revenues for the year were $149.2M thanks to $86.2M in contract revenues ($66.6M as part of an agreement with Eli Lilly (LLY)). The thing is, RIGL already provided preliminary numbers for full year 2021including net product sales of Tavalisse of ~$63.0M in a January 10, 2022, business update, so there are no real surprises either way here to justify a large reaction in the share price.
Looking further, RIGL’s GAAP EPS of $-0.13 for Q4’21, was in-line with expectations, which wouldn’t explain the rally in the stock either.
The answer isn’t in the financials but I’ll finish up the summary here. RIGL had cash, cash equivalents and short-term investments of $125M per share as of year-end 2021, and notes that it took on an additional $10M from its credit facility in February 2022. With 183,724,053 shares outstanding as of February 24, 2022, at $3.40 RIGL has a market cap of $583.7M and an enterprise value of $478.7M.
Figure 2: Net product sales of Tavalisse by quarter.
RIGL’s update on the COVID-19 study
RIGL’s update on its COVID-19 study of fostamatinib seems the more obvious candidate for the rally in the stock. While RIGL began running a 308-patient study in 2021, and had already enrolled 176 patients by August 12, a subsequent update of 210 patients enrolled by November 2 (34 patients over 82 days, 0.41 patients per day) was a little underwhelming. RIGL has since noted changes to the inclusion criteria, in part to speed the rate of enrolment, of the COVID-19 study as of December 2021. Unfortunately a January 10, 2022, update of 231 patients enrolled (21 patients over 69 days, 0.30 patients per day) was progress but at an even lesser rate. The good news is that the earnings update on March 1, noted 265 patients now enrolled in the study (34 patients in 50 days, 0.68 patients per day) and I think that improvement in enrollment rate, combined with confirmation that RIGL is on the home stretch, is what has caused the stock to run.
RIGL should be able to complete enrolment of the remaining 43 patients required in about 65 days if prevailing rates of enrolment were to continue. I have that date, 65 days from March 1, as May 5, 2022. The endpoint in RIGL’s 308-patient, COVID-19 study is “Progression to severe/critical disease within 29 days of first dose of study treatment.” If RIGL completed enrolment of the study in early May, then results in mid-to-late June seem plausible, accounting for a week to analyze the data and leaving some wiggle room for a bit of slowing in enrolment rate. For a study where mediocre rates of enrolment have sometimes been a concern, confirmation that RIGL continues to enroll and is close to a result is what seems to be causing the rally in RIGL stock.
Concerns about COVID-19 studies being able to enroll remain relevant as the omicron variant has proved to be a milder variant, causing fewer and shorter hospitalizations. Indeed SAB Biotherapeutics (SABS) recently announced that the National Institutes of Health had ceased enrolment in a COVID-19 study testing its drug SAB-185. That being said, the SAB study was stopped due to low rates of hospitalized patients and low rates of death. RIGL’s study doesn’t require deaths to compare the drug to placebo, and looks at the already hospitalized patient. SABS did note that it would look at high risk patient groups as a potential avenue for future clinical study of SAB-185 in COVID-19, in addition to the prophylaxis indication, and so SABS remains a potential competitor in the future for RIGL.
Before we talk about what this says about the COVID-19 premium built into the stock, I want to note the other announcements in RIGL’s earnings release.
Figure 3: Screenshot of RIGL’s earnings release, high impact updates highlighted by Biotech Beast.
On top of expected revenues, RIGL confirmed results in the warm autoimmune hemolytic anemia (wAIHA) study were still expected in mid-2022, along with results in COVID-19. RIGL’s January 10 update had already announced enrolment in the wAIHA study was complete and that results were expected in mid-2022, so the wAIHA part is not really news. Further the company noted R289, an IRAK1/4 inhibitor, was moving into a phase 1b trial. A trial start is good news, but a phase 1b study doesn’t likely explain the run-up in RIGL’s stock. Lastly, RIGL’s R552, partnered with LLY, was noted to be heading into phase 2 in psoriasis. Still the LLY partnership was already known and was said to be entering phase 2 in February 2021 when the deal was announced. If anything, that entry to phase 2 seems a little behind the initial schedule.
There is a COVID-19 premium now built in
RIGL had been trading the mid-to-low $2.50’s and with the stock now trading in the $3.40’s, there is $0.90 of upside that really shouldn’t be explained by RIGL reporting revenues that are more or less where they were expected to be, the start of a phase 1b trial, or another confirmation that RIGL expects results in wAIHA in mid-2022. The COVID-19 trial was the uncertainty with lackluster rates of enrolment and if there was any COVID-19 premium in RIGL’s stock, it might have been there in 2021, not in early 2022. Indeed I’ve seen the COVID-19 premium ripped out of many stocks, Moderna (MRNA) and BioNTech (BNTX) are down over 60% from their 2021 highs with a brutal biotech sell off from November onwards not helping even the non-COVID biotech names. Notably, even though the biotech sector has seemingly found a bottom, the SPDR S&P Biotech ETF (XBI) is up about 1.6% since March 1, whereas RIGL jumped 21% with earnings and has run a further 12% since.
Figure: XBI trading the past 12 months. An ~40% downturn from early November to late February might have found a bottom, but not like RIGL.
Conclusions, trade implications
Since I view the price action above $2.50 as largely due to COVID-19 premium, I’d speculate that a failure in COVID-19, if announced prior to results from the wAIHA trial, would send RIGL back down to at least that level. That being said, overreactions occur, and at an enterprise value of $478.7M, based on product sales of $63M, an EV-to-sales multiple of 7.6 seems a little lofty for the sales growth offered comparing 2021 to 2020 (see figure 2 to compare 2021 quarters to 2020). As such, you can argue RIGL has more room to fall than to $2.50 if you want, that there was already some COVID-19 premium built into the share price, and the update showing improved enrolment rates has added more.
There are counterpoints. While the 7.6 EV-to-sales multiple here gives the stock plenty of room to fall if we look at how sales growth seems modest, the continued ex-US launch of fostamatinib by RIGL’s partners remains a relevant source of future revenue growth and the wAIHA indication offers another potential source of revenue growth. Which brings me to my next point, the COVID-19 result won’t happen in a bubble and sales of $63M, or the fact that sales growth seems modest, would be an irrelevant if RIGL’s fostamatinib succeeds in wAIHA. If you’re long right now you’re exposed to both COVID-19 and wAIHA.
I’m still bullish and I still see a long in RIGL as a good potential play, but I think the price action recently shows there is now more COVID-19 premium built into the stock. The risks of any long in RIGL are several fold, a few of which are noted here. Firstly, a slowing of enrolment has occurred before and could occur again, the incidence of COVID-19 is dynamic, if no one is getting sick, it is hard to enroll, lackluster updates on enrolment could cause the stock to fall. Secondly, failure of RIGL’s COVID-19 study would cause the stock to drop but so would failure of fostamatinib is in other trials for COVID-19 that are being run, such as the NIH’s ACTIV-4 study. Comments on the recent earnings call suggest RIGL will produce a readout in COVID-19 first, but there isn’t a guarantee on that.
We expect our readout to be in mid-year and I think the ACTIV-4 probably is afterwards. So obviously, we’ll have the first answer — our own answer first. And we’ll proceed from there.
Raul Rodriguez, CEO and President of RIGL, Q4’21 earnings call.
Lastly, RIGL could announce disappointing results in the wAIHA study, causing the stock to drop, before the COVID-19 trial results are ever announced.