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Quarterly Update, 1Q20: LJPC

In this article series I go over our core investments, their investment thesis, and new developments during the First Quarter of 2020 (1/1/20 to 3/31/20) starting with LJPC.

La Jolla Pharmaceuticals (Nasdaq: LJPC)

During 1Q20 LJPC gained +8% while the S&P500 lost -22% outperforming the market by +30%. Unfortunately for many of our community members, including executive team members, our cost average is still above the current market price. Nonetheless, we reaffirm our bull thesis which we argue is bolstered by new developments in the context of the still evolving COVID-19 global pandemic.

To recap, LJPC is a commercial stage pharmaceutical company with one approved commercial product Giapreza (Angiotensin 2). Giapreza has been commercially available in the U.S since March 2018 and approved for commercial use in Europe since August 2019. Giapreza is used to increase blood pressure in adults with septic or other types of distributive shock. For instance, shock induced by complications associated with critically ill COVID-19 patients. 

A New Drug Application (NDA) was submitted for LJPC’s second commercial stage drug LJPC-01188 (I.V artesunate) in November 2019 for the treatment of severe malaria. Based on data from two randomized clinical studies LJPC-0118 was granted Breakthrough Therapy Designation and Orphan Drug Designation. In these studies LJPC-0118 demonstrated superiority over quinine (the standard of care) at reducing mortality rates in patients with severe malaria. The resulting designations for LJPC-0118 signal that it could provide a significant treatment benefit over quinine and comes with perks such as an expedited FDA review process and extended patent life protection.  

Investment Thesis: Giapreza is gaining traction as a vasoconstrictor (i.e a medication for increasing blood pressure) in the U.S and its commercial performance should soon align with the markets original expectations. Furthermore, we anticipate FDA approval of LJPC-0118 sometime this year and the subsequent award of a priority review voucher with a market value between $90-128+M. Our 2020 price target for LJPC is $20. 


Recent Sales Growth

Figure 1: LJPC March 2020 Corporate Presentation

Full year net sales of Giapreza increased +129% between 2018 and 2019 from $10.1M to $23.1M. Between 4Q18 and 4Q19, net sales increased +74% ($4.2M to $7.3M). Furthermore, the change between 3Q19 to 4Q19 was +28% ($5.7M to $7.3M). Based on our market research, these changes were driven by increased clinical adoption and off label use. Over 2019 Giapreza made it into formularies at top-tier medical institutions including Northwestern University, University of Chicago, Kaiser Permanente, Mount Siani Hospital, and the Mayo Clinic. 

Two industry veterans and medical experts argue in this article that the sales uptick may also be attributable to more comparable pricing of Giapreza relative to its top competitor Vasostrict which recently raised prices. The authors explain that 25 vials of Vasostrict costs $4326.20 compared to $1500 per vial of Giapreza. The key differentiator being that on average patients use 1-2 vials of Giapreza (total average cost = $2,250 per patient) vs. 10 vials of Vasostrict per patient (total average cost = $1730.48). This comes out to a 30% markup for Giapreza. To offset its higher cost payers can leverage the new technology add-on payment (NTAP) program through the Centers for Medicare and Medicaid Services (CMS) that reimburses up to 65% of the average cost. Furthermore, as of 10/1/19 payers can be reimbursed up to an additional $1,950 for qualifying patients. LJPC further offers a robust Warranty program signaling confidence in Giapreza’s performance.

Moving forward we anticipate continued commercial strength in the U.S, penetration into the European market, and increased use of Giapreza associated with treating critically ill COVID-19 patients to propel the share price into the double digits this year. It would not be surprising to see record Giapreza sales in 1Q20, although 2Q20 is where expect to see the greatest jump in sales revenue driven by COVID-19. On top of that, FDA approval of LJPC-0118 should bolster the company’s balance sheet with a potential $90-128+ from the sale of the resulting priority review voucher, as well as, any revenue recognized from commercial sales of LJPC-0118. 

What took so long?

Figure 2: LJPC 5-Year Chart From TradingView

Two years ago when Giapreza made its market debut LJPC traded for around $35 per share. At the time, peak annual sales of Giapreza were forecasted by analysts to be north of $500M. It quickly became apparent that was not going to happen in the treatment paradigm of the time. Even though the 321 patient ATHOS-3 (Angiotensisn 2 for the Treatment of High-Output Shock) study showed that Giapreza significantly improved blood pressure response in 75% of patients in the treatment group, clinicians were reluctant to incorporate it into their treatment protocol for high-output/distributive shock. Why? Because the standard of care regimen of first using norepinephrine, followed by vasostrict for non-responders, worked well. When dealing with critical/intensive scenarios care doctors will opt with the most well understood therapeutic options over new compounds (i.e. Giapreza). However, as evident by a significant uptick in sales revenue growth (figure 1) and new research presented at the 2020 Society of Critical Care Congress, Giapreza market uptake is accelerating.  

One such study conducted at the University of Minnesota assessed the impact of using Giapreza in 32 patients with refractory septic shock. Essentially this means that patients included in the study went into a septic shock and did not respond despite receiving high doses of vasopressors (such as norepinephrine and vasostrict). The results strongly support data observed in the ATHOS-3 study. The primary composite end-point was achieved in 79% of patients. Moreover, the average vasopressor dose needed after 48-hours was reduced by over 50%. Notably, 38% of patients required a higher dose of another vasopressor and there was a 68% in-hospital mortality rate (mortality rates for refractory septic shock can be as high as 90-100%). The investigators concluded that Giapreza effectively increased the blood pressure in patients with refractory septic shock within 3-hours while simultaneously decreasing the vasopressor requirement 48-hours after initiating therapy with Giapreza.       

New Developments- Giapreza Joins The Global Arsenal of Pharmaceutical Weaponry in The War Against COVID-19

Over the past 30-days Giapreza has secured an international foothold in the Coronavirus (COVID-19) treatment landscape. As you know, COVID-19 is a novel virus that originated in the Wuhan Providence of China. Current treatment options are limited and although vaccines are under development it will be 12+ months before any are commercially available.

According to data from Statista up to 31% of COVID-19 patients between 75 and 80 years old are admitted to the ICU while the average for all age groups ranges from 5% to 12%. These stats are corroborated by a February 2020 case study conducted by the Chinese Center for Disease Control and Prevention. They discovered that of 44.7K confirmed COVID-19 cases 5% became critically ill developing septic shock, respiratory failure, and/or organ failure. Moreover, as the outbreak evolved into a pandemic we’ve seen that other countries are facing similar if not worse outcomes. Thus, it makes sense that in less than 30-days leading physicians in Italy, the United Kingdom, Germany, and  have requested Giapreza for use in patients with septic shock related to COVID-19. 

These are certainly positive developments for LJPC. The direct significance, however, is not to LJPC’s top-line revenue growth. Rather it supports our bull thesis that Giapreza is gaining broader market adoption and has significant utility when dealing with critically ill patients. The resulting real-world data should increase the permeability of the European market for Giapreza. Doctors will have an increased awareness and likely access to clinical protocols established by their peers that should catalyze adoption.  

 As stated earlier we anticipate U.S sale of Giapreza to continue strengthening throughout 2020. Its bitter sweet but in reality the COVID-19 outbreak should boost 2020 Giapreza revenue. It follows that if Giapreza is being requested throughout Europe for treating sepsis associated with COVID-19 prior to commercial launch then its also being used for the same purpose domestically. The difference is that in the U.S Giapreza is available commercially. As we saw earlier Giapreza showed significant sales in the latter half of 2019. In our view, Giapreza should be prescribed even more now than it was pre-COVID-19 for the treatment of septic shock and this should be reflected by an uptick in 2Q20 sales revenue. This is supported by the incorporation of Giapreza into the Department of Defense Guidelines for clinical management of septic shock associated with COVID-19 where its recommended as a third-line agent. We feel that in time Giapreza should become more widely accepted as a second-line therapy over Vassopressin and the primary hindrance is its premium pricing and lack of awareness. One of the doctors using Giapreza in Europe confirmed to us that it works well as a second or third-line choice. In an interview with Reporter Gary a professor at the University of Texas and practicing emergency room physician Dr. Randy Lipscher voices his opinion that Giapreza is the only FDA approved medication that actually works in treating critically ill COVID-19 patients. Lastly, an editorial article published in the Critical Care on 4/7/20 raises some intriguing question regarding the application of Giapreza in treating COVID-19 patients with, and potentially without septic shock. In short, the authors argue that Giapreza should be explored as a protective measure against COVID-19 as its mechanism of action counters the believed parthenogenesis of COVID-19. 

Concluding Remarks

We feel that 2020 will be looked back on as the beginning of a new era for the LJPC. Even now some associate the company with poor commercial execution and as having limited upside. The strengthening commercial performance of Giapreza in 2019 suggests their sentiment is misguided. Moreover, the body of clinical evidence is mounting in support of Giapreza as an effective vassopressor on par with Vasostrict. The data produced by doctors using it in Europe should affirm this and potentially influence more doctors to insist their hospitals stock it despite the higher cost. As we have heard from Dr. Lipscher and doctors using Giapreza in Europe it really does save lives in patients with septic shock from COVID-19 or otherwise. 

I am/we are long LJPC  

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