The Stock That Tripled in a Day...And May Not Be Done

Key Points

• On February 28th, the FDA approved Reata’s lead candidate Skyclarys.
• The next day, Reata’s share price skyrocketed 199% to around $93.
• Skyclarys becomes the only approved drug on the market for patients aged 16 and older with Friedreich’s ataxia.
• Management estimates sales of Skyclarys will lead to $1.85 billion in annual revenue.
• Even after tripling, Reata Pharmaceuticals appears to have more in the tank.

Texas-based biotechnology company Reata Pharmaceuticals, Inc. NASDAQ: RETA lulled shareholders to sleep in 2022. The news flow was light, the trading pattern sideways and volume virtually nonexistent.

Things changed in dramatic fashion last week. 

On February 28th, the U.S. Food and Drug Administration (FDA) approved Reata’s lead candidate Skyclarys for the treatment of patients with an inherited neuromuscular disease called Friedreich’s ataxia. 

The next day, Reata’s share price skyrocketed 199% to around $93, its highest level since December 2021. Trading volume was 15x the stock’s average over the previous 90 days. The move showed just how explosive biotech stocks can be for patient, risk tolerant investors willing to wait for the big headline. 

Back ‘on the map’ as a biotech growth story, Reata Pharmaceuticals now has a long-coveted commercialized drug in its portfolio. Should investors covet the stock for their portfolios?

Why Is the Skyclarys Approval a Big Deal?

Also known as omaveloxolone, Skyclarys becomes the only approved drug on the market for patients aged 16 and older with Friedreich’s ataxia. The ultra-rare, progressive disease is diagnosed in approximately 5,000 Americans each year. Skyclarys, which is also under review in Europe, represents a major milestone for the patients, families and caregivers affected by the disease.

Along with the drug’s approval, the FDA awarded a ‘priority review voucher’ to Reata Pharmaceuticals as the sponsor of a product for a rare pediatric disease. The voucher gives the company rights to faster FDA review of a future drug for any disease. With an estimated four-month review advantage over competitors, it incentivizes Reata to develop treatments for other life-saving diseases that could reach the market and generate revenue quicker than usual. 

What Are the Financial Implications for Reata Pharmaceuticals?

Reata has stated that it expects Skyclarys to become available in the second quarter of 2023. This means the once-daily oral medication will soon be prescribed by neurologists and generate revenue. With patients set to contribute a nominal co-pay for the treatment, commercial insurance and Medicare are expected to be primarily responsible for the cost.

During a conference call, management told investors that Skyclarys would have a wholesale price of $370,000 annually. This equates to $1.85 billion in annual revenue — which may be at the lower end of the range. The National Health Institute (NIH) has estimated that the prevalence of Freidreich’s ataxia is upwards of 6,000 patients, pushing the market size to $2.22 billion. Plus, Reata has said that it plans to explore expanding the label to pediatric patients under 16 years of age. 

Regardless of how much revenue comes in over the next 12 months, it will be far more than Reata has generated since joining the Nasdaq in 2016. In 2022, the company earned around $2 million in collaboration revenue tied to its relationships with AbbVie and Japan’s Kyowa Kirin. Profitability is likely still years away but should trend in the right direction due to Skyclarys.

Is it Too Late to Invest in Reata Pharmaceuticals Stock?

With Skyclarys, Reata Pharmaceuticals gains not only revenue generation potential. The approval legitimizes the company as a developer of novel therapies for rare diseases and enhances the value of its platform. This stands to drive greater interest from institutional investors and could help accelerate the progression of other pipeline candidates.

Reata plans to start a phase 2 study of its second candidate, cemdomespib (or RTA 901), in the third quarter of this year. The drug is being developed as a potential treatment for various neurological conditions, including diabetic peripheral neuropathic pain (DPNP). Its other pipeline candidate, bardoxolone, is progressing well in studies for diabetes and chronic kidney disease.  

Even after tripling, Reata Pharmaceuticals appears to have more in the tank. For starters, it is still trading more than 60% below its record peak from three years ago. Second, the stock has found favor on Wall Street. Five analysts have called Reata a ‘buy’ since the FDA approval while two have taken neutral stances. Among the five bulls, the average price target is $113, which implies another 25% upside. 

The reason for caution, however, is the fact that CEO James Huff completed a $6.4 million sale of Reata stock on March 2, 2023 after acquiring 75,000 shares the day prior.  The sale represented about two-thirds of his direct stake.