Relypsa (RLYP): Eight Reasons We Wouldn't Run Away & Join This Circus

by Sonya Colberg, Senior Editor - 6/9/2016 9:53:16 AM

Relypsa (Nasdaq: RLYP) is a misunderstood dog-and-pony show forced to shine a light on its one and only trick pony, Veltassa.

Relypsa fans keep the show going by sticking a carrot out in front of investors. Indeed, the company's oh-so-benevolent stock promoters - plus a short squeeze that we believe is now over - have managed to push shares to nosebleed levels. Now there's nothing but air left in the stock.

Investors may check here for other viewpoints on the Redwood City, California-based chronic money-loser with one lonely drug to its name - and a whopping ~$300 million cash burn. Meanwhile, here are TheStreetSweeper's top eight reasons this stock is riskier than a colicky circus pony:

*1. Sole Drug: Cheap Castoff

The market has missed a telling issue regarding Relypsa and its only drug.

The company acquired the potassium-lowering drug, Veltassa, for just $12.5 million, according to the SEC filing.

But the seller, Ilypsa, didn't even bother to keep a percentage of any possible royalties:

"We do not have any royalty obligation under the IP License Agreement with respect to Veltassa, and in March 2013, we satisfied our sole milestone payment obligation with respect to Veltassa with a payment of $12.5 million...

"While the IP License Agreement does require that we make certain royalty payments on sales of covered products, other than in respect of sales of Veltassa, we are not currently developing any covered products under the IP License Agreement."

Here's the deal:

If the developer had any faith in Veltassa's intellectual property, it would have never sold that property on the cheap ... especially without hanging onto at least some royalties.

Ilypsa just wanted to unload the drug.

Relypsa's sales indicate the seller was smart to take the money and run... Read on ...

*2. Free Drug, Doc? Thanks, Not Really

Veltassa got cleared last fall to treat excessively high blood potassium or hyperkalemia. But not before the FDA had attached the dreaded "black box" warning label. The agency concluded the drug dangerously binds with other oral drugs, thus decreasing their effectiveness.

The stock got crushed because the FDA's strictest warning greatly limits the drug's possible uses - specifically not in critical life-or-death situations. Relypsa has rushed to submit more data in hopes the FDA might lift the black box warning.

The company began shipping the drug late last December. But Relypsa can barely give the drug away:

(Source: Company SEC filing)

The number of patients who were given a free starter kit actually declined slightly from March to April.

Relypsa also considers hospital and institutional acceptance of Veltassa critical to success.

But only about 69 units per week were sold to hospitals: 

(Source: Company SEC filing)

Indeed, while retail scripts increased, Relypsa stats indicate a persistently low acceptance rate by hospitals.

Now, let's step back to May to examine disappointed investors' sudden flight from the stock ...

*3. Stock Drop: Bad Earnings, Bad Funding Chances

Crowd anticipation can carry a circus act only so far. Sooner or later, the show has to go on and satisfy or even surprise the crowd.

So it has been with Relypsa.

The volatile stock cratered in early May:

(Source: Yahoo Finance)

The crowd dashed away from Relypsa, as indicated by the chart's yellow lines, primarily because of two big disappointments.

*First, the company surprised folks with a debt-tied private stock placement. Investors can't be blamed for getting mad over the idea of their stock getting diluted.

Nor could they be blamed for getting steamed over the terms of the debt deal: $150 million in senior secured term loans due in six years at an interest rate of ... 11.5%! 

This draconian arrangement indicates Relypsa could face great difficulty getting future funding.

*Second, on the heels of the dastardly debt deal, the company once again announced miserable earnings figures. In the first quarter, Relypsa turned in a stunning loss exceeding $54 million. That meant a $1.26 per share loss.

What could Relypsa fans now do to prop up the stock price?

Well, read on ...

*4. Promoters: Get The Stock Moving

Enter the stock promoters.

That's right. About three weeks after bad earnings and bad debt clobbered the stock price, promoter Bull In Advantage stepped into the center ring with a shiny bullhorn.

The promoter sent out thousands of emails hyping Relypsa on May 27. The email hype campaign is merely the latest of 10 such promotional campaigns that began in November:

 

(Source: stockpromoters, click to see more Relypsa promotions)

Hmmm, kind-hearted Bull In Advantage promoted Relypsa just when the stock needed a boost.

*5. How'd We Ever Get Here? Competitor's Loss Built Into Relypsa's Stock Price

Along with promotions and possibly a short squeeze, the stock rocketed amid buyout rumors ... rumors that arose shortly after AstraZeneca bought a business focused on a high blood potassium treatment called ZS-9.

But the FDA delayed approval of ZS-9 after finding issues during a manufacturing inspection. The agency also wanted to review recently submitted drug data.

That delay spooked investors and drove up Relypsa's price.

But investors misunderstood. 

They thought the two drugs were basically the same. However AstraZeneca's ZS-9 is designed for use in life-or-death situations ... while the FDA specifies Relypsa's drug "should not be used as an emergency treatment for life-threatening hyperkalemia because of its delayed onset of action."

Indeed, Reuters recently quoted sources who said they "expect ZS-9 to outperform Veltassa over time" anyway.

Yet the delay looked enticing to Relypsa bettors, especially after a rumor circulated that those companies that had been interested in ZS-9 might still be interested in a hyperkalemia stock. Well, the stock ran up so high that the company's valuation ballooned to around $1 billion.

Now, the market's misconceived enthusiasm is built into Relypsa's stock price...and in our view the stock is now perfectly positioned to plunge. Indeed, insider selling this week suggests someone else thinks this is a good time to sell...

*6. Insiders Yell "Sell! Sell!"

Insiders sold more than 10,000 shares of their stock  ... just this week.

(Source: Insidertrading.org)

We wonder why executives and directors would unload stock now if they believed in a buyout or an improving  future for Relypsa.

*7. Cash Burn: Growing Worse; Terrible Numbers; Potentially Dilutive Offering Possible?

Indeed, Relypsa is expected to burn through a stunning $275 to $300 million in operating expenses this year, the chief financial officer said during the last conference call. Losses already exceed $539 million.

Indeed, the company appears overwhelmed by the costs of handling its sole drug offering.

Last quarter financials show, while revenue rose ~$11 million due to a partial recognition of a one-time payment, overall operating losses soared above the same time in 2015 by 87 percent. And salary costs rose a whopping 275 percent!

(Source: Company SEC filings)

Today's lofty stock price, growing operating expenses and overhanging loan payments suggest another dilutive stock offering could soon loom over stockholders' heads.

Relypsa puts the dire financial situation in blunt terms:

"We will continue to incur net operating losses, even if we generate meaningful revenues from the sales of Veltassa."

*8. Excessive Executive Compensation

Who's profiting from this unprofitable company - which expects continuing losses even if its drug did happen to become a commercial success?

Take one guess ...

(Source: Company SEC filing)

Salaries, bonuses, stock, options, relocation benefits and other goodies really add up for the top folks.

Altogether, they hauled in ...

$15.3 million!

*Conclusion: Stop The Madness

So should investors really buy the stock now ... at a cost of ~70 times the price Relypsa paid for its drug?

Should they really buy a stock that costs 26 times projected (absurdly inflated) sales?

Should they buy shares when insiders are selling?

Should they really continue to fund executives' $15 million compensation package?

What about that fading buyout rumor? Reuters reported Merck, Pfizer and Biogen have "expressed interest in acquiring undervalued companies."

They are not going to buy overvalued Relypsa to get a risky, commercially unproven drug with extremely disappointing sales.

Indeed a week after the rumor surfaced, Benzinga sources essentially dashed the idea. Sources said Relypsa had stopped using an advisory firm hired to attempt to sell Relypsa's business assets.

It's hard enough to imagine a buyout happening at $5 or $6 per share ... and virtually impossible to imagine one at today's nearly $20 per share.

All the clowns in the circus would hang up their silly hats in disgust if anyone suggested they buy this company that offers: (1.) a sole, arguably inferior drug can barely be given away; (2.) dependence on dilutive stock offerings, debt; (3.) a recent draconian 11.5% loan suggesting future funding difficulties; (4.) losses exceeding half-a-billion bucks; (5.) projected expenses of ~$300 million; (6.) overpaid executives; and (7.) professional stock promoters who help push shares to unsustainable heights.

We'll throw our own silly hats in the air and anticipate this stock will soon dive around 50 percent.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in RLYP and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].

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