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by: Wilsonville Capital
Wilsonville Capital
Growth, momentum, long only, IPOs
( 291 followers)

Summary

Tricida is trying to sell 10.3 million shares at $16-18 per share, which will trade on the Nasdaq under the symbol TCDA.

No convertible securities will be remaining after the IPO goes live. Dilution risk will diminish.

At $17 per share, the company would trade at approximately 2.8x its cash per share.

Goldman Sachs, J.P. Morgan and Cowen are working on the IPO.

With an experienced management in place and in-house generated patents, Tricida seems a must follow stock. The fact that company’s only product candidate is at Phase 3 is quite interesting. Finally, loan agreement with Hercules will provide additional financing, which could lead to share price appreciation in 2018 and 2019.

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The underwriters are well-known. It is another beneficial feature:

Source: Prospectus

Business Overview

Incorporated in Delaware in May 2013 and headquartered in San Francisco, Tricida is a pharmaceutical company focused on the treatment of chronic kidney disease. With one product candidate at Phase 3, the company seems interesting because the research is at the final stage. It has planned to submit a New Drug Application in the second half of 2019.

The company casts itself with the following words in the prospectus:

Company’s only product candidate completed a Phase 3 clinical trial after working with 208 eligible subjects. The image below shows the results provided in the prospectus:

Source: Prospectus

In the next phase, Tricida will work with 196 patients to continue its safety extension trial TRCA-301E, which is expected to be completed in the first half of 2019.

What’s the total addressable market? According to estimates of Tricida, approximately 3 million people suffer from chronic kidney disease in the United States. The following lines from the prospectus show more information about people suffering from disease as well as Tricida’s patent rights:

Source: Prospectus

According to the prospectus, annual Medicare expense for CKD including end-stage renal disease is approximately $98 billion.

Which are the competitors of Tricida? Investors will appreciate that there are no therapies approved by the FDA for the treatment of metabolic acidosis. No competition will mean more potential revenues for Tricida in case of success:

Source: Prospectus

Tricida has 61 employees, of which 45 are engaged in RD. The following lines provide further information:

Source: Prospectus

Additionally, the company leases a 26,897 square feet office until 2021. The amount of square feet seem sufficient for 61 employees.

Source: Prospectus

Experienced Team

The management seems to have outstanding expertise accumulated in large pharmaceutical companies. The founder and CEO, Gerrit Klaerner, Ph.D., and CSO, Jerry Buysse, Ph.D., previously discovered and received approval for the commercialization of Veltassa® (patiromer) and bixalomer (approved in Japan as Kiklin®). Additionally, members of the management bring expertise accumulated in Anacor Pharmaceuticals, Inc., Goldman Sachs (NYSE:), Alexion Pharmaceuticals, Inc. (NASDAQ:), and Pfizer Inc. (NYSE:).

Assets and In-house Generated Patents

As it is usually the case in pharma IPOs, the company shows stable financial situation. With $9.7 million in cash and $57.7 million in marketable securities, the company seems cash rich. The following is the list of assets provided in the prospectus:

Source: Prospectus

With that, there are some intangibles that are not registered in the balance sheet. The rights for the TRC101, the company’s sole product candidate, were not acquired by Tricida, but discovered in-house. The company has two issued patents in the U.S. and another one in Europe. The following lines provide further information in this regard:

Source: Prospectus

Research in Google Patents shows that Tricida filed a patent application in February 2015 and received a patent in December 2015. Check the following image and note the name of the company:

Source: Google Patents

With most small pharmaceutical companies acquiring rights from large groups to conduct their research, investors will appreciate that Tricida discovered the potential beneficial use of TRC101.

Liabilities: Hercules Loan

On the liabilities front, as of December 31, 2017, the company showed total liabilities of only $11.545 million with $11.2 million in current liabilities:

Source: Prospectus

However, the investors need to notice the Loan and Security Agreement signed with Hercules Capital Inc., which was not included in the balance sheet. Depending on several performance-based milestones, the company could receive up to $100 million at high interest rate of 8.35%. The following lines contain further information in this regard:

Source: Prospectus

With that, the contractual obligations as of today are not worrying. Tricida will have to pay $37 million for term loan and several leases:

Source: Prospectus

Investors will appreciate term loan received from Hercules Capital Inc. If the clinical data from the Phase 3 Clinical trials is beneficial, Tricida will receive financing to continue its activities. With that, investors should also notice that 8.35% interest is elevated. It is evident that in case of failure, Tricida will have to pay large sums to debt holders. Little assets could remain after payment to debt holders. As a result, equity investors could see large value erosion if the company is not successful

Income Statement, Cash Flow Statement

The company seems very well financed, but it is also burning cash at a high pace. The net losses in 2016 and 2017 were equal to $28.6 million and $41.3 million respectively:

Source: Prospectus

On the cash flow front, the situation is the same. The company used cash of $23.1 million and $40.4 million in operating activities in 2016 and 2017 respectively:

Source: Prospectus

With this elevated cash burn rate, the company will need to raise more capital or receive more debt soon. The company noted in the prospectus that with the current amount of cash, it will have financing to fund its operations for the next 12 months. Investors should be aware of the risks. If the company raises more capital, the share price could decline in the future.

Source: Prospectus

Use of Proceeds

Investors will appreciate that the money to be received from the IPO will be used for financing the research activities. A small part of the proceeds will be used to repay the term loan:

Source: Prospectus

Conversion of Convertible Securities

Investors who take a quick review of the current state of the balance sheet will not appreciate $147 million in convertible preferred stock. It is shown in the image below:

Source: Prospectus

My followers and investors making a full review of the prospectus will get to know that the equity structure will be much better after the IPO. All the outstanding convertible preferred stock will be converted into shares of the company’s common stock. Read the following lines for more information in this regard:

Source: Prospectus

Previous Shareholders could buy up to $45 million in new shares

The following is the list of shareholders with the amount of shares owned before the offering. Investors will appreciate getting to know that well-known money manager Wellington Management Company is among the shareholders:

Source: Prospectus

Additionally, it is also beneficial that certain shareholders have indicated interest in acquiring up to $45 million in shares:

Source: Prospectus

With that, it is also quite beneficial that the Board of Directors of Tricida is independent:

Source: Prospectus

Resources and Valuation

Selling shares at $17.00 per share, the company would have $233 million in cash after the IPO. With $33 million in debt, the net debt is equal to approximately -$200 million. Taking into account 39 million shares outstanding after the offering at $17, the market capitalization would be equal to $663 million, and the enterprise value would be equal to $463 million.

With Medicare expenses for CKD at $98 billion, in my view, the amount of capital employed is not large. With this information in mind, shareholders should get excellent stock returns if the company is successful.

Source: Prospectus

The cash in hand per share is equal to approximately $6. If shares trade at $17 after the offering, the price would be 2.8x its cash in hand. With most pharma IPOs trading at 3x after the offering, Tricida does not seem undervalued. Readers should check Autolus (NASDAQ:) , or Eidos () for some other examples of pharma IPOs trading at 3x their cash per share.

Conclusion

With a massive total addressable market and a fantastic team of professionals, Tricida seems like an interesting stock to buy and hold for a long time. Taking into account the agreement with Hercules, beneficial data after the clinical trials would help Tricida receive additional financing, which could lead to share appreciations. With this rationale, following company’s press releases closely will be very important.

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

“We are a late-stage pharmaceutical company focused on the development and commercialization of our drug candidate, TRC101, a non-absorbed polymer designed to treat metabolic acidosis by binding and removing acid from the gastrointestinal tract, or GI tract. Our goal is to slow the progression of chronic kidney disease, or CKD, through the treatment of metabolic acidosis.” Source: Prospectus

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