Happy holidays and Happy New Year! Full disclosure: I'm already fully invested in Baudax Bio Inc (BXRX) with an average cost basis around $1/share. Before this year ends, I want to take some time to write down this thesis for my own reference, and hopefully this can provide some insights to someone who is also interested in this beaten-down biotech company.
What I like about BXRX:
- Low risk entry: a very strong accumulation base on chart with a sexy gap to fill
- Two private placements in total $20M have offering prices of $1.165 and $1.185 per share, at a premium to the market (this is very important)
- Commercial launch of FDA-approved drug Anjeso, a non-opioid long-acting IV treatment, with significant commercial opportunities
- Founder CEO Gerri Henwood has over 2.5M shares to vest (I like when management has their skin in the game)
- A spin-off from Recro Pharma Inc (REPH) on 11/22/2019. (I like it more when a stock is under selling pressure that has nothing to do with its fundamentals)
- They should be good without raising more capital for another 12 months
- Non-opioid drug theme
- Mismanaged capital raise earlier this year. The # of shares increased quickly from 17M shares in March to 42M now (78M fully diluted)
- Revenue ramps up slower than expected due to hospital shutdown caused by COVID
Overview
BXRX owns Anjeso, a non-opioid, long-acting IV drug for moderate to severe acute pain. Anjeso was originally acquired by Recro Pharma Inc (REPH) as an asset deal from Alkermes (ALKS), along with a contract development and manufacturing organization (CDMO) business, together for $50M in 2015. At that time, Anjeso was just ready for starting Phase 3. After a few years of trial and a couple of back and forth with FDA, Anjeso finally received FDA approval in Feb 2020.
Near the end of 2019, with the anticipation of the receipt of FDA approval, REPH decided to spin off BXRX from its CDMO business and prepare for the commercial launch of the new drug. BXRX is targeting at rapidly growing non-opioid market which addresses the need to reduce the reliance on opioid for acute pain management. According to BCC Research, "the global market for non-opioid pain treatments should grow from $13.8 billion in 2019 to $31.8 billion by 2024 at a compound annual growth rate (CAGR) of 18.3% for the period of 2019-2024."
Low risk accumulation phase
Chart is always my first key to understand a company. Look at the beautiful flat line since November 2020, together with the huge volume spikes over the same period. The stock is absolutely unloved by most and gets dumped harshly by the market. Apparently, this has shown a great support at this price level - someone is accumulating all the shares sold by panicking crowd. That's why the stock didn't keep plummeting under continuous heavy selling pressure because someone is constantly buying to support the current price level. Then I ask myself - who are the buyers? It has to be smart money. BXRX is not a business that sits there doing nothing for fun; it has a drug approved by FDA earlier this year and it's making progress quickly to ramp up sales. This is not just my speculation: this hypothesis has been reaffirmed by the institutional investors (the smart money) by paying a premium to get over 20M shares and warrants. Although it may not be the same institutions who bought shares on the open market, it clearly shows that the smart money wants the shares.
| Date | 2/21/2020 | 3/23/2020 | 12/29/2020 |
| Event | FDA approval | First public offering | Today |
| Price | $9.16 | $3.25 | $1.02 |
| # of Shares | 9.3M | 20.9M | 42.6M |
| # of Shares (Fully Diluted) | 12.8M | 36.3M | 78.3M |
| Market Cap | $85M | $68M | $43M |
| Market Cap (Fully Diluted) | $117M | $118M | $80M |
In addition to the strong base setup, on 10/20/2020 when the company announced its plan to convert outstanding warrants, the stock price plunged 40% from $2.6 to $1.5, leaving a price gap on the chart. Keep in mind that 90% of the gaps end up getting filled. I recently learnt the rationale behind this and found it quite fascinating. Market makers are the participants that buy and sell the same security to narrow the spread between bid-ask spread and provide liquidity to the market. They make profits by selling the security at a higher price than what they buy. When a bad news hits, market makers see lots of market sell order before the opening of the market. Their best interest is to set the price as low as possible so when the market opens they can absorb most of shares from the sellers who sell on market orders. This sudden price drop forms the gap on the chart. However, remember market makers are there to make money by providing liquidity. The question becomes how are they going to make money after they've amassed so many cheap shares? Again, it is now their best interest to sell those shares in their inventory at a higher price - they push the price up to back where they were, and the gap will get filled. Yes, I'm aware that not all gaps are created equal and 10% of those never got filled, but 90% odd is still in my favor. It's just a game of statistics.
Non-opioid drug competitive landscape
I'm not a medical expert in any sense, but I'm still trying to put together a competitive landscape in the table below so that I can understand the potential market opportunity for Anjeso.
Non-opioid drug competitive landscape
I'm not a medical expert in any sense, but I'm still trying to put together a competitive landscape in the table below so that I can understand the potential market opportunity for Anjeso.
| Drug | Anjeso | Exparel | Zynrelef | Ofirmev | Caldolor | Dyloject | Toradol |
| Company | Baudax Bio Inc (BXRX) | Pacira Biosciences Inc (PCRX) | Heron Therapeutics Inc (HRTX) | Cadence Pharmaceuticals (CADX) | Cumberland Pharmaceuticals, Inc. (CPIX) | Hospira, Inc. (HSP) | Generic |
| Duration | 24 hours | 72 hours | 72 hours | 6 hours | 6 hours | 6 hours | 6 hours |
| Drug Price | $94.00 / dose | $334.18 / dose | FDA approval pending | $47.37 / dose $173.84 / 4 doses | $78.60 / 4 doses | $9.84 / day | |
| Market Valuation | $80M (fully diluted) | $2.56B | $2B | Acquired by Mallinckrodt plc for $1.4B | $46.01M | ||
| Peak sales | $250M (Est.) | $470M | $545M (Est.) Current revenue $84.90M comes from other drugs | $340M | $5.2M ($42M sales comes from other products) | No meaningful sales |
The two failed drugs Caldolor and Dyloject have very similar profile with the generic drug, Toradol, with effective duration for only 6 hours. In contrast, Anjeso has a special position among all, being the only drug that provides 24 hour pain relief duration and competitive pricing compared to other brands. Many bears are concerned that the cheap generic Toradol will limit the growth of Anjeso. However, according to BXRX, their ambition is really to gain more market share from the traditional opioid treatment and to target at those physicians who are open-minded to experiment with different kinds of new non-opioid solutions. With the public sentiment shifting away from opioid use (e.g. U.S. Sues Walmart, Alleging Role in Fueling Opioid Crisis), I believe there is still a significant opportunity for non-opioid drugs to take over. If I discount analysts' estimate for peak sales and assume BXRX can only achieve 20% of the target, given average P/S ratio 4 across the industry, Anjeso should have a fair market cap of $200M which is more than double of what it has right now even based on a fully diluted basis. If BXRX can really hit that estimate, the upside is 10X. The risk and reward looks very attractive to me.
Here is the comment from John Harlow, chief commercial officer at BXRX about their competitive landscape:
"A certain number of accounts are not spending any branded dollars, including for Ofirmev and Exparel, for non-opioids. They prefer opioids and ketorolac and we’re not going to win the clinical discussion. However, a significant opportunity exists in about 2,000 accounts beyond what Ofirmev has sewn up"
"From a physician standpoint, we have done the same type of segmentation work among orthopedic, colorectal and general surgeons. We have those who want to reduce opioids, we have physicians who love ketorolac and think it’s an oldie but goodie and don’t want to change, and we have a handful we somewhat label as ‘spreaders’ because they like to use all products."
Cash runway and cost reduction
I have to admit, the public offering in March 2020 was absolutely mismanaged. The management failed to contemplate a situation where they need to raise more capital so soon and the stock price is lower than the warrants' exercise price. In order to attract additional capital, they were forced to exchange the existing warrants with newly-issued shares for free in October. That's the main reason for the significant increase in the share count.
With that said, the company was still able to raise capitals via two private placements that have successfully added $20M to its balance sheet in December. Based on the most recent 10Q before the capital raise, BXRX has $24M cash on its balance sheet and burnt $11M cash in the same quarter. In the quarterly press release, the company has announced to reduce the workforce to save an annualized cost of $10.6M and there will be significant cost reductions made for 2021 manufacturing and launch related activities (unspecified amount). Let's spread the $10.6M across 4 quarters equally and assume $1-2M cost saving per quarter from manufacturing. It gives us $6-7M cash burn per quarter moving forward. Adding the $20M capital that was recently raised, that $44M cash position should be giving BXRX at least 4 more quarters to run until the end of 2021 before it needs any additional financing. In addition, after the recent two private placements, although another 20M warrants are now overhanging, if exercised, that will raise another $20M, or 2 more quarters, for the company to operate.
How much longer will the pandemic last? Nobody knows, but with all the recent vaccine news, I believe it will take less than 1 year for the economy to gradually recover and for hospital to resume more elective surgeries. The company has taken all the necessary measures that will help them operate more sustainably while the pandemic is still going on.
Conclusion
BXRX has been a bloodbath this year for many investors who got in too early. Many investors have experienced 50-80% drop in value and many are even concerned the company is not able to generate any revenue after they cut the sales force. This is exactly my favorite time to buy shares when the sentiment is at its lowest. When the market feels so hopeless and hateful about a stock, any positive news can reverse its trend easily. Due to the favorable setup and risk reward profile, BXRX has become one of my largest positions in my portfolio. The stock price may consolidate around this lowest level for a little bit longer, but once the tax-loss harvesting season is over, I believe the company is well positioned for a strong rebound and beyond.
Here is the comment from John Harlow, chief commercial officer at BXRX about their competitive landscape:
"A certain number of accounts are not spending any branded dollars, including for Ofirmev and Exparel, for non-opioids. They prefer opioids and ketorolac and we’re not going to win the clinical discussion. However, a significant opportunity exists in about 2,000 accounts beyond what Ofirmev has sewn up"
"From a physician standpoint, we have done the same type of segmentation work among orthopedic, colorectal and general surgeons. We have those who want to reduce opioids, we have physicians who love ketorolac and think it’s an oldie but goodie and don’t want to change, and we have a handful we somewhat label as ‘spreaders’ because they like to use all products."
Cash runway and cost reduction
I have to admit, the public offering in March 2020 was absolutely mismanaged. The management failed to contemplate a situation where they need to raise more capital so soon and the stock price is lower than the warrants' exercise price. In order to attract additional capital, they were forced to exchange the existing warrants with newly-issued shares for free in October. That's the main reason for the significant increase in the share count.
With that said, the company was still able to raise capitals via two private placements that have successfully added $20M to its balance sheet in December. Based on the most recent 10Q before the capital raise, BXRX has $24M cash on its balance sheet and burnt $11M cash in the same quarter. In the quarterly press release, the company has announced to reduce the workforce to save an annualized cost of $10.6M and there will be significant cost reductions made for 2021 manufacturing and launch related activities (unspecified amount). Let's spread the $10.6M across 4 quarters equally and assume $1-2M cost saving per quarter from manufacturing. It gives us $6-7M cash burn per quarter moving forward. Adding the $20M capital that was recently raised, that $44M cash position should be giving BXRX at least 4 more quarters to run until the end of 2021 before it needs any additional financing. In addition, after the recent two private placements, although another 20M warrants are now overhanging, if exercised, that will raise another $20M, or 2 more quarters, for the company to operate.
How much longer will the pandemic last? Nobody knows, but with all the recent vaccine news, I believe it will take less than 1 year for the economy to gradually recover and for hospital to resume more elective surgeries. The company has taken all the necessary measures that will help them operate more sustainably while the pandemic is still going on.
Conclusion
BXRX has been a bloodbath this year for many investors who got in too early. Many investors have experienced 50-80% drop in value and many are even concerned the company is not able to generate any revenue after they cut the sales force. This is exactly my favorite time to buy shares when the sentiment is at its lowest. When the market feels so hopeless and hateful about a stock, any positive news can reverse its trend easily. Due to the favorable setup and risk reward profile, BXRX has become one of my largest positions in my portfolio. The stock price may consolidate around this lowest level for a little bit longer, but once the tax-loss harvesting season is over, I believe the company is well positioned for a strong rebound and beyond.
Good Analysis, thank you for sharing
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