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Relypsa, Inc.

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PREFACE
Relypsa (RLYP) is a small-cap clinical stage biopharmaceutical company with a market cap of ~$600 million as of yesterday. Today we're looking at a massive spike to $1 billion.



The company has a single drug named Veltassa that treats hyperkalemia, which is a condition of fatal levels of potassium in patients with chronic kidney disease or heart problems.

Sales of Veltassa officially started in January of this year and in total it is expected to have an addressable market of 2.4 million to 3 million people and to reach peak sales of $1 billion within several years.


BREAKING
Reuters reported that the firm is exploring a sale following a number of overtures from potential buyers, according to people familiar with the matter.

"The discussions are in their early stages and may not lead to a sale, the people added, asking not to be identified because the talks are private."

Relypsa's treatment for hyperkalemia is the first new medicine in fifty years but ZS Pharma has similar compound ready for an FDA ruling this summer.

ZS Pharma sold for $2.7 billion to Astra Zeneca last year. Even with the spike in Relypsa's shares today, the company still sits at a $1 billion market cap.

THE GUTS
Relypsa released its first ever sales update a few weeks ago and then updated it again on March 15th.

The prescription numbers have been quite good, although the short interest on the stock has punished the price, based on a short thesis that the firm will run out of money by year end and require a financing move.

The stock has enormous short interest. Here's the accumulation:


The drug is doing quite well, awareness is high, demand is high and the drug is welcomed as a much needed alternative. The immense short interest makes for a rather uncomfortable disconnect between the business and the stock.

Every time we get more data on the company, it reads positive. The company announced full month sales for January and February a few weeks ago. We already had data through February 12th, this last update filled in the rest of February.

Bull or bear, the results were quite good.

Setting	Jan	Feb	% Chg
New patients who started taking Veltassa with a free start-supply	409	812	99%
Outpatient prescriptions reimbursed and dispensed	99	350	254%
Hospital/institution units sold	56	117	109%

The growth is quite impressive, though we must temper the enthusiasm noting that we are still dealing with small number math.

What was yet more encouraging, is the period from February 12th - February 29th, which was the new data we received, showed no slowing of growth at all.

Setting	Feb 1-12	Feb 13-29	% Chg
New patients who started taking Veltassa with a free start-supply	133	217	99%
Outpatient prescriptions reimbursed and dispensed	67	109	248%
Hospital/institution units sold	21	38	107%

We also saw, for the first time in a long time, insider buying. My goodness, it's about time. This is from Forbes:

"There was insider buying on Tuesday, by Director Thomas J. Schuetz who bought 30,000 shares at a cost of $13.39 each, for a total investment of $401,832. This purchase marks the first one filed by Schuetz in the past year."

STOCK
The stock has tumbled before today's news all the way down to $13.

At the same time the short interest has accumulated, the closing stock price of $13 (before today) compared to the median price target from all 10 Thomson/First Call analysts of $45, which was a staggering 160% higher . Today the stock is trading near $23.

Further, Wedbush has a price target of $86, H.C. Wainwright has a price target of $63 and Oppenheimer has a price target of $55. Morgan Stanley stands famously as the only firm with a sell rating on the stock.

THE BULLISH THESIS CONTINUES
Agreements have been signed with Express Scripts and CVS Caremark, the two largest pharmacy benefit managers in the United States.

Centers for Medicare & Medicaid Service (CMS) have added Veltassa to its calendar year 2016 Formulary Reference File on Thursday for all three dosage strengths of Veltassa listed on the label. The decision by CMS is both positive and early, with initial expectations calling for a March decision.

This affects about 1.8 million of the 3 million-plus Veltassa-eligible patient population being covered by Medicare (Street Insider).

WHAT'S GOING ON
The Relypsa story is one that seems so bullish and at the same time so steeped in fact that it will feel almost impossible. At the same time, the stock market is never 'wrong,' and the price is tumbling.

THE FUTURE VALUE
Analysts predict that Relypsa's drug will reach peak sales in the United States alone of $1 billion. That's not to speak of Japan, and Europe. As of the close of trading today, Relypsa is trading at a confounding 0.4 price to future sales. The IBB biotech index has an average price to sales of 6 to 1. The stodgy S&P 500 has a price to sales of 2 to 1.

Now, large cap pharma AstraZeneca paid $2.7 billion to takeover ZS Pharma for its hyperkalemia drug candidate. Yes, while we can play the "price-to-sales" game all we want, a major pharma company has said out loud with its pocket book that just the chance of a drug approved in a year to treat hyperkalemia is worth more than $2.7 billion.

Further, a Citigroup analyst said (emphasis added):



CONCLUSION
Even at a $1 billion market cap, the stock price is now controlled by the massive short interest.

But, at CML, we still hold this company as one of the few gems in small cap biotech with an approved drug, accelerating sales and a large addressable market.

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The author is net long Relypsa.

Thanks for reading, friends.

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