• Strong omaveloxolone results in FA was a surprise and could generate $1B+ in sales. Importantly, their Nrf2 activators could potentially treat many other neurodegenerative indications beyond FA

• Moving forward, attention will shift back to bardoxolone with Alport Syndrome readout expected this quarter, and CTD-PAH by 1H20

• The bear case still centers on hyperfiltration and an abundance of caution given 2012 safety issues in BEACON. Reata appears to have put these issues to rest with its consistent results since 2012

• As Reata continues to validate its MOA, bulls see the platform growing into many other indications, including four others currently being studied in CKD.
  

Attention on Reata has grown over the last two weeks, as the stock has surged by over 130% in light of strong pivotal phase 2 results for omaveloxolone as well as Reata's reacquisition of rights from AbbVie.

In this note, I'll first detail the reacquisition of the rights as well as the importance of omaveloxolone (omav). Secondly, I'll detail the company's other drug, bardoxolone (bard), where two pivotal phase 3 results are expected to readout over the next nine months. For further context, I would suggest reading the bull case that I presented one year ago.

This is a company that has flown under the radar for some time, and if the readouts look good, we could see increased capital inflows as the risk/reward profile starts to look more attractive. My own view is that these results will look positive and that the stock will be rewarded as the market increasingly recognizes its potential as a platform for many indications.

Reata Reacquires All Rights from Abbvie

On October 10th, prior to the stock surge from omaveloxolone results, Reata announced the reacquisition of full worldwide rights for bard, omav, and all future Nrf2 activators from AbbVie. The total transaction was a $330M cash payment to AbbVie, and was largely seen as a sign of confidence from management as they doubled down on their portfolio of drugs. The reacquisition at the price (seen by some as very inexpensive) was well-received by the street as the stock surged by 32% in the following days, and was clearly a positive move in hindsight given the positive omav readout.

Omaveloxolone Posts Strong Results, Surprising the Street

Reata next announced positive results from part 2 of its pivotal MOXIe trial studying omav in Friedreich's Ataxia (FA). This was the big event that led to the 60%+ move in the stock over the last week, which was largely unexpected by the street.

Investors were skeptical around the program heading into the results for two reasons: 1) FA is a difficult indication with no approved drugs, and 2) part 1 results from the MOXIe trial were interpreted as mixed by some investors. In particular, post-hoc analysis found that patients with pes cavus (deformed foot) were more likely to hurt results.

For context, the FDA-approved endpoint that is used for Friedreich's Ataxia is the modified Friedreich's Ataxia rating scale (mFARS). This is a physician-assessed test that measures disease progression, and has four parts to it - speaking/swallowing, upper limb coordination, lower limb coordination, and standing/walking. Patients with pes cavus tend to struggle more on several parts of the section (i.e. standing upright), hurting mFARS test scores.

Even after the analysis, Reata decided to continue enrolling patients with pes cavus (but they did cap the subgroup at 20%). This led to increased investor uncertainty surrounding the readout. While some analysts had called out the risk/reward as potentially favorable, most did not have much, or any revenue, from omav.

In the end, the pes cavus concern was well-founded but proved to have just a small impact on results.  Omav achieved a statistically significant, placebo-corrected mFARS improvement (decrease) of 2.4 points at 48 weeks. Even when including pes cavus patients, omav achieved a statistically significant, placebo-corrected mFARS improvement (decrease) of 1.93 points. This was a strong achievement and likely exceeded Reata's internal expectations as well, as the study had been powered for a 1.7 point improvement.

Additionally, omav achieved several key secondary endpoints. Similar positive trends were seen in patient global impression of change (PGIC) and activities of daily living (ADL). Importantly, patients saw a 65% reduction in falls. This is a significant outcome given that falls can be very problematic and dangerous for patients.

In terms of safety, the drug appears to be well-tolerated with few mild adverse events.  The events observed included headache, nausea, fatigue, and abdominal pain. Additionally, increased liver enzymes were observed but seems to be generally understood and accepted by the street as a pharmacological effect of the drug.

With such strong results, the next question is the addressable market and revenue opportunity. In terms of the immediate opportunity in FA, management has noted that there are about 22,000 patients worldwide with FA and about 6,000 in the US. Street estimates are at $1B+ in peak revenue, assuming orphan-drug pricing. Flowing it to the bottom line (and adding leverage on fixed costs), the street is adding roughly $50 or more (depending on various estimates for probability of success and drug pricing) to their price targets by adding omav to their models, which accounts for all of the stock increase.

But there’s still further stock upside from here, as the drug will need to receive approval and launch into the market. Most of the street is still just modeling about a 80-85% probability of success (POS). Additionally, estimates for peak drug sales vary significantly as well, with estimates ranging from $700 million to $1.4 billion, and one estimate as high as over $2 billion in sales by 2028. Once launched, pricing and global addressable market will be key.

Beyond the immediate opportunity in FA, omav potentially has additional opportunities in other neurodegenerative diseases. Both omav and bard improve mitochondrial metabolism and ATP production. The improvement in mitochondrial function correlates with neurologic function, thereby suggesting that the mechanism of action (MOA) for omav and bard could potentially help treat other diseases such as Huntingtons, amyotrophic lateral sclerosis (ALS), Parkinson's disease, Alzheimer's, and epilepsy. As the company explores these illnesses, investors will be looking for updates on either line extensions or new drugs that could drive further stock upside.

Focus to Shift Back to Bardoxolone in Coming Months

Going forward investors will shift their focus back to bardoxolone, as there are two important readouts over the next two quarters. For those who are not familiar with bard, I would encourage you to look back at my prior article written a year ago.

Recall that bard is currently being studied in a number of different indications due to the drug's fundamental mechanism of action. The drug is being studied primarily in five different rare forms of chronic kidney disease (CKD): Alport Syndrome, focal segmental glomerulosclerosis (FSGS), immunoglobulin A nephropathy (IgAN), type 1 diabetes chronic kidney disease (T1D CKD), and autosomal dominant polycystic kidney disease (ADPKD).

Bard has shown strong estimated glomerular filtration rate (eGFR) results in just about all indications. Note that many of these indications have few, if any, effective treatments. Since my last article, Reata has reported additional readouts in IgAN, T1D CKD, and FSGS, and again, all the data continues to be supportive of a drug that fundamentally improves kidney function.

Additionally, beyond CKD, bard has also been studied in connective tissue disease-associated pulmonary arterial hypertension (CTD-PAH) and in pulmonary hypertension-interstitial lung disease. Both studies have also shown strong topline results and met primary endpoints.

As I highlighted previously, the stock today is not getting full credit for these results for several reasons. First, and perhaps most importantly, bard's BEACON study in 2012 was halted due to elevated levels of hospitalizations/deaths from heart failure. This has led to a degree of skepticism around bard's results, and some investors refuse to get more involved until they see concrete results in more indications.

Second, there’s a theory that the eGFR gains that are being seen are due to hyperfiltration. Hyperfiltration is a characteristic in which eGFR increases due to higher fluid retention and blood pressure, but not due to any improvement in kidney function. In that same BEACON trial, some patients did show elevated blood pressure.

There is a bevy of evidence that counters these arguments. On the hyperfiltration issue, Reata has shown through several different datapoints that the drug is improving the underlying functioning of the kidney. Reata conducted retained benefit studies where patients received the drug for 48 weeks, then taken off the drug, and then reexamined at week 52 of the trial. The idea is that if a benefit is still seen at week 52, the benefit would be due to the drug's improvement in kidney function, and not due to increases in blood pressure. The results in Alport's syndrome showed exactly this, as the net eGFR benefit was still +8.3 mL/min at week 52. Additionally, there were no issues in the urine albumin/creatinine ratio (UACR). If hyperfiltration were the cause of the eGFR improvements, one would observe elevated UACR ratios.

On the safety issues, management at the time conducted an analysis and found that the heart failures were entirely due to a small subset of patients at risk, which were then excluded from future trials. The FDA agreed with this assessment, and all subsequent trials have not had this issue (with >1,500 patients enrolled at this point).

Despite these counterarguments, investors continue to harbor concerns over hyperfiltration and safety issues as it is a constant topic of discussion. In my view, these concerns present the opportunity. The bull case is that with safety and efficacy is now well-proven, the company will continue to validate the drug with more studies and data, gradually attracting more capital as the downside risk becomes more palatable to a broader set of investors.

In the near-term, two bard studies are expected to read out over the next two quarters. This quarter, Reata is expected to present phase 3 CARDINAL results in Alport Syndrome. Given consistently strong results for bard in kidney function, it is difficult to see why results would not meet primary endpoints. At the same time, expectations have drifted higher, and a small magnitude or some unexpected adverse events would not be received well by the market. And if evidence of hyperfiltration shows (increased UACR, for example), it would be extremely negative for the stock. Expect results by the end of November (there is a note in Reata's recently amended loan agreement that implies that topline results should be reported by then). Reata is also expected to report pivotal Phase 3 CATALYST data in CTD-PAH in 1H20. Investors will likely shift more attention to this indication after Alport results read out.

In terms of addressable market size, Alport Syndrome has about 30K-60K patients in the US as estimated by the company, giving it a larger market than omav in FA. Additionally, there are no approved treatments for the indication, and bard has already received orphan drug status. Using these inputs and low penetration rates (I have yet to see a strong argument for low penetration rates; I assume this is conservatism by the street), consensus currently sits at ~$800M in global revenue by 2025.

Crucial Readouts in Near-Term; Other Indications the Longer-term Opportunity

With the reacquisition of rights from AbbVie, Reata is now set up well to fully capitalize on readouts expected in Alport Syndrome (likely before the end of November) and in CTD-PAH (by 1H20). Meeting primary endpoints would obviously spur higher revenue estimates from these two indications in the near-term. Longer-term, strong results would further validate bard and omav’s MOA and provide further support against the hyperfiltration argument. In my opinion, this would support the real opportunity: Reata’s continued platform expansion into additional indications in CKD indications and neurodegenerative diseases.