Even Under 'Worst Case Scenario,' BMO Thinks Retrophin Should Trade Higher

Retrophin is BMO's top small-cap biotech pick, as it believes "shares are undervalued given three commercial drugs driving a profitable, cash flow positive business, and two biotech quality pipeline drugs with highly favorable risk-reward."

Top Small-Cap Biotech

BMO expects the near-term DUET data to support its Outperform rating and upside to $25 price target. Even a worst case scenario of $20 share price implies an upside of 10.6 percent over Wednesday's close of $18.09.

The brokerage put out a preview report on upcoming Phase II DUET data for Sparsentan in FSGS, which is expected to be released very soon, given the March 30 enrollment completion and six-week study duration.

Related Link: "A Potentially Transformative Event" For Retrophin

Focal segmental glomerulosclerosis (FSGS) is a cause of nephrotic syndrome in children and teens, and a leading cause of kidney failure in adults.

"We view a statistically significant relative improvement of 50 percent or greater for Sparsentan over active comparator (e.g., 30 percent vs 20 prcent proteinuria reduction), with no meaningful increase in edema or other safety issues, as the best outcome for the DUET trial," analyst Do Kim wrote in a note.

"We estimate a best case outcome would represent 96 percent upside to our price target, mixed results would be 8 percent downside, and a failed study would translate to 20 percent downside," Kim said.

3 Possible Outcomes

Following are the analyst's impact and analysis of the possible three scenarios from the DUET data:

1. "Best Case: $49 per share. We believe under the best case scenario of significant benefit and solid safety would lead to an accelerated filing and 2017 approval. We estimate US peak sales of $1 billion, with a 65 percent probability of success, up from 25 percent."
2. "Mixed Case: $23 per share. We believe mixed results, either positive trend in efficacy or moderate rates of edema, would require a larger Phase III trial, delaying the NDA filing and push out our estimates by two years."
3. "Worst Case: $20 per share. We believe a failed study with no benefit or unacceptable edema rates would terminate the Sparsentan program. We expect downside support from value of commercial drugs and RE-024."

Shares of Retrophin closed Wednesday's trading 2.58 percent lower at $18.09. Year-to-date, they are down 8 percent.