Initiating Coverage On RegeneRx Biopharma - Analyst Blog

Initiating Coverage On RegeneRx Biopharma
by Zacks Small-Cap Research

We are initiating coverage of RegeneRx (RGRX) with a ‘Neutral' rating. Despite the fact that we are intrigued by the potential to develop multiple therapeutic applications with Thymosin Beta 4, we believe more data is necessary. The lead development program is RGN-259 for dry eyes and neurotrophic keratitis (NK). Preclinical animal data yielded some impressive results in NK and various forms of dry eyes. So much so, that the product was tested in compassionate use studies that demonstrated the ability of RGN-259 to repair and regenerate corneal tissue. We believe that RGN-259 may provide a novel approach to the treatment of patients with corneal defects. It offers a potential competing therapy to Allergan's (AGN) Restasis (cyclosporine ophthalmic), an estimated $700 million drug in 2011. Data from two preclinical programs will be presented at the 2011 Association for Research in Vision and Ophthalmology (ARVO) meeting in Ft. Lauderdale on May 3, 2011. We are also intrigued by the fact that RegeneRx is collaborating with the U.S. military on RGN-259, seeking to evaluate the drug to prevent or reduce eye damage caused by chemical warfare agents.

RegeneRx is also developing RGN-352 in acute myocardial infarction (AMI). Preclinical data with RGN-352 demonstrates improvement in cardiomyocytes rhythmic beating and survival in vitro, as well as improvement in myocardial function and reduction in scar volume in animal models. Phase 1 data yielded encouraging safety and tolerability data. The ongoing phase 2 program is designed to show the type of utility in an acute population that would allow management to secure a develop partnership for a pivotal phase 3 program. Unfortunately, the phase 2 program has been placed on clinical hold due to non-compliance with FDA's current Good Manufacturing Practice (cGMP) regulations by RegeneRx's contract manufacturer. Once this program resumes, we think investor attention will return to the story. We are awaiting the company's next update on the status of reinitiating the trial. In May 2010, RegeneRx was awarded a 3-year, $3.0 million grant from the NIH's Heart, Lung and Blood Institute to support the further development of RGN-352.

Waiting For Clinical Validation

Research has demonstrated diverse biologic activity for Thymosin B4. Research shows the 43-amino acid peptide that plays a vital role in cell structure and motility and in the protection, regeneration, remodeling and healing of tissues. These effects have suggested a range of possible therapeutic applications, and several have been extended to animal models and human clinical trials. We believe the science and theory around TB4 is solid. Drug candidates developed around various formulations of TB4 have the potential to be disease modulators. For indications such as acute myocardial infarction and dry eyes, this is enormously exciting, as most of the approved drugs for the aforementioned indications only target symptom relief. We believe proof-of-concept has been demonstrated by RegeneRx in AMI, neurotrophic keratitis and dry eyes. The potential is there in epidermolysis bullosa (EB), multiple sclerosis (MS), and cystic fibrosis (CF) as well. What we need to see is pivotal data in large-scale, randomized, placebo-control trials that can be used for registration approval. We think the market will remains skeptical until this data has been presented.

Valuation

RegeneRx's stock looks vastly under-valued at today's price. The current market capitalization of only $14 million massively discounts the potential for drug such as RGN-352, RGN-259, and RGN-137. Indications such as dry eye, AMI, multiple sclerosis (MS), cystic fibrosis (CF) are multi-hundred million dollar indications, even potential blockbuster indications depending on the success of the phase 3 trials. The market clearly does not see a blockbuster in RegeneRx' pipeline or else the stock would not be trading at $0.18 with a market capitalization of only $14 million. Instead, the market is skeptical, and sees only un-proven programs and a need to raise cash with committed equity financings later in 2011.

We have taken a look at each potential indication for the various forms of TB4 under development at RegeneRx. We have forecasted peak sales opportunities given the potential label indication and the year of launch. We've heavily discounted these figures based on the stage of clinical development and the high historic failure rate of phase 1 and phase 2 drugs. We've also factored in a need for cash and development partnerships to achieve market approval for any one of the advancing candidates. Our discounted cash flow (DCF) analysis yields a price target of $0.50.

The main reason for our ‘Neutral' rating at the current time is the need for cash at some point in 2011. RegeneRx exited 2010 with $3.8 million in cash and investments. In January 2011, the company raised $1.45 million through two institutional investors at $0.27 per share. In addition to the $1.45 million investment, RegeneRx entered into a separate purchase agreement where Lincoln Park Financial (LPC) has committed to purchase up to $11 million of RegeneRx's common stock over a 30-month period.

The company burned $5.0 million in 2010, including $1.1 million in the fourth quarter 2010. We expect the current cash burn rate in 2011 to be at a similar level, or around $1.2 to $1.3 million per quarter. Therefore, we believe RegeneRx will hold around $3.8 million at the end of the first quarter 2011. We estimate that cash balance is enough to fund operations to October 2011. Therefore, in the near-term, we expect the company to begin offerings to LPC. Although we are pleased with the fact that the offerings will be at fair-market value, we believe the issuance of new shares and dilution will weight on the stock until the long-term funding position improves. We would become significantly more bullish on the name with an improved financial position or a development partnership on RGN-259 or RGN.352.

For a copy of our 19-page initiation report on RegeneRx Biopharmaceuticals, please email SCR@Zacks.com with the ticker symbol, RGRX, in the subject line.

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