Credentials: Bachelors in Finance, FINRA licensed Series 7, 63, 65, 66, CFA Level II

Candidate. Ex-Morgan Stanley & Merrill Lynch portfolio manager and analyst
covering bio-tech and tech in the Silicon Valley.

Summary: AUPH is severely undervalued at $6. Outperform Rating with a 12-

Month Price Target of: $12.

Recent Updates on Phase III

Dr. Gonzalez, a nephrologist in Miami, told me that the clinical sites are almost ready
for the Phae III trials. According to Rashieda Gluck, Aurinias VP in Clinical
Operations, Daylen Diaz and Diana Paz are the study coordinators in South Florida
that lupus nephritis patients can reach out to inquire about enrollment. During the
last communication with Rashieda, it seems they are very busy with Phase III
enrollment and are in no way desperate for candidates. This is a good sign!

On March 1, 2017, when the company announced 48-week top-line data, Dr.
Glickman described patient recruitment as firing in all cylinders. Moreover, during
the National Kidney Foundation on April 20, 2017, he addressed the enrollment
concerns of billionaire investor, Robert Duggan. Mr. Duggan said, Prior to
commencement of AURA study, data was lousy, so patients had no real reason to be
excited to enroll. Dr. Glickman cheerfully responded that with the superb AURA
study data, he expects patients, physicians, and even advocacy groups to be excited.
It should be noted that Phase II took 16 months to recruit 265 patients. Target
estimate of Phase III is ~12-16 months to recruit 320 patients.
Management noted that Phase II patients were the sickest group of lupus nephritis
patients ever studied to date. Phase III has high probability of success due to
healthier patients recruitment. Also, 11 of the 13 deaths in Phase II occurred in third
world countries such as Bangladesh and Malaysia, where access of healthcare was
compromised. This will not be allowed to happen in Phase III. In conclusion, patient
care and monitoring will be closely followed.

Current Market Value Of $6 As Of June 13, 2017

Since March, volume has decreased dramatically to below 1M, short interest
reached more than 35%, and share price declined by ~40%. Shorts thrive on
dilution especially from the recent $6.75 secondary offering. With plentiful shares
and it is easy for shorts to control. As for any small bio pharmaceuticals, they are
prone to manipulation. In my experience and what Ive seen recently on Aurinia is,
time and time again chart patterns showing redistribution of shares from retail to
institutions. No one can predict what the share price of any stock in the short run
but fundamental valuations can improve odds in making a great investment.
Investing is different from day trading; it requires time and patience.

Secondary Offering Dilution

On March 14, 2017, Aurinia announced the secondary offering of common shares to
raise $150M. One week later, due to high demand, the company was able to raise a
Canadian record for small pharmaceutical companies of $173M!

Many may see this as an adverse sign and is evident in the drop in share price. The
true value is not reflected at todays current price. I believe that the stock price will
eventually move towards my 12-Month price target of $12. Current institutional
ownership is well over 65% including 7% owned by Robert Duggan. Former Street
writer, Adam Feuerstein, acknowledged management for their offering execution.
On Benzinga, Adam gave his approval of Aurinias management. Overall, this is a
sound decision by management to increase shareholders value in the long run and
provide leverage in any takeover scenario.

Takeover Prospects Affected By Dilution

Whats holding back a potential takeover is the recent secondary offering and
outstanding warrants/options. For any acquirer this is a poison pill. According to
the recent 1st Quarter 2017 10-Q, there are 83,100,000 shares outstanding. Dilutive
options/warrants can bring this figure up to 94,516,800. On top of this there is an
additional 11,507,000 antidilutive options/warrants which brings the grand total to
106,023,800 shares.1

Management has highlighted that $200M cash (as of 3/31/17) is enough to fund the
company towards bringing voclosporin to the market in 2020. Also, the company
may raise additional capital through licensing voclosporin to Japan, which will also
help serve as a mid-term catalyst. In other words, Aurinia is fully sufficient on cash,
and a future dilution is unlikely.

Takeover Is Highly Likely And Heres Why

At the current price of $6, any big pharmaceutical company would gladly pay $6 per
share multiplied by the number of shares 106,023,800 equating to the market
capital of $636M. Due to outstanding Phase II results, management and investors
will likely not approve of such low price acquisition. The problem is reaching a price
where both acquirer and target can agree. Its no surprise that Dr. Glickman who
sold Aspreva for $915M is demanding more with such amazing results. Note: The
sale of Aspreva to Galencia in 2007 was a record-setting transaction in Canada.

Due to the exceptional 48 week results of 49% patients achieving complete

remission (P-value<.001 when compared to placebo), and no additional safety
issues, it is projected that voclosporin will have an 80%+ of getting NDA approval.
Furthermore, the company will be conducting AURORA with primary endpoint at 52
weeks, and secondary endpoint at 24 weeks. Although the clinical trial endpoints
were acknowledged by the FDA, management intentionally made some changes to
satisfy NDA requirements for the US, EU, and JP. With the FDAs Fast Track
Designation blessing already in place, being able to kill three birds with one stone,
Im confident voclosporin will be the first FDA approved drug for lupus nephritis.
For comparison, Tobira Pharmaceuticals (TBRA) was bought out by Allergan (AGN)
for $1.65B with ambiguous Phase II results. Allergan is betting on nonalcoholic
steatohepatitis (NASH) due to the increasing rate of diabetes. 2, 3

Below is a chart of Aurinia compared to past acquisition of Celator Pharmaceuticals

(CPXX), Tobira Pharmaceuticals (TBRA), and Relypsa Pharmaceuticals (RLYP).4, 5, 6
If you download the word document you can zoom in on this chart which I highly
recommend because it will give you a good idea what big pharmaceuticals are
willing to pay at what amount of risk.

Other Factors that contribute to acquisitions:

Low interest rates make acquisition very favorable; you can ask Warren
Buffett why he is so bullish in todays low interest rate market. Interest rate
is a vital factor of the economy. Inflation and cheap money drives
investments.
It takes ~10 years to get a drug approved and can range from $100M to
$200M to conduct Phase I to Phase III clinical trials. Research &
Development for big pharmaceutical is a huge expense with high risk of
failure. The below chart taken from Independent Institute summarizes the
entire process.7
 Historically, most acquisitions occur during NDA approval or right after P2
results.8 The below chart shows at what phase acquisition most likely occur.
 Ernst & Young reports biopharmaceutical M&A expected to sore in 2017.9
Autoimmune Disease is the 4th largest therapy market and growing since
2015.
With clinical results of p-value<.001, risk is mitigated dramatically. Any acquirer
listed below will reap the benefits of saving time and money through benefits of
synergies, and huge revenue potential. With access to superior financial
engineering to secure cheaper debt it is a no brainer for most big pharmaceutical to
takeover small bio with huge potentials.

Priority Of Potential Interested Acquirers

Currently, the only indication Aurinia can capitalize on is lupus nephritis. Any other
indications such as organ transplant, uveitis, psoriasis, and dry eye disease are very
far off into the future to be priced in. You can check all the previous trials on Pub
Chem. 10 Acquirers such as Roche and Merck definitely can see this as a strategic
investment opportunity.
Below are the four big pharmaceuticals that could be potential acquirers:

1. Galencia/Vifor- Their goal is to be the leader in nephrology. They acquired

Aspreva in 2007. With the recent acquisition of Relypsa it might be too soon to
acquire Aurinia but the synergy is there.

2. Roche- Roche has previous relationship working with Aspreva in developing

CellCept. Although voclosporin withdrew from Phase III organ transplant clinical
trials, voclosporin can be a potential competitor in the future. Synergy again is
evident here.

3. Merck- Already partnered for canine dry eye indications, one of Mercks big
revenue component derive from drugs for animals. Optimmune is one such drug.

4. Allergen- Allergens 2nd highest revenue generating drug is Restasis at $1.4B.

Retasis continues to grow according to 2016 10K. Allergan should be concerned if
Merck & Aurinias partnership leads to an approved product for canine and human
use. Allergan also sold their generic drug unit to Teva Pharmaceuticals for $40B.
The cash was used for dividends, share repurchase, and acquisition Tobira and Vitae
(VTAE). This implies that they have a lot of cash that needs to be put to work.

5. Other big pharmaceuticals with high cash position & low debt to equity ratio- Big
pharmaceuticals such as Gilead might be interested in acquiring during approval to
generate more revenue. Gilead recently repurchased their shares because they
simply had too much cash and dont seem to have any other better idea to use it for.

Below is a chart of top biopharmaceuticals of 2016. 11

With all these potential acquirers, I do see competitive offers for Aurinia once the
first offer is placed.

Some critical thoughts for any takeover:

One major mindset about big pharmaceutical companies is that they tend to be risk
averse and invest in stable companies. Aurinia will be considered a stable
investment once voclosporin gets approved in late 2019. If big pharmaceuticals are
not willing to acquirer Aurinia earlier, they will be paying for a much higher
premium in the future. One reason why big pharmaceuticals are risk averse is
because they are controlled by non-founding CEOs. Non-founding CEOs can hinder
growth as they tend to act like an employees that only works for a big paycheck and
go home back home to enjoy their life. They would not take unnecessary risk to
jeopardize their pay or their current lifestyle. Most non-founding CEOs would not
create stress for themselves and most likely depend on the expertise of their
subordinates. As long as they commit to low risk stable investments there is a low
chance the company will underperform industry average that could upset
shareholders. On the other hand, founding CEO tends to perform much better than
the industry because of their sacrifice and willingness to go above and beyond.
Founders normally work for more than a paycheck and ultimately a much grander
vision. That is why it is important to invest in a company with founding CEOs and a
product that has a monopoly. Aurinia is one such company that has these attributes
and more. From my experience, it is extremely rare to find a company with such
huge reward potential and mitigated risk.
 VALUATION

Price Target (12-Month Price Target) As Of June 13, 2017 - $12 Price Target.
My price target is calculated based on weighted averages of the following methods:
comparable transactions and DCF FCFE using an annual discount rate of 30%
accounting for failure rate, cost of capital, and time.

Price Target In 2020 - $36 Price Target

At this point, it is not about the question if the drug will or will not get approved. It
is about how much the company is worth.

Im a numbers guy. The success rate for Phase III is exceptionally high and NDA
approval is ~80%. Im confident they will achieve Phase III primary and secondary
endpoints. The only difference between Phase II and Phase III is the change in
UPCR<.7 within 48 weeks to UPCR<.5 within 52 weeks.

With a potential sale of $1.3B peak sale per year intrinsic value and future
development of organ transplant ($1B) and dry eye ($1-2B) investment/synergistic
value, my price target calculated to be $36.

Expected annual LN patients is 50,000, while expected voclosporin cost per patient
is $50,000 (per LN Expert Breakfast Meeting 7/28/16).

My price target is calculated based on sum-of-parts for each drug/indication

combination using 30% annual discount from peak annual revenues projections and
1-10x multiple.

With the above price target of $36, a takeover offer of $18 to $24 is plausible as of
today.

Short Thesis Debunked

There is no biopsy endpoint requirement to confirm complete remissions.

The current Phase III primary and secondary endpoint requirements were
coordinated with FDA for NDA approval.
There is no Intellectual Property issue. Under Hatch-Waxman Act, patents
are good until 2027.

Working as an analyst and portfolio manager at Morgan Stanley & Merrill Lynch in
the past, I would like to challenge any Goldman Sachs Morgan Stanley, Merrill Lynch,
or other large asset investment firms the accuracy or valuation of this report.

Disclosure: I am/we are long AUPH.

I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any company whose stock
is mentioned in this article.

SOURCES
1.https://www.sec.gov/Archives/edgar/data/1600620/000119312517169703/d350841d
ex991.htm
2.http://ir.tobiratx.com/releasedetail.cfm?releaseid=994666
3.http://www.aomarkets.com/tobira-therapeutics-tbra-stock-soars-700-buyout-
allergan/
4. https://globenewswire.com/news-release/2017/04/19/962366/0/en/Relypsa-
Presents-Veltassa-Phase-4-Data-Showing-Consistent-Efficacy-and-Safety-Whether-
Taken-With-or-Without-Food-in-Patients-with-Hyperkalemia.html
5.https://www.streetinsider.com/Corporate+News/Relypsa+(RLYP)+Announces+Signific
ant+Data+from+Veltassa+Phase+3+OPAL-HK+for+Oral+Suspension/11046206.html
6.http://www.biospace.com/news_story.aspx?StoryID=398447
7.http://www.fdareview.org/03_drug_development.php
8.https://biopharmadealmakers.nature.com/users/9880-biopharma-
dealmakers/posts/13880-trends-in-pharmaceutical-mergers-and-acquisitions
9.http://www.ey.com/us/en/newsroom/news-releases/news-ey-biopharmaceutical-ma-
expected-to-soar-in-2017-pricing-pressures-dim-global-revenue
10.https://pubchem.ncbi.nlm.nih.gov/compound/Voclosporin#section=Top
11.https://igeahub.com/2017/03/14/top-10-pharmaceutical-companies-2017/