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 getting
ready. According to Rashieda Gluck, Aurinias VP in Clinical Operations, Daylen Diaz
and Diana Paz are the study coordinators that LN patients can reach out to inquire
about enrollment for Phase III. During the last communication with Rashieda, it
seems they are very busy with Phase III patient 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 cylinder. 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 2 took 16 months to recruit 265 patients. Target
estimate of Phase 3 is 12-16 months to recruit 320 patients.
Management noted that Phase 2 patients were the sickest group of LN patients ever
studied to date. Phase 3 has high probability of success due to healthier patients
recruitment. Also, 11 of the 13 deaths in Phase 2 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 3. 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 nearly 1M and below, short
interest reached more than 35%, and share price declined by ~40%. Shorts thrive
on dilution from the March secondary offering. Shares are plentiful allowing them
control and as for any small bio pharmaceuticals they are prone to manipulation. In
my experience and what Ive seen recently on AUPH 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, AUPH 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 AUPHs 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.

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, AUPH 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 $636 million. 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 $915mil is demanding more with such amazing
results. Note: The sale of Aspreva to Galencia in 2008 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, TBRA was bought out by AGN for $1.65B with ambiguous Phase II
results. AGN is betting on NASH due to the increasing rate of diabetes.

Below is a chart of AUPH compared to past acquisition of CPXX, TBRA, and RLYP.

Other Factors:
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.

Historically most acquisitions occur upon NDA approval or right after P2
results.

Ernst & Young reports biopharmaceutical M&A expected to sore in 2017.
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 while borrowing money is cheap.

Priority Of Potential Interested Acquirers
Currently, the only indication Aurinia can capitalize on is LN treatment. Any other
indications such as organ transplant, uveitis, psoriasis, and dry eye disease are very
far off into the future to be able to priced in. 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 RLYP it might be too soon to acquire
AUPH 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 drug for animals. Optimmune is one such drug.

4. Allergen- Allergens 2nd highest revenue generating drug is Restasis at $1.4B and
continues to grow. AGN should be concerned if Merck & AUPH partnership leads to
an approved product for canine and ultimately human use. AGN also sold their
generic drug unit to TEVA for $40B. The cash was used for dividends, share
repurchase, and acquisition TBRA and VTAE.

5. Other big pharmaceuticals with high cash position & low debt to equity ratio-
Companies 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.

With all these potential acquirers, I do see competitive bids for AUPH once the first
bid has been placed.

One major mindset about big pharmaceutical companies is that they normally invest
in companies that are stable. AUPH will be considered a stable investment once
voclosporin gets approved in late 2019. Of course AUPH will be priced at a much
higher premium compared to a takeover now. CEOs that are non-founders can
hinder growth as they are more risk averse and lack vision. These types of CEOs act
like an employee that only works for a paycheck in this case a big one. As long as
they commit to low risk stable investments they do not put their job in jeopardy.
That is why companies ran by founders 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.

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.