Esperion and Aerie – Countdown to M&A

At first glance Esperion (ESPR) and Aerie (AERI) have very little in common. Although each company is focused on a clinically validated drug that employs a novel mode of action, the two products are very different: Esperion’s ETC-1002 is an oral cholesterol-lowering drug while Aerie is developing eye drops for glaucoma.

Yet from a market position perspective their situation is strikingly similar. To begin with, both companies address traditional indications characterized by heavily genericized markets and few innovative programs. Both indications require a huge global marketing infrastructure to reach meaningful penetration. In Esperion’s case, even getting regulatory approval necessitates initiating clinical trials in tens of thousands of patients. In other words, both companies must secure a partner or an acquirer by year end in order to extract maximum value from their drugs.

Esperion – Attractive value proposition despite long timelines

Esperion’s ETC-1002 is the only oral LDL-lowering in development with clear efficacy in humans. The drug is still ~3 years from approval (phase III start in Q4:15), but the commercial opportunity coupled with multiple expected de-risking events should lead to a transaction (most likely an acquisition) in 2015.

Clinical hold finally lifted – The first and perhaps most important event was removal of clinical hold after positive two-year carcinogenicity data. The hold, which was based on weak PPAR activation observed with ETC-1002, limited treatment duration to 6 months and prevented Esperion from starting pivotal studies. Esperion submitted the carcinogenicity data in late December/ early January and the FDA’s ultra-short response time (Feb 2, 2015) implies the package was spotless.

Important readouts expected in H1:15 – Additional catalysts include detailed results from a phase II combination study with Zetia (March 2015) for which top-line results were already announced. The company will report top line results from two additional randomized studies as add-on to statins (March 2015) and in patients with high blood pressure (Q2:15), respectively. Positive results (20% decrease in LDL-C) will corroborate the effect seen to date and pave the way for a broad registration program.

By Q3:15, Esperion may have a phase III ready asset based on 3 large phase II studies (600+ patients in total) and regulatory clarity. At that point, Esperion will strike a licensing deal or get acquired given the regulatory requirements for approval (long-term outcome studies in 30,000 patients). As a single bullet company (Esperion has two preclinical programs but their value is negligible due to their early stage), an acquisition looks more likely.

The list of potential acquirers is limited to large companies with a cardio-metabolic franchise and a global marketing infrastructure. These include companies with traditional lipid lowering assets such as Merck (MRK) and AstraZeneca (AZN) as well as companies with PCSK9 programs including Amgen (AMGN), Sanofi (SNY) and Pfizer (PFE). As an oral agent, ETC-1002 is expected to be slotted before PCSK9 antibodies and will probably be reformulated with statins and/or Zetia. Given the importance of PCSK9 antibodies to Amgen and Sanofi, it is hard to envision them acquiring a direct competitor such as ETC-1002 (even though eventually the two classes could address different patients across the spectrum). This makes Merck and AstraZeneca more relevant as acquirers. Lilly (LLY), which has a CETP inhibitor in P3 and a PCSK9 antibody in P2 is another potential suitor.

Aerie Pharmaceuticals – Imminent P3 results

In contrast to Esperion, Aerie is closer to market with its glaucoma drug, Rhopressa. The drug is in three phase III studies (Rocket 1-3), the first of which will have data by May 2015. All trials compare Rhopressa to Timolol, a commonly used 2nd line drug in patients who fail prostaglandins. Rhopressa demonstrated clear efficacy (5-6 mmHg reduction) in two phase II studies after a 4-week treatment. If this activity is corroborated in phase III, it could easily beat Timolol. Except reproducibility of phase II results, the primary risk in the phase III studies is durability of response (primary endpoint measured at 3 months).

Aerie plans to file for approval in mid-2016 after it has results from the three studies. Positive readout in Rocket-1 (May 2015) will be viewed as indicative for the other trials and could trigger a partnership or an acquisition. Aerie is also developing Roclatan, a fixed-dose combination of Rhopressa with Xalatan (most commonly used 1st line glaucoma drug). Based on positive phase II results for the 2-drug formulation, Roclatan is expected to start phase III in mid-2015 and has the potential to become a popular 1st line option.

The list of potential acquirers is even shorter in Aerie’s case. Two obvious candidates are the ophthalmology giants Alcon (Novartis [NVS]) and Allergan (Actavis). Valeant (VRX), which recently acquired Bausch and Lomb is another potential suitor.

The big question – Is M&A already factored in?

The key questions investors need to ask themselves is whether a takeout premium is already priced in, especially for Esperion which climbed from $16 to $66 in six months ($1.02B market cap). Aerie is up “only” 65% in the past six months and has a $665M market cap.

From a market opportunity perspective, Esperion appears better positioned as there are millions of patients who could theoretically benefit from a new lipid lowering drug. A recent piece from four CVS executives provocatively claims that PCSK9 antibodies could cost the American healthcare system tens of billions and beyond. Regardless of the feasibility of this scenario, their calculation definitely demonstrates the opportunity represented by patients who are either not adequately controlled by available drugs or are intolerant to statins. Even when conservatively assuming there are only 500,000 patients who need a drug like ETC-1200, the market opportunity is still in the $2.5B range in the US.

The initial market opportunity for Rhopressa is estimated at ~$700M in the US, which could double with Roclatan. But for what Aerie lacks in market opportunity, it compensates with time to phase III readouts (2015) and FDA approval (2017). In addition, safety risk for topical glaucoma drugs is lower compared to a drug that has to be given systemically such as ETC-1002. Another distinguishing factor is the lack of competition from other new treatments, whereas ETC-1002 will compete with PCSK9 antibodies (at least in some patient populations).

In order to reach a hypothetical acquisition target, I assume peak sales of $2B and $1B for ETC-1002 and Rhopressa, respectively. Using a sales multiple of 8, which is below industry average for smid-cap  and recently acquired biotechs (Intermune, Cubist), an 80% probability of success and a 25% discount rate  results in acquisition price tags that are 60%-70% higher than current prices. Therefore, both stocks can go higher in 2015 but they don’t look like multi-bagger opportunities.  Personally, I plan to keep my holdings and be opportunistic in adding more shares in the coming months.

ESPR, AERI

P.S. – I am attending the TAT congress in Paris next week and will probably have limited availability to answer questions from Friday onwards.

 Portfolio holdings – February 22nd, 2015

Biotech portfolio - 22-2-15biotech etfs - 22-2-15

80 thoughts on “Esperion and Aerie – Countdown to M&A

  1. Alex, I believe Sage main value driver is currently SAGE-547 (allopregnanolone) which is targeting SRSE. MRNS’s synthetic version ganaxolone is actually targeting epilepsy. And so you can say they are targeting different population. Interestingly Sage also has another compound SAGE-217 that is targeting epilepsy but that’s further down the road.

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  2. Alex (MRNS) – The short answer is: not for the time being. SAGE is going after the most severe “epileptic” indication (SRSE) with an IV formulation whereas MRNS is pursuing more common forms of epilepsy in its P3. Given the identical MOAs I expect there would be more overlap in the future. (Thanks, Ohmson)

    denny (KPTI) – I think they are becoming interesting at these levels. Personally, I will wait for a lower entry price. Sentiment around KPTI could also have readthrough to STML, which is developing another XPO1 inhibitor.

    Elyas (ESPR) – Overall results look positive and in-line with expectations (but they did not exceed them). This opens up a significant market opportunity in patients who are not adequately controlled by statins. Near term outlook is now solidified, in anticipation of P3 initiation in Q4.

    Dan (ESPR) – I think there is a reasonable likelihood for a deal before the FDA meeting as development route appears straightforward (i.e following the footsteps of PCSK9 inhibitors in terms of LDL and outcome-focused studies. I plan on holding even at this price level, M&A valuations has become very rich (PCYC, Flexus) and my assumptions are fairly conservative.

    Dave (ARIA) – Thanks on ESPR. Overall, the ponatinib story is disappointing and ARIA’s valuation appears high. AP26113 appears potent in ALK+ NSCLC but has no activity in EGFR+ patients and therefore should not be viewed as a competitor to CLVS.

    Ohad

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  3. Thanks
    so for the time been mrns targeting a larger population then sage but sage have X 10 higer market cap? because SAGE-547 closer to market?

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  4. Ohad

    Are you familiar with mirati therapeutics?Market cap of about 450m.Orbimed and Baker bros. have both taken quite large positions.

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  5. Ohad, have you ever looked at CYTR? Could aldoxorubicin be to doxorubicin what Abraxane is to paclitaxel? Yes, i know the CEO, Kreigsman, is a jerk.

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  6. Hi Ohad,

    I had a follow-up question about ESPR. It looks like they have succeed in another very strong secondary offering to raise 175million. I am thinking this is to strengthen their position to run the trials by themselves and as well as strengthen their position in negotiations for either a buy-out or partnership. The valuation will have to be very rich to justify being bought out in the near term at this point. Do you agree with this assessment?

    Thanks as always for all of the insight.

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  7. Alex (SAGE/MRNS) – The main reason for the valuation discrepancy is the very strong clinical proof of concept SAGE has. As both drugs are almost the same, I don’t expect this gap to persist for long.

    Re: EXEL, still no conclusions… one thing which is a concern is the very short difference between PFS and OS in the cabo study.

    Robert – Sorry, don’t know them well.

    Dave (MRTX) – Yes I am familiar with them. I like the strategy of pursuing niche MET and AXL addicted tumors but my main problem with them is the broad spectrum activity profile of their compounds (similar to cabo). There are other molecules in development that are more selective. In Axl, they might be the first to show a signal, if AXL fusions really exist (still unclear to me).

    Richard (CYTR) – It’s been a while since I looked at them but my impression was not positive.

    Elyas (ESPR) – A very strong secondary offering, in bright contrast to the previous one which weighed in heavily on the stock. The strengthened cash position will improve their negotiation leverage with acquirers, which will have to pay at least a 30% premium imo.

    Ohad

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  8. Ohad,

    Thanks for the all the effort and analysis. In regard to the big question of factoring in M&A is ESPR now at 2.16b fully valued or are you thinking there is still a premium to be considered? Great recent calls on ESPR and FMI. Thanks again.

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  9. Any views on PRTA — interesting phase 1 results today for PRX002/Parkinson’s and ongoing phase 3 on NEOD001/AL amyloidosis. Thx.

    Like

  10. Ohad

    Can you give your thoughts on the hep c space?both gilead and Abbv/Enta have approved regimens.Merck and Bristol both seem to be close to approval for competing regimens,as well as possibly regulus.Any opinion on how this will evolve over the next 2-3 years,and if gild will continue be the big winner.

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  11. Hi Ohad, can you follow up on GERN ?, their deal with Janssen and what are the chances of an AA in case any indication Janssen studies in p2 comes up with a desease modifying confirmation?? and if the AE of myelosuppression where overblown and or can it be controlled specially since the FDA lifted the hold?? can that be an indication of controllable myelosuppression? and lastly why you could like or could don’t like the stock?

    Thank You

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  12. Hi Ohad,

    Any thoughts on Xenon Pharmaceuticals (XENE). They have a few partnerships (Genentech, Teva) that are proceeding along though early. In particular, the Nav1.7 sodium channel inhibitor (GDC-0276) by Genentech looks to have potential.

    Thanks!

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  13. hi Ohad

    regarding MRNS, how much risk is involved compared to your other portfolio stocks? I assume less than CNAT or ARQL or STML, but that’s about it?

    when is the next derisking event?

    I am sure you have checked IP situation for SAGE and MRNS, how is it for MRNS?

    what about M&A, it looks rather cheap in comparison to SAGE

    thanks for your insights Ohad!

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  14. Pete (ESPR) – I agree it is getting expensive, I plan to re-assess after the hypertension study but my working hypothesis that under the current circumstances where you see companies battling for acquisitions (PCYC, SLXP), ESPR is extremely well positioned. Therefore, I plan to hold.

    Chris (RGLS) – The HCV data are impressive and validate their approach but I don’t see the program as commercially meaningful. Therefore, I don’t view it as a BUY.

    Lisa (PRTA) – Very nice data on synuclein knockdown, althhough I feel people are blowing this out of proportion in the absence of a direct proof for clinical improvement. From a biology standpoint, PRTA did a great job selecting targets and indications, good mix of innovation, unmet need and underlying biology.

    Dave – Not an HepC expert but my personal feeling is that risk/reward is negative as price wars and lower than expected prevalence could impact long term value proposition.

    Juan (GERN) – I don’t have a concrete opinion. The initial disease modification signal is clearly there (but it got weaker at the last update from what I recall). I am out for now.

    Elyas (XENE) – Actually, they look quite interesting with a reasonable valuation and multiple sots on goal. Nav1.7 is a great target, probably the hottest one in pain.

    Christian (MRNS) – I view MRNS almost as an arbitrage opportunity as the MOA risk is relatively low (ganaxolone has p2b data + SAGE’s validation in SRSE) and upside potential is huge. Not sure about IP but from what I understand SAGE has no composition of matter and the compounds are chemically (and potentially functionally) distinct so don’t see a major risk there.
    Plan to add more on Sunday.

    Ohad

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  15. hello Ohad

    thanks for MRNS input!

    regarding AERI, doesn’t the red eyes issue bother you? maybe ITEK is an interesting alternative/diversification buy for glaucoma space?

    brgds
    Christian

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  16. Thanks Ohad. And I want to add my thanks to everyone else’s for your time and generosity in hosting this blog. Your knowledge and objectivity really make it unique on the web. I’ve followed you into FMI, AMBI, and other profitable stocks and have become a better investor generally because of your thoughtful, conservative approach.

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  17. Yes, I agree with last comments, Thanks for the time U dedicate to the blog and precious opinions: helpful for all the non-expert investors.
    Respect!

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  18. hello Ohad,

    again regarding MRNS: what makes you confident that the responder analysis (ITT) will be successful in the phase 3? In the phase 2 it missed statistical significance (p = 0.057)

    overall, I guess you assume that safety is the big plus for ganaloxone (efficacy does not seem superior to other approved agents).

    thanks!
    Christian

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  19. Ohad

    May want to check out mstx

    Has a pipeline and a p3 for sickle cell enrollibg quickly ….79mill market cap….very low!

    If I am not mistaken Bakers are in

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  20. Hi Ohad,

    Do you think Evotec is attractive at these levels? just signed a strategic collaboration with Sanofi. Seems market cap is not too high.

    Thanks as always
    Chris

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  21. Hi Ohad, what’s ur opinion -if u follow- about STEM? Price is tempting and data of two trials will be released in mid-2015. Seems to be a good opportunity.
    Thanks

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  22. Christian (AERI) – I am not aware of a red eyes issue. Agree about ITEK as a potential hedge but they are a couple of years behind AERI.

    Thanks, Lisa , Allen and Manny. Glad I could help.

    Christian (MRNS) – Given the small size of the study, I believe there is a reasonable likelihood of meeting the 1ry endpoint in P3, which is powered to demonstrate that. Agree that the effect size is not dramatically better than other drugs but ganaxolone could work for patients who fail earlier treatment lines + safety profile looks compelling. I also have high hopes for additional indications and the IV formulation for more severe indications (like SRSE).

    Robert (MSTX) – Thanks, will take a look.

    Chris/Manny – Sorry, don’t know these companies well enough to have an opinion.

    Ohad

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  23. Ohad, Thanks for sharing your thoughts. Giving the recent news on ESPR – do you still think ESPR has a decent M/A chance? ESPR claim that 2 to 7 million adults in the U.S., ceased therapy because of muscle pain or weakness and can be considered statin intolerant. You factored 0.5 million adults – so it is very conservative numbers

    Thanks

    Like

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