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.
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