Esperion – Seeing the glass half full

Esperion (ESPR) has been the target of a lot of criticism lately, demonstrated by the collapse from $115 to $24 in just 5 months. Investors became skeptical about Esperion’s ability to get FDA approval without cardiovascular outcomes data, which may push approval by 2-3 years and decrease probability of success. Even if the drug obtains FDA approval, many are worried about a narrow label that will limit initial commercial opportunity.

While some of the criticism may be justified, I feel the market is over-reacting since the shift in investor sentiment has nothing to do with ETC-1002’s clinical profile but instead reflects a more cautious outlook around regulatory route and market positioning. ETC-1002 remains a promising lipid-lowering drug as the only agent with a statin-like effect on LDL-C and hsCRP (two validated surrogates for clinical benefit) without causing statin-related muscle pain/weakness.

It seems to me that investors are ignoring the positive aspects while overblowing the risks. Below are the three primary concerns and why I think the market is seeing the glass half empty.

Restrictive label for PCSK9 antibodies

Praluent and Repatha were recently approved based on LDL reductions but with restrictive labels which were narrower than what the market had hoped for. They can be used only in “high risk” patients (with acute coronary syndromes, HeFH, a history of a heart attack or stroke etc.) whose LDL is not adequately controlled. Investors (rightfully) assume the FDA will use similarly restrictive language in ETC-1002’s label but this patient population still represents a multi-billion dollar opportunity (2-3 million patients in the US alone).  From a reimbursement perspective, these patients are considered the primary target population for new LDL agents anyway, and the label can be broadened with time based on positive outcomes data.

Need for CV outcomes data

In September, Esperion provided an update on its registration plans following receipt of written feedback from the FDA (End of phase 2 meeting). The update was not in line with what the company guided one month earlier and included cautionary language from the FDA regarding the need for cardiovascular outcomes data for approval, especially in statin intolerant patients.

Investors were particularly troubled by the following statement in the press release:

“FDA has encouraged the Company to initiate a cardiovascular outcomes trial promptly, which would be well underway at the time of the New Drug Application submission and review, since any concern regarding the benefit/risk assessment of ETC-1002 could necessitate a completed cardiovascular outcomes trial before approval.”

Although such a statement can be viewed as pure conservatism and a logic idea (in case the risk/benefit profile is not a clear cut) and does not mean outcomes data are required by definition, it was enough to cut the stock in half. In addition, there was a lot of anger towards the company because this was not mentioned in an update call they had one month earlier (solely based on the EoP2 meeting prior to receiving minutes).

FDA’s recommendation indicated the bar for LDL-lowering drugs is getting higher, however, it certainly does not rule out LDL as an approvable endpoint, especially in high-risk patients on statins that do not achieve their LDL target. Esperion plans to conduct a separate P3 trial in these patients and another trial in statin intolerant patients. A reasonable scenario would be approval based on LDL in the statin combination setting and approval based on outcomes data in statin intolerant patients.

Competition from CETP inhibitors

CETP inhibitors, which have been pursued for over a decade, were once the big hope of the cardiovascular field because they increase HDL (the “good” cholesterol) and decrease LDL. This class is viewed as ETC-1002’s primary competitor since CETP inhibitors are oral and some of them lead to more significant LDL reductions (40-50% vs. 25-30% with ETC-1002).

In September, Amgen acquired Dezima Pharma, for its P3-ready CETP program for $300M upfront and $1.25B in milestone payments. The fact Amgen, which markets a PCSK9 antibody (Repatha), decided to acquire a CETP company rather than Esperion was seen as a clear negative and exacerbated concerns around competition from CETP inhibitors. The relatively low price was also seen as a negative read-across to Esperion, which had a $1B valuation at the time.

One month later, Lilly (LLY) announced it decided to terminate its CETP program (evacetrapib) after a 12,000-patient trial failed to demonstrate clinical benefit. Evacetrapib joins CETP programs from Pfizer (PFE) and Roche that could not demonstrate benefit in CV outcomes trials. Merck is the only remaining company with a CETP program in P3, with an interim analysis and final data expected in Q4:15 and 2017, respectively.

Investors fear that Lilly’s failure could make the FDA less flexible with respect to approving drugs based on LDL reduction. I find this unlikely because CETP inhibitors were never viewed as “LDL drugs” so the LDL hypothesis is probably irrelevant for them. In fact, Lilly’s trial enrolled patients with relatively low LDL levels and the fact increasing HDL levels did not translate to clinical benefit in these patients indirectly supports the LDL hypothesis. In addition, the FDA just approved both Repatha and Praluent based on LDL reduction despite failures with older CETP inhibitors.

Lilly’s failure removed an important competitor and demonstrated for the third time that CETP inhibition has no clinical value. While this doesn’t guarantee Merck’s CETP inhibitor will fail, it certainly calls into question CETP inhibition as a therapeutic approach even with new agents that decrease LDL (Roche’s CETP inhibitor had no impact on LDL).

Still an attractive M&A target

Esperion has a market cap of $540M and ended Q2 with $314.3M in cash. Assuming a quarterly burn rate of $25M for the remainder of the year, the company will have an enterprise value of ~$280M by year end. Even after reducing likelihood of success and stretching timelines, this is very cheap for a first-in class P3-ready oral cardiovascular drug with a relatively high likelihood of success and $1-2B sales potential.

ETC-1002 has a unique clinical profile because like statins it is an oral drug that lowers LDL (25-30%) and hsCRP (~35%) by inhibiting the cholesterol biosynthesis pathway, but unlike statins it does not lead to muscle-related side effects (possibly because it is not activated in muscles). Having a similar profile to that of statins without their primary side effect makes ETC-1002 a relatively safe program regardless of the need of CV outcomes data. The true risk for ETC-1002 is long term safety, which must be extremely clean and is impossible to predict before conducting long term studies in thousands of patients.

Esperion will shortly have the only P3 oral drug in development for hypercholesterolemia and in contrast to other programs, ETC-1002 is the only agent in its class (ACL inhibitor). This scarcity value, coupled with a large body of evidence supporting the importance of LDL and hsCRP reductions in preventing CV events should make Esperion an attractive acquisition for companies with a CV franchise who could exploit the weakness in Esperion’s shares to replenish their CV pipelines with a late stage program. These include AstraZeneca (AZN), Gilead (GILD), Novartis (NVS) and Sanofi (SNY).

Dezima as a benchmark

Some view the Dezima transaction as a good benchmark for what a potential buyer will pay for Esperion as both drugs are P3-ready and target a similar indication. I think Dezima (even before Lilly’s failure) is several-fold riskier because: 1) HDL increase is not a validated endpoint 2) CETP inhibitors failed in the past 3)outcome studies are required for approval 4)two competing P3 programs were ongoing at the time of acquisition. Esperion’s ETC-1002 is a first-in class molecule with no direct competition and a “statin-like” efficacy profile (without muscle-related side effects) with a reasonable likelihood of gaining approval without outcomes data. Esperion has global rights to ETC-1002 while Dezima had global rights for its CETP inhibitor excluding Japan and other Asian markets.

With an upfront payment of $300M, $1.25B in milestone payments and a minor royalty stake the Dezima transaction can be conservatively valued at $450M.  Esperion should be worth at least 2-fold more than Dezima, bringing the acquisition price to ~$1.1B (including a $200M cash position), which represents a 100% premium over current stock price. This is still an extremely low price compared to industry benchmarks but the recent weakness in Esperion may enable  a smart acquirer to take advantage of the situation.

Portfolio updates  

We are adding a third position in Esperion, bringing the overall exposure to the stock to ~5% of the total portfolio.

Portfolio holdings – November 1, 2015

Biotech portfolio - 1-11-2015 - after changes

Biotech ETFs = 1-11-2015

65 thoughts on “Esperion – Seeing the glass half full

  1. Some of the analysts declare Rocilitenib worthless. Price target is slashed to $25-$35. Is the current valuation of 1B too high assuming only Rucaparib may be approved in a distant future (if at all)?
    The reputation of the management is seriously damaged. Adam Feuerstein is all over them comparing CLVS to ImClone.

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  2. curiousgeorge (EXEL) – The most important data point will be the survival benefit which will be reported this week. Not sure how significant the difference in safety profiles are. Don’t know about a hidden agenda that was behind the pricing decision.

    Adam/Christian (ARRY) – Overall I view the deal is disappointing as the economics are modest and it may also mean that other companies were not that interested in the drugs.

    CLVS – I am utterly shocked by CLVS, this is probably the most surprising twist I have ever seen . It is hard for me to believe this issue of of response confirmation emerged only last month (they are recruiting patient for more than 2 years…). Coupled with recent departure of CFO and CMO, this smells really bad…
    Still haven’t decided what to do but it’s hard to invest in people who are not trustworthy…

    Ohad

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  3. Hi Ohad,

    Thanks for your responses.

    As for EXEL, do you see that there is downside risk for them this week if the survival benefit is below expectation?

    Ethics aside, I don’t understand the doomsday scenario for CLVS. They should still have a legitimate approval able drug and two other high potential molecules. The market likely will punish them for the questionable information transfer; Analysts definitely seemed very displeased on the conference call yesterday. Seems like they might be more willing to be bought and their valuation is much more modest now.

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  4. hey Ohad
    same reaction as you on CLVS. Very disappointed. The funny thing is that the poster present at ESMO (Link provided above by Martin) clearly shows that ORR was much lower than what reported before…. ESMO poster was end of September…. Yes, management mislead investors, but I wonder why nobody put 2 and 2 together… were there no investors at ESMO?
    Re ARRY, the marked did not like the deal, or is it that everybody is nervous about NEMO? what are the chances of that trial failing?
    Thanks
    Dan

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  5. Dan, that ORR is for T790M negative based on my understanding. Confirmed response is course 101, so it’s hard for me to believe their innocent. Agree with Ohad, personally I wouldn’t invest a penny for these liars.

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  6. $EXEL Clovis had paired up with Roche to combine the lung cancer drug with azeto. Cabozantinib works well with Tarceva, and might work well with azeto. Exelixis is now more valuable to Roche than before given it’s market potential for lung cancer, and RCC and the fact that Cabo Phase 1 b trials are expanding in RCC and bladder cancer for the combo of Opdivo and Cabo as revealed in the call today.
    I think Roche is intentionally underplaying Cobimetinib as they are probably interested in buying Exelixis and want it at a lower price. Waiting for a good deal won’t hurt as Exelixis has de-risked drugs compared to unpredictable Clovis, and they know Cobimetinib is effective so they will wait to see it’s full potential. Exelixis will probably be bought by a big Pharma. Do you think that Exelixis is now more attractive to Roche for a buyout ?

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  7. Adam

    EXEL – I don’t think there is a lot of risk as we know the trial met the OS endpoint and expectations are already low.
    CLVS – There is always a chance that future updates for both roci and AZD9291 will indicate the prior has some commercial potential but so far roci looks inferior. Rucaparib in ovarian cancer is the only think left and it does have the potential to become a 300-500M drug with a differentiated label. Not sure if this can offset the tarnished reputation.

    Dan –
    CLVS – The poster from ESMO was in T790M- patients. I tried to look for any indication in Clovis’ presentations of distinguishing confirmed and unconfirmed responses and couldn’t find anything. Agree this is a question that should have been asked but I personally trusted the team that if they present a response rate in such a consistent manner after a long follow up then most responses are confirmed.

    ARRY – I also didn’t like the deal, was expecting something more lucrative. I think the trial has a 50% likelihood of success but MEK inhibitors still have potential in other indications.

    Christian (ARRY) – Yes, amazing. While ARRY focused on flianesib which had mediocre activity the smart people at LOXO understood the concept of targeting clear drivers of cancer.

    N0cturne (ARRY) – Yes I plan to hold them going into NEMO data but thinking about adding more if the trial fails and the stock gets hit.

    curiousgeorge (EXEL) – Don’t know about any hidden agendas but I still think EXEL is a good fit to a company with an oncology franchise.

    Ohad

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  8. Hi Ohad,

    Do you follow Depomed? (DEPO) any thoughts about recent developments?
    Do you plan keeping AUPH in your portfolio?

    Thanks as always,
    Chris

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  9. Hello Ohad,
    I have been following this blog for only a few months and thanks to you- already own a number of the companies mentioned.
    Do you have any thoughts on either RLYP (Relypsa) or CARA ? I traded TRVN for CARA.
    Your comments are much appreciated. Thank you.

    Like

  10. Chris (LIFE) – I really like their platform and the possibility of having a new class of therapeutic proteins is exciting. Although EV is relatively low (~70M), I am still waiting for a better entry point given the early stage.

    n0cturne (CNAT) – The data they presented were consistent with previous top line results but there are still open questions like the lack of correlation with cCK18 and the puzling increase in HVPG for less non-severe patients.

    Chris – Sorry don’t know DEPO well. Re AUPH, yes I plan to keep it as I think there is a reasonable likelihood of success in the P2b given experience with other calcineurin inhibitors.

    Lawrence (RLYP/CARA) – I don’t have a strong opinion on either of them. I admit RLYP looks attractive on paper solely based on ZSPH’s acquisition but I haven’t delved into the details.

    Ohad

    Like

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