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Summary

  • Amicus Therapeutics is a rare disease drug developer with asymmetric upside potential and a near-term catalyst.
  • Lead drug in development migalastat disappointed in the past, but has achieved success since, with a high likelihood of winning another phase 3 trial success and registration soon.
  • Professional investors are paying attention: Joseph Edelman’s Perceptive Advisors acquired 13% holding last month.

Name: Amicus Therapeutics (NASDAQ:FOLD)

Current share price: $2.69

Market cap: $173M

Enterprise value: $118M

Target price: $7.70

Expected time horizon: 3-6 months

Summary of investment thesis: Amicus Therapeutics is a rare disease drug developer with asymmetric upside potential and a near term catalyst. The stock price tumbled early 2013 when its lead asset migalastat disappointed in phase 3, GSK subsequently returned partnership rights. However, FOLD has since updated clinical design and achieved positive outcome on the same patients, without corresponding stock recovery. Result for a second phase 3 trial is due Q3 2014 and expected to be positive. This should lead to approval of an oral product in an infusion biologic dominated market, meaningful share in a billion dollar market, and more than doubling of Amicus value. FOLD has attracted professional investor attention: Joseph Edelman's Perceptive Advisors acquired 8.3M share (13%) holding on May 29. Major risk for this investment is that in the unlikely event the new phase 3 disappoints, FOLD can lose share value with few near term catalysts to drive recovery.

FOLD overview: FOLD is an orphan disease specialist built on an innovative small-molecule chaperone therapy platform.

A number of orphan diseases are caused by enzyme deficiencies (e.g., Gaucher, Fabry, Pompe), leading to accumulation of toxic lipid or sugar that harm organ function. Unlike conventional biologics that use synthetic enzymes to replace the defective patient copies (Enzyme replacement therapy, ERT), FOLD targets such diseases through innovative chaperones, small molecules designed to bind and stabilize the mutant enzymes in patients to improve folding and rescue function. This approach has been widely researched in labs but FOLD is the leader in clinical application. It provides an oral alternative therapy to infused biologics that is more convenient and has less concern from immunogenicity.

Majority of FOLD's value is in a single product, migalastat for Fabry's disease. The company also has a chaperone therapy for Pompe's disease through 2013 Callidus Biopharma buyout; however, here the field is more crowded, with heavy weights Biomarin and Genzyme each advancing next generation products (BMN701 in phase III, Genzyme Neo-GAA in phase I). FOLD also has partnership with Biogen on Parkinson's disease and MPS-I therapy in very early, pre-clinical stage.

Fabry's disease market overview: billion dollar market with clear unmet need and space for differentiated product.

Fabry's disease is a lysosomal storage disorder where Alpha-GAL enzyme deficiency leads to the lipid GL-3 accumulation. Intense pain is a major daily concern, and kidney function loss a major source of mortality. GI problems, heart attack and stroke are additional issues. Symptoms can start at any stage in life. Fabry's disease is a X linked disorder so used to be thought of as a male disease, but it is clear now that females can be affected too often with milder symptoms.

Fabry's disease is a billion dollar market with two major incumbents today. The two biologics available (Genzyme's Fabrazyme, and Shire's Replagal that is not approved in the US) are synthetic enzymes with a combined $990 million sales in 2013 at ~$200,000 cost per patient. Patients received infusion at doctor office every two weeks for life time. Large quantity of enzyme is infused since less than 5% of the enzyme makes it to the target organelle the lysosome. Over time the patient can start making antibodies to the infused enzymes, causing neutralization of the biologic and loss of efficacy.

Addressing unmet need is critical in orphan disease market since price alone can't convince patients to switch from tried and true life saving drugs. For example in the Gaucher's disease market, Protalix's Elelyso has fallen short, achieving likely under 1% US market share after over two years, despite a partnership with Pfizer and a 30% price discount to market leader. Unmet medical needs in Fabry's Disease include the following:

1. Patients who have built resistance to existing ERT need alternative treatment, especially in the US where Fabrazyme is the only treatment option.

2. Some patients have severe allergy to Fabrazyme: the enzyme is produced in CHO cells, carry some murine feature and can cause immune reactions.

3. Both ERTs require biweekly physician visits to get drug infused. Patients with mild symptoms, especially females with one mutant copy, may decide against treatment due to the incontinence.

The Fabry's disease market is also friendly to new therapy in terms of new patients available who are potentially interested to try new therapy: the patient population is steadily expanding as new diagnostic approaches emerge including sequencing and new biomarkers (esp. lyso-Gb3). Prevalence estimation is going up from 1 in 100,000 birth to as much as 1 in 3,000. Females in particular have been under diagnosed in the past and increasing in diagnosed number.

Migalastat clinical profile: Migalastat is likely a moderately efficacious medicine in subset of Fabry's patients, with good safety profile, oral convenience, and no infusion concern. Study 012 finding in Q3 2014, if positive, will provide complete data package for filing. Success rate for Study 012 is in 70-80% range.

Migalastat is a small molecule shaped like Alpha-GAL substrate. Over 500 Fabry mutations have been reported. In 30-50% of patient population the mutations can be rescued by migalastat binding that improves protein folding and lysosomal transport.

Migalastat is being developed as mono therapy for Fabry's disease through 2 pivotal trials. Study 011 has a twisted development history but ultimately successful. It was initially designed as a double blind trial comparing migalastat and placebo arms for reduction in kidney GL-3 inclusions. Outcome at 6 months showed therapeutic trend but not statistical significance: 13/32 (41%) patients in the migalastat group versus 9/32 (28%) in the placebo group were responders with a 50% or greater reduction of GL-3 inclusions. Management attributed the failure to low and variable GL-3 level in placebo group and reached agreement with FDA on a number of modifications including:

1) Move all placebo patients to migalastat to conduct a further 6-month, open label study, and follow up on kidney function at 24 months. The existing data will be included as an interim analysis for full evaluation.

2) Change primary end point of open label study from responder analysis (% responders with a 50% reduction threshold) to mean change of GL-3 inclusions.

3) Updated the in vitro assay used to classify whether a patient carries migalastat amenable mutation and meet inclusion criteria.

With the above changes FOLD announced successful completion of study 011 with 12 and 24 months data: in both treatment and placebo cross over groups kidney GL-3 is reduced after 6 months of treatment with statistical significance and remained low. Kidney function estimated by glomerular filtration rate remained stable over the 18-24 months of treatment, where steady renal decline is expected in untreated patients.

The initial negative finding in study 011 should not be regarded as a red flag since the study enrolled patients with milder symptoms than the studies it based its design on: over 50% patients were heterozygous female (43/67) compared to 2/58 in the pivotal study for Fabrazyme. Also only 'amenable' mutations were included, many of these mild and do not completely abolish function.

Based on Study 011, migalastat is likely a moderately efficacious medicine in subset of Fabry's patients, with good safety profile, oral convenience, and no infusion concern. Consistent with such favorable profile, 35 out of 41 patients chose to voluntarily stay on migalastat beyond the 2-year study.

FOLD is now expecting outcome of Study 012, a 60 patient, phase 3 non-inferiority study designed to compare ERT and migalastat in maintaining patient renal function over 18 months. Result is expected in Q3 2014. Positive findings will be followed soon by FDA filing. Success rate of Study 012 is in the 70-80% range given 011 success.

Migalastat commercial potential: Peak sales of migalastat mono-therapy should be in $100-200M range, justifying $400M valuation at 3X sales.

As mono-therapy migalastat can penetrate 10-20% current market size, or $100-$200M annual sales. Core patients include those carrying amenable mutations and 1) on ERT and desire alternative treatment due to antibody build up to current therapy or severe allergy, and carry amenable mutations, likely ~5-10% of current patients; OR 2) newly diagnosed with mild symptoms, especially heterozygous females, looking to balance therapeutic effect to convenience and side effect in treatment option. New patients are significant since the market is under-diagnosed, and drove 13% market growth in 2013 according to Genzyme.

In terms of competition, migalastat is differentiated from the in-market ERTs in oral convenience and safety profile. No pipeline competitors are major worries. Genz-682452, a novel oral from Genzyme, is still in phase I. Protalix PTR-102 is a biosimlar that carries the same issues as existing ERT. Experimental gene therapy for Fabry's disease has been reported but again in very early stage of development.

FOLD also has ERT- migalastat co-therapy in development: Migalastat should improve tissue delivery of the synthetic enzyme delivered, creating a differentiated therapy for the broad Fabry's population. Success of mono-therapy will boost company value by providing validation to the chaperone therapy platform to potential biotech partners, and improving chance of success for the ERT-migalastat co-therapy.

Valuation

FOLD base case value is ~$500M at $7.7 per share at sum of part valuation, factoring in clinical trial risk. This is significantly higher than the value FOLD had reached in last 4 years, driven by high likelihood of monotherapy phase 3/registration success and the anticipated revenue once marketed.

· Migalastat monotherapy $300M: 3X peak sales= ~$400M, 70% risk discount for study 012 success (Success rate of Study 012 is in the 70-80% range given 011 result)

· Chaperone therapy platform $150M: $200M (conservative), 70% risk discount

· Migalastat ERT co-therapy $50M: 3X peak sales= $400M (assuming same peak sales as mono therapy); subtract $80M development cost, apply 50% risk discount, further discounted for 4 time periods at 10% annual rate given development timeline

M&A potential: Further upside possible once platform is validated by Migalastat approval.

The possibility of GSK acquiring FOLD is conceivable but low. FOLD's prior partner GSK has deep pocket but little orphan disease experience or patience for failure. GSK first established a rare disease unit in 2010 with no proven blockbuster under its belt. The current chief, already second since unit inception, has no orphan experience coming from vaccine commercialization. GSK has also returned right to Prosensa's muscular dystrophy drug this year after PIII trial trouble, only to watch regulators softening on clinical data standard, and Prosensa submitting registration submission a few months later. GSK still has 18% share in FOLD, and may be interested in M&A to fill its dwindling rare disease pipeline. However GSK's commitment to rare diseases and willingness to spend remains a question.

A veteran orphan disease player will extract value better from the deal: Shire and Biomarin both have no direct competing products in the U.S., could bring in valuable commercialization capability to boost value, as well as apply the technology platform to additional products. Shire in particular has shown an appetite for marketed orphan drugs (NPS, Viropharma), finishing the Viropharma deal at 5X estimated revenue contribution. Such benchmark could value FOLD at $750M based on migalastat sales alone, with further upside when platform value considered.

Financial position: adequate for near term.

FOLD has $72M cash on the book as of end of A1 2014, with adequate runway to Q2 2015. If study 012 does not succeed, management will likely need to raise additional funding for migalastat development program and dilute existing equity.

Management: veterans in orphan disease from insider track.

The FOLD management team are experienced with orphan drug development. This is very important since the business model for orphan drug development is distinct from other therapeutics, requiring distinct skills in building relationship with patient and treatment community, and addressing reimbursement issue for these high priced drugs. John Crowley, the CEO of FOLD, was among the first generation of orphan disease developers. Mr. Crowley was motivated by the condition of his own children with Pompe's disease, started a company devoted to the disease, and ultimately contributed to the development of Myozyme by Genzyme as one of the first ERT therapies.

Major stockholders and transactions: Perceptive Advisors just increased holding to 13%, signals confidence in underlying.

GSK maintained 17.8% share as the largest stockholder (2013 annual report). Joseph Edelman's Perceptive Advisors revealed 8.3M share (13%) holding May 29, 2014, price point that day was $2.43/share.

Risks: limited fall but long road to recovery if Study 012 fails.

Major risk is clearly Study 012 failure. In such case FOLD will need new funding in $100 million range and 3-4 years to bring migalastat mono therapy back to registration stage. In such case the sum of part valuation will still be close to current EV (migalastat mono therapy down to ~$100 M after accounting for additional time, clin risk, clin development spend; platform value neglectable; ~$40M co-therapy). But new funding could be costly to raise. Based on past market reaction in such situations, 30% or more share price fall is likely. The lack of near term catalysts means that price will take a long time to recover.

Source: Amicus Therapeutics - Long Opportunity With Asymmetric Upside Potential And Near-Term Catalyst