Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

On January 27, the FDA granted marketing approval for Amylin Pharmaceuticals (NASDAQGS: AMLN) and Alkermes' (NASDAQGS: ALKS) diabetes drug Bydureon. The companies began marketing the drug in the US on February 13. The new GLP-1 receptor agonist is a once-weekly version of Amylin's twice-daily GLP-1 agonist Byetta (exenatide).

Approved in April 2005, Byetta was the first GLP-1 agonist approved. However, Novo Nordisk's (NYSE: NVO) once-daily GLP-1 agonist Victoza (liraglutide), which was approved by the FDA in January 2010, is now the market leader. In order to gain a better understanding of the expected market dynamics surrounding the introduction of Bydureon into the marketplace, we conducted a survey of endocrinologists in our proprietary Expert Network. The results of the survey are summarized below, and full results can be found here.

The path to Bydureon approval was not straightforward for Amylin and Alkermes, and Amylin's marketing partner for the drug, Eli Lilly (NYSE: LLY), returned all rights to the drug before approval in an apparently ugly break-up. Amylin, Alkermes and Lilly initially filed the NDA for Bydureon with the FDA in May, 2009, and the Application was accepted for review in July of that year. In March 2010, however, the companies received a complete response letter (CRL) from the FDA concerning, according to the companies, issues related to labeling with accompanying REMS and manufacturing processes.

A response to the CRL was completed in April, 2010 and the FDA responded by setting a PDUFA action date of October 22, 2010. On October 19, 2010, the FDA issued another CRL, this time requesting a thorough QT (tQT) study looking at the effect of high-dose exenatide on heart rhythms, specifically QT elongation. Bydureon received European approval on June 21, 2011 while Amylin was conducting the tQT study. The company announced successful results of the study on July 7, 2011 and resubmitted the Bydureon NDA to the FDA on July 28, leading to last month's approval.

Eli Lilly Break-up

On May 16, 2011 Amylin filed suit against Eli Lilly alleging anticompetitive tactics because of Lilly's entrance into an alliance with Boehringer Ingelheim GmbH. The alliance was formed to develop and market BI's Tradjenta (linagliptin), a DPP-4 inhibitor that competes with the GLP-1 agonists. Amylin sought to stop Lilly from using the same sales force to market the two drugs, but the disagreement led to an end to Amylin's relationship with Lilly.

On November 8, 2011, the companies announced that Amylin regained full responsibility for Bydureon, Byetta and related products, beginning in the US and moving to all markets by the end of 2013. As part of the break-up, Amylin agreed to an upfront payment of $250MM. Additionally, Amylin will pay 15% of global net sales to Lilly until the aggregate payments total $1.2 billion plus accrued interest. Amylin issued a $1.2 billion secured note to Lilly, and revenue sharing payments will go towards paying the balance.

Amylin will also owe a $150MM milestone payment to Lilly upon approval of a once-monthly version of exenatide that is currently in Phase II development. Amylin will continue to pay Lilly for a $165MM line of credit, but maturity of the debt has been extended from the second quarter of 2014 to the second quarter or 2016. Amylin also has responsibilities to Alkermes, including a $7MM milestone payment upon the first US sale of Bydureon. Alkermes will also receive 8% of net sales from the first 40MM units of Bydureon sold in a given year and 5.5% of net sales for all additional units.

With a stock price of $17.59, Amylin has a market cap of $2.57 billion and enterprise value of $3.73 billion. The company reported net loss of $461.5MM for the fourth quarter compared to $19.2MM for the same period in 2010. The increase in loss was due to their break-up with Eli Lilly, discussed above. For the year, Amylin reported a net loss of $543.4MM compared to $152.3MM for 2010. Amylin ended the year with $214.6MM in cash and equivalents. Amylin did not give an update on the progress of Bydureon sales in Europe, which are still being managed by Eli Lilly. Amylin will take control of all international Bydureon sales by the end of 2013.

Current GLP-1 Market

Although Byetta was first to market, Victoza, which has a more convenient dosing schedule (once/day vs. twice/day) and a pen-style delivery device, was able to quickly gain market share upon approval. Amylin reported net sales of $559MM for Byetta in 2010, however 2011 sales were off by 7% as the company reported $518MM in Byetta sales. Meanwhile, Novo Nordisk reported a 159% increase in Victoza sales in 2011, with sales topping $1 billion (6 billion DKK) for the year.

Now that Bydureon has been approved for sale, physicians treating type 2 diabetes patients will have to choose between the three GLP-1 agonists. The biggest difference between the three GLP-1 agonists is dosing schedule, as Byetta is administered twice/daily, Victoza once/daily, and Bydureon once/weekly. Amylin conducted a head-to-head non-inferiority trial, called DURATION-6 to compare Bydureon to Victoza. In the trial, patients taking achieved A1C reduction of 1.3 percentage points, versus 1.5 percentage points for those taking Victoza. Bydureon failed to achieve the primary endpoint of 'non-inferiority' to Victoza. At the same time, Victoza patients reported more adverse events than those taking Bydureon.

In the DURATION-6 trial, the following rates of adverse events were recorded. Victoza patients: nausea reported among 20%, vomiting 11%, diarrhea 13%; Bydureon patients: nausea 9%, vomiting 4%, diarrhea 6%. Other key differences between the GLP-1 agonists include needle gauge, with Bydureon requiring a larger needle, and preparation of the required dosage. While Victoza comes in a multi-dose pen, Bydureon comes as a powder and must be reconstituted by the patient in a multi-step process.

Survey Results

As part of the survey, we asked physicians to weigh 6 factors (A1C, adverse events, injection site reactions, dosage preparation, needle gauge, and frequency of administration) independently on a scale from 1-5, with one being most important and 5 being least important. So, a lower score represents a more important factor. According to this series of questions, the difference in A1C from DURATION-6 is least important while frequency of dosing is most important. This is not to say that A1C control was not important (as revealed below), but rather that most physicians did not view the DURATION-6 result as clinically important. Some said that this difference would sway their decision, but more comments mentioned the importance of the dosing schedule.

We then asked the physicians to weigh the six factors against one another, asking them to, "Please rank the importance of each of the following factors when choosing an GLP-1 agonist for a patient. (Please rank on a numerical scale from 1-6.)" When asked in this way, the results were a little different, with endocrinologists listing A1C reduction/blood sugar control as the most important factor they would look at when choosing a GLP-1 agonist. The comments suggest that this is the broad reason for prescribing a GLP-1 agonist, but that the difference elucidated in DURATION-6 is not a differentiating factor between the drugs. One noteworthy factor was the importance of adverse events. In both scales, physicians rated AEs as the second most important factor to consider when choosing between GLP-1 agonists.

An important point revealed by these data is that the factors a physician will consider are highly individual to both the doctor and the patient. The ratings were bunched without clear differentiation in the middle. Some physicians mentioned that the need to prepare Bydureon before injection was the most important factor, while needle gauge is considered to be a very important factor for particular patients. There does not appear to an overriding trend, but rather individual physicians and patients have varying preferences and needs.

GLP-1 Market Outlook

In our survey, 25/45 (56%) physicians predicted that the GLP-1 market would grow by 20% and the balance forecast no increase. The survey suggests that Bydureon should grow the GLP-1 market by about 10% in the coming year (versus 12% actual year-over-year GLP-1 growth in 2011). Total WW GLP-1 sales for 2011 were approximately $1.6 billion (~$1.0 B for Victoza and ~$600MM for Byetta). According to Novo Nordisk, North America represents 68% of the market value (Europe is 26% and 'Other' is 6%). Hence, with 10% market growth, we'd expect WW sales of the GLP-1 drugs to be approximately $1.8 billion in 2012, with approximately $1.2 billion coming from North America.

In our survey, a weighted average of the proportions of academic/major referral center and community physicians creates the following division for the GLP-1 market one year from now: Byetta, 23%; Victoza, 41%; Bydureon, 37%. Assuming a total WW market size of $1.8 billion in 2012 and a similar physician sentiment outside the U.S., this division would represent WW 2012 sales of $414MM for Byetta, $738MM for Victoza, and $666MM for Bydureon (this assumes similar pricing). If we assume two-thirds of the market is U.S., or $1.2 billion, then the survey results suggest that U.S. sales division would be of $276MM for Byetta, $492MM for Victoza, and $444MM for Bydureon.

Amylin's Bottom-Line

So, what do our survey results suggest about Amylin's earnings and stock price going forward? Importantly, our survey may not be predictive of future sales, as physicians and patients do not yet have experience with Bydureon. Also, Bydureon sales may ramp at a slower rate than suggested by our surveying. Nevertheless, we use the survey data to get a rough idea of Amylin's outlook. Our survey suggests that the exenatide franchise, Byetta and Bydureon, may bring in up to $714MM for Amylin in 2012. The company's drug, Symlin, achieved sales of $92MM in 2010 and $104 in 2011, an increase of 13%. Assuming sales grow at a 10% pace, this drug would have net sales of $114MM in 2012. This leads to potential sales of $1.1 billion for Amylin.

The table below gives an estimate for Amylin's revenues and costs for 2012. All values are in millions, and estimates for 2012 are based on Amylin guidance. Sales estimates are based on our survey, pro-rated for the fact that Bydureon was not on sale all year. The company has estimated non-GAAP loss of $20-40MM for 2012.

Item

2011A

2012E

Symlin sales revenue

$103.9

$114

Byetta sales revenue

$517.7

$414

Bydureon sales revenue

n/a

$600

Revenue from collaborations

$29.1

$7.5

Total Revenue

$650.7

$1,135.5

Cost of Goods Sold

$48.4

$227.1

SG&A plus R&D

$432.4

$600

Collaborative Profit Sharing

$222.5

Net costs to re-acquire exenatide from Lilly

$431.6

Restructuring

$7.2

Royalties/Milestones

$30

Royalties

$152.1

Total Costs and Expenses

$1,142.1

$1,009.2

Operating Profit/Loss

($491.5)

$126.3

Interest Expense, net

$51.9

$165

Net Profit/Loss

($543.4)

($38.7)

Based on Amylin's guidance and our survey, we estimate that the company may spend approximately $1,009.2MM and bring in revenue of $1,135.5MM, for a net loss of $38.7MM, which is impacted by the interest expense. The goal of this exercise is not to try to pinpoint Amylin's earnings, but rather to see what factors will affect the bottom-line going forward. Amylin will pay royalties of from 5.5% to 8% of Bydureon sales to Alkermes and 15% of Byetta/Bydureon sales to Lilly. Cost of goods sold including Bydureon are expected to be about 20%, compared to about 10% in recent years for Amylin.

Also, as one can see, marketing a diabetes drug is costly. This analysis highlights that the deal that Amylin struck with Eli Lilly to regain rights to the exenatide franchise may have a negative effect on earnings for many years and Amylin may need to raise additional capital before reaching profitability. However, Amylin should have more to gain from future Bydureon and Byetta sales (as well as monthly exenatide, if approved) in the out years once the debt is repaid. Of course, investors will be focused on the introduction of competitive products. For example, Phase III data from Lilly's weekly GLP-1 agonist is expected in 2Q12.

Looking Further Ahead: GLP-1 Agonists for Obesity?

The story of GLP-1 agonists is still in the early chapters, and numerous upcoming events will continue to reshape the market and investor's expectation of the future market. In order to better compete with Victoza, Amylin is developing a pen-type delivery system for Bydureon. The company is also developing both weekly and monthly versions of Bydureon that will not need to be reconstituted. The Phase III program for monthly exenatide is expected to commence in 2013. Meanwhile, Novo Nordisk has commenced Phase I trials for a weekly version of Victoza. Novo is also testing semaglutide, a weekly GLP-1 analogue, in Phase II. Importantly, Lilly is evaluating their weekly GLP-1 agonist, dulaglutide, against exenatide in a Phase III trial (AWARD-1); results are expected in 2Q12.

Another reason the GLP-1 market will continue to change is because the drugs may be useful for treating obesity. In addition to helping control blood sugar, the GLP-1 agonists help diabetics lose weight. Novo Nordisk is testing Victoza in Phase III trials for obesity. An effective and safe treatment for obesity would likely become an instant blockbuster, which has led to enormous speculation in the space. Orexigen Therapeutics' (NASDAQGM: OREX) drug Contrave, the Vivus (NASDAQGS: VVUS) drug Qnexa, and Arena Pharmaceuticals' (NASDAQGS: ARNA) lorcaserin all faced FDA panels and were ultimately rejected by the FDA, primarily based on safety concerns.

Vivus is taking another shot at Qnexa approval, with a panel hearing scheduled for February 22, 2012. Although Amylin has acknowledged the potential of GLP-1 agonists for treating obesity, the company has not yet commenced clinical trials in this indication.

Source: Bydureon Physician Survey: Results Yield Insight Into Launch Trajectory