Amicus Therapeutics (NASDAQ: FOLD) uses its proprietary chaperone technology in the treatment of human genetic diseases by targeting mutated proteins that are unstable, unfolded and misfolded. The company's lead product candidate is migalastat, a pharmacological chaperone that stabilizes endogeneous lysosomal enzymes and alleviates the build-up of mutant proteins in lysosomal storage diseases like Fabry's disease.
Figure 1: Investment highlights
Figure 2: Product pipeline
Migalastat in Fabry's disease: Fabry's disease is common in the Caucasian population with an estimated prevalence of as high as 1 in 50,000. About 5000-10,000 patients with this condition exist worldwide that causes kidney failure, stroke, and heart disease by build-up of abnormal protein (source: company presentation). Migalastat is targeted at Fabry's disease with certain amenable mutations which are estimated to occur in 35-50% of patients. The product received a positive opinion from Europe CHMP committee with a final decision expected in Q2, 2016. The company is expected to meet with FDA in Q2, 2016 to discuss submission of NDA for migalastat. Currently, the main treatment for this debilitating disease is enzyme replacement therapies (NASDAQ:ERT) like Agalsidase beta and alpha from Sanofi (NYSE: SNY) and Shire (NASDAQ: SHPG). Patients on ERT need a transfusion port and receive bi-weekly infusions. Migalastat is oral, easier to administer and may be able to gain some market share over ERT in amenable mutations. Migalalstat was equal in clinical efficacy to ERT in a phase 3 study (in patients switched from ERT) and decreased disease substrate buildup in another phase 3 study (in patients naive to ERT), source: company annual report. Amicus also plans to test a combination of migalastat and its proprietary ERT which could be used in all Fabry's patients and was found to provide higher level of enzyme than ERT alone in a phase 2a study.
Amicus is also developing SD-101 in the treatment for Epidermolysis Bullosa (EB), a debilitating blistering condition that affects about 30,000-40,000 patients worldwide. The product is a topically applied allantoin formulation that was successful in a phase 2b study and is now is planned to be tested at 6% dose in a phase 3 study. The product has breakthrough therapy designation in the U.S. and orphan drug designations in the EU and US.
The third key product in the pipeline is a combination of ATB200 (novel ERT) plus chaperone in Pompe's disease (about 5000-10,000) patients worldwide. A phase 1 clinical study has been initiated.
Figure 3: Competitors to Amicus product pipeline (source: company annual report)
Financial highlights and valuation: The company has cash of $ 214 million, enough to last till mid-2017. The long-term debt is $ 100 million.
In valuing the company's future revenue from Fabry's disease,we used two approaches to calculate likely market share. In the first approach, we assumed about 15000 patients worldwide with 70% in EU. We assumed that the female/male ratio was 60/40. The proportion of amenable mutations in the population was assumed 35-50%. The proportion of females requiring therapy was assumed=15% and 50% in males. This data was obtained from a expert talk script available at Slingshot Insights. The drug was assumed to be launched in EU in 2017 (80% probability) and US in 2018 (60% probability) reaching a peak market share in 5 years. Likely revenue from migalastat plus novel ERT was also considered though this constituted a small proportion of forecasted revenue due to lower probability. In the second approach, we used the current annual ERT sales data in Fabry's ($ 1.5 billion, EU-34%, US-27% and rest of world-39%). We assumed that half of these patients will have amenable mutations and about half will these will switch to migalastat due to convenience. Therapy in Fabry's is currently considered for patients with organ failures like kidney, heart etc. due to high cost and so the proportion of patients who might be candidates for migalastat might be much smaller than the estimated prevalence of Fabry's disease in the population. The discount rate used was 9.7% which was calculated according to the CAPM model. Non-cash working capital was estimated as 20% of sales and capital expenditure as 32% of sales according to data from NYU-Stern.
The key point that had significant effect on the forecasted cash flows from Fabry's as well as EB was the high possibility of a gene therapy or gene editing cure possibly in next 10 years. Lysosomal storage diseases are excellent candidates for gene therapy or editing due to single gene involvement and several such trials are in progress. Due to this, I expect the market share for ERT and migalalstat to decline sometime starting in next 6-7 years. In addition, EB and Pompe's are also good gene therapy/editing targets. This factor had significant effect on the forecasted cash flows for Amicus therapeutics and the fair value of the share price.
The DCF valuation model is available at this link and the discount rate calculation model is available here. We could not get a positive NPV using the DCF model. Using the comparables model, and at a peak sales of $ 300 million for migalastat alone in Fabry's, $ 52 million for migalastat plus CHART ERT, and about $ 15 million for SD-101 (total peak sales= about $ 365 million), EV/sales multiple of about 5 (NYU-Stern data), we estimated enterprise value of about $ 1.8 billion in 2021. Discounting this to the present, a fair value estimate of the current enterprise value was $ 1.2 billion. I am not a big believer in comparable valuation method and would leave it to the investors if they consider it useful.
In conclusion, our rating on the common stock of Amicus Therapeutics is Hold. The company's pipeline is very likely to offer competition from gene therapy/ editing programs under development, leading to longer term erosion of market share. Migalastat EU approval seems to be well-priced in the stock price and a favorable FDA opinion might cause a brief run-up of the stock price to around $10-12 level offering a brief trading opportunity for active traders. For long-term value investors, we recommend to avoid this stock.
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