Amicus (NASDAQ:FOLD) did not make much headway over the last few months. And it's no wonder since the company has been a major source of supply. Amicus raised $100 million through its at the market offering, or ATM, during Q2 and Q3, which has put some pressure on its share price. However, several value creating catalysts are coming up: investors are waiting for the update on the U.S. regulatory pathway for Galafold and the top line data from Zorblisa's phase 3 trial. Both events should move the stock significantly up or down, depending on the outcome. Galafold's launch in the EU is progressing nicely despite the reimbursement hurdles. I am reiterating my bullish view on Amicus but reducing my price targets due to dilution. Galafold (outside of the U.S.) provides downside protection and makes the risk/reward skewed to the long side.
Galafold's EU launch progressing nicely; investors await the U.S. regulatory update
Galafold's progress in the EU has been encouraging. Amicus is still focused on getting reimbursement in place all over Europe. The process is cumbersome and the company has to navigate reimbursement country by country. In the meantime, the company managed to get 21 commercial patients on Galafold through the Expanded Access Program. No revenues have been recognized in Q2, but those 21 patients translate into an annualized run rate of around $4 million. And that's not bad considering how early in the launch we are and the fact that reimbursement is still a big issue. I continue to expect modest revenue contribution over the next 6-12 months and think revenues should ramp up in 2H 2017 as I think reimbursement in all important EU countries will be in place by then.
Amicus is also committed to getting Galafold approved in Japan and the United States. The company plans to submit a Japanese NDA in 1H 2017, which was much faster than management anticipated earlier. Roughly 700 Fabry patients are currently being treated in Japan, representing one of the largest markets in the world, with approximately 13% of the global sales generated there.
However, the most important near-term development for Galafold is the update on its U.S. regulatory pathway. As a reminder, the FDA requested further integration of existing clinical data across studies last year and there are several possible outcomes: full approval, restricted approval under Subpart H or another clinical study. In the meantime, the company had active discussions with the FDA and it now has a stronger data set and the EU approval with a strong label. I think there is a fair chance for Galafold to receive either full or restricted approval. The company expects to provide an update in Q4. A favorable resolution could move the stock substantially higher in the following weeks while I continue to believe that a negative outcome is already mostly priced in (although I think shares will go down in the near term if the outcome is negative).
The EU approval covers a third of the addressable market and represents the basis for approval in almost 75% of the market (including the EU). So, even if Galafold doesn't get approved in the United States, the company still has roughly 75% of the market (worth almost $900 million) to penetrate into. Galafold's advantages over the only two competitors, Fabrazyme and Replagal (oral versus IV, better safety profile, improved cardiac outcome and all of that with same/similar pricing) could make the product the standard of care for Fabry disease in the following years. I think Galafold can at least match Replagal's annual sales ($441 million in 2015 and growing in single-digits in 2016) in 4-5 years even without being approved in the U.S.
Co-administration of Galafold with Replagal and/or Fabrazyme could also unlock substantial long-term shareholder value. CHART phase 2a results have shown that Galafold's co-administration with Replagal and/or Fabrazyme have led to consistent increases in active plasma enzyme levels and tissue uptake. The improved efficacy could make combo therapy the standard of care and in that case, Galafold could be used in all patients that are taking Replagal or Fabrazyme now. Of course, pricing could be an issue here since it is questionable whether payers would be willing to pay double the current price.
Source: Amicus investor presentation
Zorblisa phase 3 trial gets a co-primary endpoint
Amicus held a series of discussions with FDA's Dermatology Division regarding the statistical analysis plan while remaining blinded to the phase 3 study and the FDA has agreed to the proposed revisions. The FDA agreed "time to target wound closure" to be elevated from a secondary endpoint to a co-primary endpoint, together with the previous endpoint - "proportion of patients with target wound closure." Amicus believes that achievement of one or both co-primary endpoints could be enough to get Zorblisa approved. I am not sure what to think here. Is the company worried about hitting the first primary endpoint or is this just a way to increase the odds of success? It could be both, but we can only speculate at this point. The median time to wound closure with the higher dose was significantly better in the phase 2b trial and the company said that "statistical simulations indicate increased probability of success" if time to wound closure is added as a co-primary endpoint.
Source: Amicus investor presentation
The company now expects to report top line data from the phase 3 trial in 1H 2017 instead of late 2016. This a very important medium-term catalyst for Amicus which could unlock significant shareholder value in the following years. While I believe in the company's statistical analysis which says that adding a co-primary endpoint increases the odds of success, I prefer to err on the side of caution and will keep the probability of success for Zorblisa at 50%.
Amicus was the main source of supply over the last few months
I was surprised to see how aggressive Amicus was with raising cash in Q2 and Q3. The company reported Q2 earnings in August and said it has raised $57.8 million through its at-the-market (or ATM) financing facility in Q2 and an additional $39.3 million during early Q3, thus completing the $100 million ATM program. The company also raised $30 million in debt and ended Q2 with $214 million in cash and equivalents. If we include the $39.3 million raised in Q3, the cash balance is actually around $253 million. Cash burn in 1H 2016 was around $70-75 million and the company reiterated its cash spend guidance of $135-155 million for 2016, meaning that the company should exit 2016 with $180-200 million in cash (assuming no revenue contribution from Galafold).
The cash raised over the last few months should be sufficient to last at least 12-18 months and eliminates the funding issue in the medium term, but I assume the company would need to raise again in 2H 2017. The completion of the ATM means that the largest seller is now out of the market and I am happy to see that the market was able to absorb the excess supply of shares.
Looking at the chart, the stock is facing some resistance in the $7.50-8.00 range. A breakout past this range could drive the stock higher in the following weeks and the update on Galafold's U.S. regulatory pathway could be the catalyst for that move higher.
Adjusting the price target(s) on dilution
With the completion of the ATM, the share count has increased from 125 million to 142 million. This count doesn't include option grants (14 million shares), which have an average exercise price of $7.42 and which are currently anti-dilutive. But to be conservative, I have included them into my model (available to Growth Stock Forum subscribers) as well as the 3.7 million outstanding warrants. Based on the increased share count, I am reducing my conservative price target from $11 to $9 and the base case (mid-range) price target from $16.50 to $13.50. The bullish case price target is $19.
The valuation includes only Galafold (just the current indication with the assumption that the low end of the peak sales range could be achieved without the U.S. approval) and Zorblisa and I think that the rest of the pipeline is also very promising and consider it a free call option at this point. My initiation article on Amicus provides more details on Amicus' pipeline.
Exciting times are ahead for Amicus. Clarity on the U.S. regulatory pathway for Galafold in the following weeks and the phase 3 data readout on Zorblisa in 1H 2017 could unlock significant shareholder value over the next 12 months. Commercial updates (uptake, reimbursement progress) on Galafold could also move the stock as well as earlier stage pipeline updates. I have reduced my price target range on Amicus due to dilution but I still think the risk/reward is skewed to the long side considering the fact that Galafold is approved in the EU, which covers a third of the addressable market and which is the basis for approval for almost 75% of the addressable market. The main catalysts are at the same time the main risks to the thesis. The stock is bound to head south if the company fails to bring Galafold to market in the United States and if Zorblisa fails in phase 3 trials in 1H 2017.
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Disclosure: I am/we are long FOLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article reflects the author's personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.