This summer has been a bonanza of biotech new drug approvals with wins posted by Vivus, Inc. (NASDAQ:VVUS), and Arena Pharmaceuticals (NASDAQ:ARNA) for obesity medications, Horizon Pharma (NASDAQ:HZNP) for a rheumatoid arthritis treatment, and Amarin Corporation PLC (NASDAQ:AMRN) for its triglyceride lowering drug Vascepa. One thing that sets AMRN apart from the other biotechs with newly approved drugs is that there are additional binary events related to Vascepa's go-forward plan that investors should be ready to understand and profit from.
After Vascepa's approval announcement, much is being made of whether or not Vascepa gets FDA's blessing as a new chemical entity or NCE. Investors will find out Vascepa's NCE fate as early as Friday, August 17, when the FDA publishes its next update to the Orange Book. We argue herein that NCE status, while it will affect short-term stock price, is unlikely to have a practical effect in buyout valuations and in drug marketing.
What's at Stake
The stakes for AMRN are the difference between new drug product exclusivity, which fends off generic competitors for three years versus NCE which fends off competition for five years. Many investors believe that the larger stakes are whether or not NCE status affects the valuation of the company in a potential buyout scenario since this is AMRN's preferred course of commercialization. Indeed, AMRN has been described as having three separate binary events in the form of FDA approval, NCE status, and issuance of the '889 patent for their drug.
According to the FDA, a generic drug maker can file an abbreviated new drug application (ANDA) to make a generic version of any drug that is not under an exclusivity period. Even if the drug is patented, the ANDA can be filed as long as
... the applicant shall provide the patent number and certify, in its opinion and to the best of its knowledge, ... that the patent is invalid, unenforceable, or will not be infringed by the manufacture, use, or sale of the drug product for which the abbreviated application is submitted. The applicant shall entitle such a certification "Paragraph IV Certification".
In other words, just because you have a patent does not mean you will not be challenged. Generic drug makers can use the legal system to challenge patents of widely prescribed drugs much sooner than the expected patent life. Indeed, Teva Pharmaceuticals (NYSE:TEVA) has used this strategy with great success in the past many times.
During the conference call discussing Vascepa's approval, AMRN management downplayed the significance of the NCE status designation. Some traders took this to be a sign that the NCE negotiations are not going well. Let's see if we can understand why AMRN management might have said this.
During the first three years after approval, a new drug enjoys exclusivity even if the "active moiety" (the part of the drug that is pharmaceutically active) has previously been approved, as long as the NDA was based on clinical trials in humans conducted by the sponsor, or the data for which the sponsor has the rights. When the active moiety has never been used in a drug before, the exclusivity period is five years.
The big question is: "Is Vascepa's active moiety new?" Some longs we've interacted with indicated that, due to the purity of the active ingredient, icosapent ethyl, in Vascepa, the active moiety is new. However, a look at the originally approved label for Lovaza (originally called Omacor), from GlaxoSmithKline (NYSE:GSK) shows that their drug contains:
Omacor®, a lipid-regulating agent, is supplied as a liquid-filled gel capsule for oral administration. Each one gram capsule of Omacor® (omega-3 acid ethyl esters) contains at least 900 mg of the ethyl esters of omega-3 fatty acids. These are predominantly a combination of ethyl esters of eicosapentaenoic acid (EPA - approximately 465 mg) and docosahexaenoic acid (DHA - approximately 375 mg).
Note, icosapent ethyl and eicosapentaenoic acid are interchangeable names for the same molecule. Indeed, Vascepa's FDA approved label states that
VASCEPA is an ethyl ester of eicosapentaenoic acid
It is pretty clear that FDA has previously approved a drug containing the active moiety icosapent ethly. For clarity, here is FDA's definition of active moiety from the small business assistance section of their website:
An active moiety means the molecule or ion, excluding those appended portions of the molecule that cause the drug to be an ester, salt (including a salt with hydrogen or coordination bonds), or other noncovalent derivative (such as a complex, chelate, or clathrate) of the molecule, responsible for the physiological or pharmacological action of the drug substance.
Our view is that NCE status is not a sure thing based on the above definition.
Does NCE Matter
Even if Amarin does NOT get a five-year NCE exclusivity for Vascepa, our view is that, in practical terms for drug marketing, it does not matter. The three-year exclusivity for a new drug product can likely be extended by at least another two years.
The FDA indicates (see small business link above) that:
A three-year period of exclusivity is granted for a drug product that contains an active moiety that has been previously approved, when the application contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the sponsor that were essential to approval of the application. For example, the changes in an approved drug product that affect its active ingredient(s), strength, dosage form, route of administration or conditions of use may be granted exclusivity if clinical investigations were essential to approval of the application containing those changes.
In other words, when new clinical data, either in a new patient population, for a new indication or dosage form are submitted, the three-year exclusivity clock can be reset. Indeed, GSK's Lovaza was originally approved on November 10th 2004; however, the FDA electronic Orange Book database indicates that Lovaza has marketing exclusivity until September 16, 2012, five years beyond the NCE exclusivity that came with the original approval.
In the case of Vascepa, Amarin already has the ANCHOR clinical trial data in patients with high triglycerides (as opposed to the approved patient population of very high triglycerides). The company indicated in its second-quarter conference call that it would submit a supplemental new drug application for the ANCHOR trial results as soon as their REDUCE-IT cardio-vascular outcomes trial was substantially underway. This supplemental NDA (sNDA) submission could come as early as the end of this year. Since the standard turn-around time to review efficacy supplements is 10 months under the prescription drug user fee act (PDUFA), the earliest that an ANCHOR sNDA approval should be expected is October of next year if the submission happens this December. Should the approval come in October 2013, this effectively adds 16 months to the marketing exclusivity period for Vascepa. Note, the three-year exclusivity due to an ANCHOR sNDA approval would not add to the five-year exclusivity should Vascepa be granted NCE status because the exclusivity periods are not cumulative.
Eventually, Amarin will have clinical trial results from the REDUCE-IT trial, which will add another exclusivity period to the drug; provided that exclusivity does not lapse in between. The company has also indicated that it plans to run a clinical trial of a combination of Vascepa with one or more statins. Results of these trials would also be the basis of a three-year marketing exclusivity period. Indeed, GSK's Lovaza gained its most recent marketing exclusivity based on combination trials with Lipitor and Crestor.
Our view is that NCE status for Vascepa is unlikely to be granted if the FDA sticks to the strict definition of active moiety as described on their website; however, the lack of NCE status is unlikely to have practical long-term implications for drug marketing. While investors and the media make much of NCE status, in reality, AMRN already has clinical trial data that will allow it to extend the three-year exclusivity by at least 16 months if not a full two years. Further exclusivity extensions based on future trials could keep Vascepa competitors out of the picture for quite some time.
We previously recommended that investors who wished to speculate on a buyout or partnership as the go-forward plan for Vascepa should begin scaling in to a position and be ready to buy on any dips. Should NCE status not be granted, a large dip is very likely to ensue as traders' expectation of the buyout price are (in our view incorrectly) lowered. We view any dip on a denial of NCE status as a buying opportunity for those looking to speculate on buyout or partnership as the go-forward plan. Pharmaceutical companies are well aware of the process for marketing exclusivity extensions; therefore, we do not view NCE status as actually having a material effect on valuation in potential buyout talks. Investors already holding AMRN ahead of the orange book publication should be ready to sell into weakness and buy back or add to their positions on NCE denial so that they can lower their cost basis.
Should FDA grant the NCE status, traders will perceive this as increasing the likelihood of a buyout and may push the stock price higher to factor in a perceived larger takeout premium. Should prices reach above $20 per share in this scenario, investors would do well to lock in a small portion of their gains while letting the majority continue to appreciate in anticipation of a buyout. Should a buyout not be announced within the next 60 days, any buyout premium will begin to dissipate and investors should act accordingly.
Disclosure: I am long ARNA.