Aegerion Pharmaceuticals Inc. (AEGR) was one of the top performers in the biotechnology sector last year, gaining more than 180%. The gains were driven by investor enthusiasm for Aegerion's only approved drug, Juxtapid (lomitapide), a treatment for homozygous familial hypercholesterolemia (HoFH).
An extremely rare disease, HoFH affects approximately one in a million people in the U.S., according to scientific studies, which made Juxtapid an orphan drug. Genzyme's Kynamro, which has also been developed to treat HoFH, has also been granted an orphan drug status. Interestingly, both drugs were approved by the U.S. FDA within a month of each other. While Juxtapid was approved in December 2012, Kynamro was approved in January 2013.
Despite a significantly higher price, there were greater expectations from Juxtapid as the drug was found to be more effective in clinical trials compared to Kynamro. That was the reason why investors pushed Aegerion shares to above $100 by October last year.
After hitting all-time high levels last year, Aegerion shares have crashed. Since October 2013, the stock has fallen nearly 70%, wiping off two-thirds of its market cap in the process. The losses have come amid a warning letter from the FDA's Office of Prescription Drug Promotion over off-label marketing, a Department of Justice investigation over marketing of Juxtapid, debate over the size of the HoFH market and weaker-than-expected sales of Juxtapid.
The big question for investors who are long on Aegerion is whether these issues are now priced in. And whether Aegerion shares can regain some of the lost ground.
Aegerion has just too much riding on just one drug. Considering this and the fact that the company does not have a product pipeline, it becomes difficult to justify last year's rally. Add to this the fact that the market Juxtapid is addressing is very small and there is already competition in the form of Kynamro.
There is also a debate, as I mentioned earlier, over the number of HoFH patients. While scientists say that one in a million people in the U.S. are affected by HoFH, Aegerion has said that there are 3,000 patients suffering from HoFH in the U.S. alone. Aegerion's number doesn't make sense as it translates to one in 100,000 people in the U.S. suffering from the disease. Such a significant difference between what the scientific community says and what Aegerion is saying does raise some difficult questions for the company.
Amid all of these issues, Aegerion recently reported that it achieved $36 million in net product sales of Juxtapid in the second quarter of 2014. More importantly, the company expects full-year Juxtapid net sales to be at the lower end of its guidance range of $180 million to $200 million.
Based on Aegerion's sales forecast and current share price of around $30, Aegerion has a price/sales ratio of around 5. Considering that Aegerion is just relying on one drug, the valuation isn't justified. Indeed, Gilead Sciences Inc. (NASDAQ:GILD), which expects sales of between $21 billion and $23 billion and has tremendous potential, has a price/sales ratio of only 7 (based on sales outlook for 2014). Apart from this there is another factor that suggests Aegerion is still overvalued despite the 70% correction since October.
This factor is the sales outlook for Juxtapid. The question is not whether Juxtapid sales will increase in the future; it is whether the company will be able to maintain its existing sales level. In clinical trials, Juxtapid was found to be more effective than Kynamro and had fewer side effects. This is the reason why despite higher price, investors were more bullish on Aegerion's product. However, Sanofi Genzyme has been expanding its marketing team to boost sales. If the increased marketing boosts sales of Kynamro, it will be at the expense of Juxtapid. Meanwhile, Amgen (NASDAQ:AMGN) has reported positive data from its Phase III TESLA study evaluating evolocumab in patients with HoFH.
Given the uncertain sales outlook, as well as debate over the true number of HoFH patients, I think Aegerion is still overvalued. The question is by how much. In my opinion, Aegerion is 50% overvalued. Assuming that Juxtapid sales remain stable at around $180 million, it gives Aegerion a price/sales ratio of around 2.50. This is justified for a company that has limited growth opportunities.
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