Esperion Therapeutics: ETC-1002 Is Appealing, But The Valuation Is Not

| About: Esperion Therapeutics (ESPR)

Summary

Esperion announced positive phase 2b results for ETC-1002.

The market for LDL-C lowering therapies is huge, although the competition may take significant share.

The current valuation of Esperion does not reflect the risks.

Author's note: Although this article is tagged as a short idea, I do not short stocks nor is this a short recommendation. This article is to document my valuation methodology for a stock I have on my watch list.

Esperion Therapeutics (NASDAQ:ESPR) is a developmental stage drug company headquartered in Plymouth, Michigan. Its lead product, and only one not in the pre-clinical phase, is ETC-1002. ETC-1002 is being developed as a small molecule, first-in-class, once daily oral pill for the treatment of hypercholesterolemia. The drug is being developed with the goal to lower LDL-C levels without the side effects of other therapies currently available. The initial patient base is targeting people who have elevated levels of LDL-C and are intolerant of statins.

Overview of ETC-1002

Esperion Therapeutics was originally acquired by Pfizer (NYSE:PFE) in December 2003 for $1.3 billion. At that time, Pfizer was primarily interested in ETC-216, which was an HDL therapy that had just completed phase 2 trials. Fast forward about 5 years to 2008, and Esperion was re-established when the company re-acquired the rights to ETC-1002 from Pfizer. Therefore, Esperion now owns exclusive worldwide rights to ETC-1002 with no milestone payments or royalties due to Pfizer or any other company/organization.

On Oct. 1, 2014, Esperion announced positive top-line phase 2b results for ETC-1002-008 clinical study, with the study meeting its primary endpoint. The highlights from these results were (quoted from the announcement):

  • In patients who received ETC-1002 as monotherapy, there were 27 and 30 percent reductions in LDL-cholesterol at doses of 120 mg and 180 mg, respectively. These reductions were significantly different from ezetimibe alone.
  • In patients who received the combination of 120 mg of ETC-1002 and 10 mg ezetimibe, substantial LDL-cholesterol reductions of 43 percent were significantly different from ezetimibe alone.
  • ETC-1002 monotherapy and ETC-1002 in combination with ezetimibe demonstrated significantly greater reductions than ezetimibe in high-sensitivity C-reactive protein (hsCRP), an important marker of inflammation in coronary disease.
  • ETC-1002 appeared to be safe and well-tolerated. Discontinuation rates due to adverse events (NYSE:AES) with ETC-1002 were comparable to those seen with ezetimibe. Elevations in liver enzymes were as expected and comparable to what is typically observed with approved LDL-cholesterol lowering therapies. In patients treated with ETC-1002, including those with statin intolerance, rates of muscle-related AEs were similar to those seen with ezetimibe.

These positive results essentially validated management's hypotheses, and allowed the company to complete a secondary stock offering shortly thereafter. On October 15, 2014, Esperion announced that it had completed a public offering of 4.89 million shares (including full exercise of over-allotment option granted to the underwriters) at $20.00 per share, which would provide sufficient funding through the anticipated phase 3 development program.

In order to complete Phase 2 development of ETC-1002, the company is also awaiting results from the following on-going studies:

ETC-1002-009 - Phase 2b clinical study in patients with hypercholesterolemia already receiving statin therapy

  • Top-line results are expected in March 2015

ETC-1002-14 - Phase 2 clinical study in patients with hypercholesterolemia and hypertension

  • Top-line results are expected in Q2 2015.

ETC-1002 Nonclinical studies

  • The two-year carcinogenicity studies in mice and rats were completed in Q2 2014, with the final reports expected to be filed with the FDA by early 2015.

The phase 3 development of ETC-1002 will be finalized after the end of phase 2b meeting with the FDA (which the company expects to occur in mid-2015), however, the current plan is to initiate the program during the Q4 2015. The phase 3 clinical program is planned to include several pivotal efficacy studies and one long term safety study, with the safety study expected to run for up to 2 years. This would mean that final results from the Phase 3 program would likely be released in the first half of 2018, with the potential for the NDA to be filed in the second half of 2018.

Potential Market Opportunity

According to company filings, Esperion estimates that there are 34 million people in the United States that are currently using statins as the standard of care. Many of these users, however, may experience side effects like muscle pain or weakness that may cause them to be statin intolerant and discontinue the use of statins. Statin intolerance is defined as the inability to tolerate at least two statins, one of which was taken at the lowest approved dose, due to skeletal muscle pain, aches, weakness or cramping, that manifested or increased during statin therapy and stopped upon the discontinuation of statin usage.

According to the USAGE survey, an approximately 10,000 patient academic study of current and former statin users published during 2012 in the Journal of Clinical Lipidology, 12% of patients on statins discontinue therapy and 62% of these patients cited side effects as the reason for discontinuation. More than 86% of patients who discontinued therapy because of side effects cited muscle pain or weakness as the reason. Based upon these data, approximately 6% of statin users, or more than 2 million adults in the United States are statin intolerant.

In addition to these 2 million people who are statin intolerant, it's also possible that there is a large population of statin users that are experiencing muscle weakness side effects, but decide to continue with statin use. Therefore, Esperion estimates that the statin intolerant market could grow substantially if a safe and effective alternative becomes available, with the potential market expanding up to 7 million people.

Non-Statin Therapies Available

Zetia (ezetimibe), which is marketed by Merck (NYSE:MRK), is currently the most prescribed non-statin with about $2.5 billion worldwide sales. It is often prescribed in combination with a statin, with Merck's Vytorin (ezetimibe & simvastatin) being an oft prescribed combination therapy. Merck, along with other companies developing non-statins, scored a significant victory in November when the IMPROVE-IT study results were released and showed a 6.4% relative risk decrease in cardiovascular events. This was the first study to demonstrate the incremental clinical benefit when adding a non-statin to a statin therapy.

Since the current thinking about LDL treatment is "the lower the better", and that a linear risk reduction in cardiovascular events in comparison to LDL levels is expected, ETC-1002 initial phase 2b results and the IMPROVE-IT study makes ETC-1002 look very appealing.

Risks

In addition to the typical risks of any developmental drug company, such as delayed/failed clinical trial(s), shareholder dilution to fund a drug development, or difficulty partnering/launching a new drug, there are additional risks that current or potential Esperion investors need to consider. The biggest risk, at least in my opinion, is from the biologic competitors that will be entering the LDL-C space within the next few years. At least 3 different drugs have initiated or completed phase 3 studies of their PCSK9 inhibitors, which have shown promising results so far.

  1. On Nov. 10, 2014, Amgen (NASDAQ:AMGN) announced that the FDA has accepted for review its BLA for evolocumab for the treatment of high cholesterol.
  2. Sanofi (NYSE:SNY) and Regeneron (NASDAQ:REGN) are developing alirocumab, and have recently made an unprecedented move by purchasing a priority review voucher from BioMarin Pharmaceutical for $67.5 million, which would provide for 6 month review instead of the standard 10 month review. A BLA filing with the FDA has been expected to occur in the Q4 2014.
  3. Pfizer initiated phase 3 trials for bococizumab in October 2013 (Pfizer March 27, 2014 press release), after a promising Phase 2 program.

Of particular significance, alirocumab resoundingly beat out Merck's Zetia in helping statin-intolerant patients lower their bad cholesterol. Among the 360 patients in a phase 3 study, those in the alirocumab arm reported a 45% LDL cholesterol reduction compared to just 14.6% for subjects taking Zetia. This means that alirocumab could directly compete with ETC-1002, although Esperion points to the lower cost (assuming traditional cost difference between biologic and small molecule pill) and more convenient route of administration (since alirocumab is an injectable biologic) as to why it believes that ETC-1002 can compete.

Another risk is from the carcinogenic study expected to be filed with the FDA by early 2015. I think the market has already fully priced positive results into the current share price, and any type of negative news could hammer the stock. According to Esperion's 10-k, the carcinogenic study is required to halt a partial clinical hold:

In 2009, the FDA determined that ETC-1002 was a potential peroxisome proliferator activated receptor, or PPAR, agonist and as a result was subject to a partial clinical hold... The clinical data to date appear to demonstrate the absence of PPAR mediated pharmacology (triglyceride decreases, adiponectin increases, mild ALT increases) or toxicity (weight gain, edema, creatinine kinase/creatinine increases) in humans. This is supportive of the conclusion that the weak PPAR alpha/gamma activities observed at high doses of ETC-1002 in vitro and in animal models preclinically are not observed with therapeutic doses of ETC-1002 in humans. These effects will continue to be monitored in our future clinical program. Most importantly, our clinical studies have demonstrated rapid and significant LDL-C lowering consistent with the dual mechanisms of action inhibiting ATP-citrate lyase and activating hepatic AMPK.

In addition, based upon early preclinical toxicology results, the FDA has limited our ability to dose ETC-1002 above 240 mg in our clinical studies. We do not plan to dose ETC-1002 above 240 mg. We recently completed the in-life phase of our long term, chronic toxicology studies in monkeys (12 months) and rats (6 months) and final reports from these studies will be issued and filed with FDA in the second quarter of 2014.

If we are unable to address FDA's concerns related to the partial clinical holds, we could be delayed in, or prevented from, obtaining marketing approval of ETC-1002. Additionally, FDA could raise these concerns as part of the NDA review process for ETC-1002, which could result in adverse limitations in any approved labeling or on distribution and use of ETC-1002, if approved.

Based on comments from the last conference call, I don't think that the carcinogenic study will lead to a complete halt of development, but the bigger risk is a delay to the phase 3 program or much more extensive studies than currently planned.

However, we have not seen any PPAR signals in our clinical program, with almost 600 patients treated with 1002. Let me give you couple of examples. 1002 dramatically lowers LDL cholesterol and doesn't affect either triglycerides or HDL cholesterol, which are the classic PPAR alpha signals.

1002 also desecrates adiponectin, increased body weight or cause edema, again, all classical signals for PPAR gamma activity.

So, to summarize, FDA identified 1002 a potential PPAR back in 2009, 1002 with a very weak PPAR, and has been tested in eight clinical trials in over 600 patients to date. And we've not observed any dose limiting safety concerns that restrict development.

Although I wouldn't be surprised if positive results from the carcinogenic study caused the stock price to temporarily gap up, I believe the risk from the carcinogenic study is too big to take any kind of position right now, especially based on the current valuation.

Another thing I'd like to note is the timing of the secondary offering. While it is certainly common for developmental drug companies to raise funds after positive clinical trials, I thought that the company would have been better off raising funds after some of the major near term risks were lifted, mainly the IMPROVE-IT study results and the carcinogenic study, which would have likely netted a much higher offering price. This is certainly a red flag that has added to my pessimism about the current valuation.

Valuation

Based upon the market potential of 2-7 million statin intolerant patients noted above, and with the biologic competition having many years of marketing lead time, I estimate that ETC-1002 may end up capturing about 1 million yearly patients. Assuming that ETC-1002 is priced at $200 per month, or $2,400 per year, peak sales could reach $2.4 billion in 2023. Investors would then need to discount these peak sales, based on their risk tolerance and time factor (current market cap: 22.4 million fully diluted shares x $38 = $851 million):

Discount Rate

Present Value

Implied market cap (3x sales)

Difference to current market cap*

30%

$226 million

$678 million

(20%)

35%

$161 million

$483 million

(43%)

40%

$116 million

$348 million

(59%)

*Note: Although the company currently has about $150 million in cash after the secondary offering, I'm using market cap, in lieu of enterprise value, since the cash will be used to complete phase 3 trials.

Although these discount rates may seem high, I believe that most investors would expect to see at least 30% CAGR in the stock price, in order to account for the huge risk of investing in a drug company that essentially has one shot on goal in a very crowded (albeit large) market. For my risk tolerance, I think the 35% discount rate is appropriate, and would not look to buy the stock until it falls near $21.50 (which is just above the public offering price in October). I will note, however, that as some risks are lifted (particularly the carcinogenic study), I'll be more than willing to reduce the discount rate and/or reassess the valuation.

Conclusion

Although I can see the potential for ETC-1002 to become an appealing option in the LDL-C lowering spectrum, the valuation does not appear to match the current risks. The biologic competition, in the form of multiple drugs targeting PCSK9 inhibitors, will have many years of marketing advantage over ETC-1002, which may severely reduce the potential patient base. Esperion will remain on my watch list with a target price of $21.50, at least until some of the risks have been lifted.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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