Eagle Pharmaceuticals: New Clarity On Past Overhangs Reveals Solid Value Opportunity

Summary

• Ryanodex for EHS now has a clear regulatory path to a 2019 pre-summer launch.
• Pending a deal, Pemfexy appears stalled until either fall of 2019 or 2022.
• Fulvestrant is on track for a game-changing launch as early as late 2019.
• At its current price, Eagle is riding on more certainty and asset value, making for a solid buy opportunity.

By J. Huang and C. Hsu

A few months ago, after Eagle Pharmaceuticals (NASDAQ:EGRX) received a complete response letter (CRL) for Ryanodex in external heat stroke (EHS), we discussed the future of Eagle’s remaining pipeline. With the stock trading as low as $46.62/share on August 7, 2017, we held an optimistic outlook on the stock’s growth potential. The risk and reward profile has dramatically changed since August of last year, and we believe that Eagle still holds potential for continued growth despite currently trading at the mid-50s.

In this piece, we flesh out considerations investors may want to take before opening new positions in EGRX, specifically providing commentary on the shifting trajectory of Ryanodex and updated evaluations of the future of Pemfexy.

The future of Ryanodex in EHS

The status of Ryanodex’s EHS indication has been in limbo for nearly six months now, and Eagle’s management has finally reported on the results of the FDA Type A meeting: a repeat clinical trial to be planned for the 2018 Hajj.

Out of the four days of the 2015 Hajj, Eagle’s trial only ran for a little over one day before the stampedes occurred, halting enrollment. In that time period, Eagle accrued 34 patients; according to Eagle’s CEO, the original accrual goal was around 120 patients. Though incidents at the Hajj are not uncommon, and the possibility of another incident in 2018 remains, we believe the likelihood of a repeat event is low. Indeed, the 2015 stampede stands as the deadliest Hajj incident in history, with nearly 1,500 deaths reported; no major incidents were reported in 2016 and 2017.

Thus, assuming the absence of a stampede on the scale of the 2015 Hajj, the 2018 Hajj trials are highly derisked. The two trials are identical save the removal of the 72-hour follow-up, which was important for the first trial’s secondary endpoints. The first trial, however, was not able to report on any data from the secondary endpoints due to only four patients completing follow-up. Therefore, there is no effective difference in study design and endpoints between the two trials. Though it is difficult to generate definitive extrapolations from 34 patients in the 2015 trials, we can consider the positive 2015 results as an interim data readout for a three-year-long study.

This new announcement confirms Eagle’s commitment to EHS and removes the overhang generated by the potential for the worst case scenario: a silent fading out of the program, as occurred when Eagle received a CRL for Kangio (albeit for a more serious reason than EHS).

Pemetrexed in litigation limbo

On October 27, 2017, Eagle received a tentative FDA approval for their pemetrexed injection (Pemfexy), pending a positive resolution of patent litigation with Eli Lilly (LLY), the makers of branded pemetrexed (Alimta). Lilly initiated a lawsuit against Eagle on August 14, 2017, and the trial date has been set for fall of 2019.

There are three possible outcomes for Eagle’s Pemfexy:

1. Lilly wins the lawsuit against Eagle, prohibiting Pemfexy from being marketed until Alimta’s vitamin regimen patent expiration

2. Eagle wins the lawsuit, immediately allowing Pemfexy to be marketed in late 2019

3. Sometime between now and fall of 2019, Eagle reaches a deal with Lilly to market Pemfexy similar to its deal with Teva (TEVA) for Bendeka

Eagle winning the lawsuit appears unlikely given the strong precedent that Alimta has made in defending off its generic counterparts with its vitamin regimen patent. This patent covers administration of pemetrexed with vitamin B12 and folic acid, which have been found to reduce toxicity of pemetrexed. Indeed, the composition of matter patent for Alimta has already expired. Eagle states that their formulation is sufficiently different from Alimta, arguing non-infringement rather than invalidation, and thus will avoid the fate of the generics that have failed to invalidate Alimta’s patent in the past.

While most of the patent disputes in the US have been between Teva’s generic pemetrexed and Alimta, the EU has seen a dispute involving Actavis’ pemetrexed diluted in dextrose rather than in saline. This argument won temporary permission to market before being overturned in a later trial. This argument of a different diluent is somewhat more similar to Eagle’s case than the true generic provided by Teva, but Alimta appears to have prevailed on that front as well.

Most recently, Lilly’s win in the inter partes review process initiated by Neptune and Sandoz further solidifies Alimta’s defense against generics on now two intellectual property fronts. A history of major generic Alimta lawsuits are described in the table below.

Major Alimta vs. generic lawsuits
Date	Market	Generic	Lawsuit	Winner
March 2014	US	Teva	US Court for the Southern District of Indiana upholds validity of the vitamin regimen patent	Alimta
June 2015	EU	Actavis	UK Court of Appeal rules that the Alimta vitamin regimen would be indirectly infringed by generic diluted in saline, but not directly infringed under doctrine of equivalents. Actavis launches pemetrexed in dextrose at risk.	Mixed
August 2015	US	Teva	US Court for the Southern District of Indiana again rules in favor of Lilly on validity of the vitamin regimen patent.	Alimta
February 2016	EU	Actavis	UK High Court rules that Actavis’ generic pemetrexed does not infringe on the vitamin regimen patent given that the generic is diluted only with dextrose solution	Generic (overturned)
January 2017	US	Teva	US Court of Appeals upholds the district court’s decision, ruling in favor of Alimta’s vitamin regimen patent	Alimta
July 2017	EU	Actavis	UK Supreme Court rules that Actavis’ pemetrexed directly infringes on Lilly’s patents, regardless of diluent used. Overturns February 2016 decision.	Alimta
October 2017	US	Neptune Generics and Sandoz	US Patent and Trademark Office rules in favor of the vitamin regimen for Alimta, through the inter partes review process	Alimta

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The possibility of a deal between Lilly and Eagle still exists, despite the lack of any definitive comment from Eagle in response to analyst questions probing this possibility. We are cautious in applying excess weight to this outcome, however, given the ferocity with which Alimta has defended its patent, now through traditional patent pathways as well as the newer inter partes review. Thus, we default to the stronger and safer assumption that it will be particularly difficult for Eagle’s Pemfexy to reach the market.

Fulvestrant: Eagle's next big challenge

Fulvestrant is Eagle’s largest pipeline opportunity, built on a strong clinical value proposition and progressing as scheduled, with complete study enrollment in H1’18, readout in August, filing in early Q4, and anticipated approval and launch in H2’19. AstraZeneca’s (AZN) patents on fulvestrant (Faslodex) are due to expire in Jan 2021, and Sandoz will be able to sell generic fulvestrant beginning March 2019. Assuming all goes well with Eagle’s fulvestrant, it will essentially be entering a world defined by generics. Eagle’s formulation boasts a single low-viscosity injection versus Faslodex’s dual high-viscosity injection to the buttocks, and with potential for a J-code, we believe Eagle’s proposition will be easily appreciated by patients, providers, and insurers, and will help it capture market share above fulvestrant generics at a favorable price. Considering AstraZeneca’s soon-to-be decimated market share, a symbiotic deal with Eagle remains possible, but so far Eagle has indicated a desire to commercialize independently. We expect Eagle to be hit with a lawsuit from AstraZeneca, triggering a 30-month stay, making 2021 a more realistic launch date for the product, regardless of Eagle’s commercial readiness.

Bendeka: Checking in on the cash cow

Bendeka is the backbone of Eagle’s revenue stream, representing almost two-thirds of FY17 revenue. Teva’s Bendeka/Treanda sales continue its expected decline in FY17, down to $658M from $661M in FY16, and with generic Treanda expected in late 2019, we are starting to see the life expectancy of this important cash cow. Without new data or substantial commercial efforts, bendamustine will continue to face erosion from competing combination therapies such as: R-CHOP and CVP-R for NHL; fludarabine, doxorubicin and rituximab for CLL; and newer targeted oral therapies such as ibrutinib (Imbruvica) and idelasilib (Zydelig). What we can try to understand is whether Bendeka will withstand the blow of generic Treanda. While the conversion to Bendeka was engineered by Teva, this may have been a very good protective move considering the positive feedback from many patients with the shorter infusion times. Irritation has been noted in a small subset of patients, however, which may become the patient base going forward that will use generic Treanda over Bendeka.

Upcoming developments create many avenues for Eagle

Albany Molecular Research

Almost two years ago, Eagle announced a collaboration with Albany Molecular Research (AMRI) to develop parenteral drug products. During Eagle’s January 2018 JPM presentation, Eagle reported that this collaboration had generated two injectable products ready for filing this year (one in 1H’18, one in 2H’18), each in single-player branded markets totalling $500M. The only details shared so far is that one is expected to be litigated and the other not, and it is unclear whether there are any other competing ANDA filers. While the plain generics play is less interesting to us than a 505b2, we look forward to seeing these future cash flows materialize.

Arsia - Eagle Biologics

In a move that inspires confidence in Arsia, the Boston-based biobetters startup that Eagle acquired in November of 2016, Eagle announced in its full year results that it had settled $48M of potential milestone payments with a one-time payment of $15M. This milestone payment originally included $11M for the successful completion of GLP toxicology studies for a product, $11M upon agreeing with the FDA or EMA on the proposed content of a first BLA/MAA, $15M upon acceptance of a BLA/MAA filing, and $11M upon the issuance of a U.S. patent subcutaneous formulations that includes a protein and viscosity-lowering agent. With upside obligations out of the way, and a total $45M ($30M upfront and $15M buy-out of milestones) investment in Arsia for a biologics platform technology, Eagle expects to make deals this year and to see products on the market 4-5 years from now.

The path to growth comes with risks

Though we believe Eagle to be significantly de-risked compared to earlier in the summer immediately post-CRL, there are still risks that characterize Eagle’s growth in the coming year. The two risks that have the most potential to send Eagle’s stock in the downward direction are negative data for Ryanodex in EHS, and fulvestrant.

While we have a snapshot of data from Ryanodex in EHS from 2015, the sample size is just too small to make any definitive conclusions about the results that will read out later this year. With a comparison of 5 out of 17 patients recovering in the Ryanodex arm versus 2 out of 17 in the SOC arm, investors are left to wonder if conclusions from the 2015 trial would have been different if one fewer patient recovered in the Ryanodex arm, or if one additional patient recovered in the SOC arm. Nevertheless, these are risks that accompany any clinical trial readout, and the optimistic data from 2015 as an “interim” data release encourages the probability of a positive readout in 2018.

As for fulvestrant, the ongoing clinical trial has enrolled only healthy patients, with the primary endpoint set as an evaluation of pharmacokinetics. Indeed, Eagle needs only to demonstrate the safety of fulvestrant in their new formulation. Despite a relatively low bar for success here, a failure in this trial could very strongly negatively impact Eagle’s value. With fulvestrant representing the largest upside potential since Bendeka, especially with Eagle’s announcement to commercialize independently, we believe that a substantial amount of Eagle’s current value is ascribed to fulvestrant’s potential success.

Price target and valuation (including key risks)

Using a sum-of-the-parts analysis we value EGRX at $90/share on a risk-adjusted basis using assumptions derived in part from the above narrative. We valued Eagle's on-market portfolio (bendeka, Ryanodex for MH, argatroban, docetaxel, etc) at $18/share using a conservative 8% YOY growth tapering down to 1% YOY in 2026 for all products except for Bendeka. For Bendeka, we assumed a bendamustine market of $500M in 2021, and conservatively assumed a steady decline of Bendeka market share down from 94% to 30% in 2026 due to anticipated generic Treanda erosion. Keeping in mind the key risk of a negative or incomplete trial result at the 2018 Hajj, we valued Ryanodex EHS at $17.7/share, assuming an 80% probability of success. Given the inherent difficulties in clinical trial design/recruitment and early phasing of Ryanodex DIH, we valued it at $7/share assuming a 20% probability of success. Lined up against multiple pemetrexed generics, Pemfexy's formulation improvement may not be sufficient to capture sufficient market share and we model it at $6.2/share with a 95% probability of success given the already secured tentative FDA approval, with peak Pemfexy sales of $60M in 2023. We believe fulvestrant is due to provide strong clinical benefit that we believe will allow it to ride over the field of generics it will be entering with, and we value it at $37/share, which assumes an 80% probability of success, total US market size of $900M in 2026 and a peak share of 30% achieved and maintained starting in 2022. We value the 2 AMRI-partnered generics at $3.1/share combined using the branded sales of $500M/year as a reference and assume a peak capture of 20% and a royalty rate of 20%. The key risk in the generic field would be delay due to litigation, which management already expects in 1 of the 2 assets. Lastly, we leave Eagle Biologics (Arsia) as a bonus to the value-minded investors given the vague yet optimistic posture of management.

Summary of upcoming anticipated catalysts in 2018 and 2019

Timeframe	Catalyst
August 2018	Completion of 2018 Hajj and Ryanodex for EHS clinical trials
December 2018	Readout for 2018 Ryanodex for EHS trial, based off of timing from 2015 Hajj trial readout
August 2018	Readout for fulvestrant trial
H2 2018	Filing of 2nd AMRI ANDA
Q4 2018	Potential NDA filing for fulvestrant
Fall 2019	Lilly vs. Eagle pemetrexed trial

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Conclusion

At its current price point of $53, Eagle is valued close to where it was post-EHS crash in the summer of 2017, but a substantial number of developments have been accomplished and timelines to catalysts future cash flows have advanced by half a year. This makes entering Eagle now a very attractive opportunity. As one analyst probed on the recent Q4 results call, even Eagle itself is seeing share repurchase at the current level an attractive capital move relative to its opportunities.

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Analyst’s Disclosure: I am/we are long EGRX. 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.