Amarin's AM101 received FDA approval on July 26, 2012

Amarin's AM101 received FDA approval on July 26 for treatment for patients with very high triglycerides. 
 

Qnexa received FDA approval on July 17, 2012

Vivus' drug Qnexa (renamed Qsymia) received FDA approval on July 17 for the treatment of obesity.

VIVUS (VVUS) valuation report ahead of the FDA action

  Authors:  Hsiou-Chi Liou, Jason Hsu

VIVUS Inc. (VVUS) and Arena Pharmaceutical (ARNA) are front runners in the development of weight-loss drugs.  The rollercoaster rides for both stocks over the past two years demonstrate the volatility of small cap biotech stocks without commercial products.  The FDA finally approved ARNA’s Belviq (lorcaserin) on June 27, 2012.  This makes Belviq the first weight-loss drug approved by the FDA in 13 years and reignites the enthusiasm for such drugs.  With the upcoming FDA decision on VVUS’s Qnexa on July 17, 2012, there are a number of issues investors should consider:  Will Qnexa receive FDA approval? What’s the fair value for VVUS? What strategies can investors use to gain on the upside and protect against the downside? 

Here we analyze Qnexa clinical trial data, the probability that Qnexa will receive FDA approval for treating obesity, market opportunities, and risk factors for Vivus.  Our discounted cash flow model suggests a weighted target price for VVUS at $33-$34.   

Clinical Trial Data

First, let’s look at the phase 3 clinical trial data and benchmark Qnexa against the already-approved Belviq.

Arena conducted three phase 3 trials for Belviq (locaserin). The studies showed that, in both 1-year and 2-year studies, about 65% and 35% study subjects treated with Belviq achieved weight loss of >5% and >10%, respectively.  The percentage is lower for people with type 2 diabetes.  By comparison, the three phase 3 trials conducted by Vivus showed that in 1-year studies, 84% of patients taking Qnexa achieved weight loss >5%.  In 2-year studies, 79% of study subjects receiving Qnexa had weight loss >5%, whereas about 54% and 30% of patients achieved weight loss of >10% and >15%, respectively.  Moreover, obese people taking high dose Qnexa showed average weight loss of 11-15%.  Therefore, from an efficacy point of view, Qnexa appears to have greater and more sustainable weight loss benefits than Belviq.  

The reason that the FDA held back approval for these two drugs in 2010 was primarily over safety concerns.  Both drugs have their own issues.  Belviq’s most common adverse effects include headache, nausea, hypoglycemia, and upper respiratory tract infection.  Qnexa’s common adverse effects include skin sensation, nausea, dry mouth, constipation, dizziness, and insomnia.  While these adverse effects are not serious, the FDA had concerns about other serious adverse effects, even though they were rare in these studies.

For Belviq, a major issue has been an association with increased incidences of mammary adenocarcinoma.  Arena was able to address these issues by providing animal data showing that only high-dose locaserin increased mammary adenocarcinoma due to increased prolactin production (Arena Pharma 2011 10K).   Thereafter, the FDA Advisory committee voted 18 to 4 to recommend Belviq for the treatment of obesity, which was subsequently approved by the FDA on June 27, 2012.

For Qnexa, the FDA requested a comprehensive assessment of topiramate's (one of the two components in Qnexa) and Qnexa's teratogenic potential, including a detailed plan and strategy to evaluate and mitigate the potential teratogenic risks in women with childbearing potential taking the drug for the treatment of obesity. In addition, the FDA asked Vivus to provide evidence that the elevation in heart rate associated with Qnexa does not increase the risk for major adverse cardiovascular events.  From Vivus’ 2011 10K filing, it appears that the company has engaged in discussions with the FDA and has provided the data that the FDA requested. 

Over the past year, the company has provided more data that shows that Qnexa does not increase the risk for major cardiovascular events or the observed increases in heart rate. In addition, the prevalence rate for teratogenic defects is very low (0.29%), which is comparable with the rates for infants of women who have previously taken antiepileptic drugs.  On February 22, 2012, the FDA Endocrinologic and Metabolic Drugs Advisory Committee voted 20 to 2, recommending that Qnexa be granted marketing approval by the FDA for the treatment of obesity in adults.   

In conclusion, based on a favorable weight loss efficacy of Qnexa over Belviq and that Vivus may have addressed the serious adverse effects raised by FDA, we believe that it is highly probable (>90%) that FDA will approve Qnexa for obesity treatment.

Market size information

According to the National Health and Nutrition Examination Survey conducted for 2007-2008, 68% of adults in the U.S. were classified as overweight, defined as a body mass index (BMI) greater than 25. The survey also found that 33.8% of adults were obese (BMI > 30).  The percentage of American adults that are obese could climb as high as 43% over the next 10 years.  Americans spend more than $30 billion annually on weight-loss products and services.  Assuming 20-25% could be spent on weight loss prescription drugs, the market size is roughly $6B to $7.5B. 

Currently approved anti-obesity drugs include Xenical (orlistat), marketed by Roche, its over-the-counter counterpart, alli, marketed by GlaxoSmithKline, and phentermine, in several dosage forms and strengths that are available from several generic manufacturers.  Thus, Belviq and Qnexa will compete with existing products as well as new products in the future.  These numbers are incorporated into the valuation of the VVUS stock price (see below).  

We have not overlooked another revenue generating drug from Vivus, Stendra (avanafil), which was approved by the FDA in April 2012 for the treatment of erectile dysfunction, or ED.  ED was reported in 52% of men between the ages of 40 to 70 in the Massachusetts Male Aging Study, with the incidence increasing with age.  Currently marketed drugs such as Viagra, Levitra, and Cialis all belong to the same class of inhibitors for phosphodiesterase type 5 (PDE5), which inhibit the breakdown of cyclic guanosine monophosphate.  Vivus’ Stendra is also a PDE5 inhibitor and thus will compete with such existing drugs. 

  The worldwide sales in 2011 of PDE5 inhibitor products for the treatment of ED were approximately $4.2 billion.  Viagra ad Cialis each have about 45% market share ($2.0 billion for Viagra, $1.9 billion for Cialis), whereas Levitra has about 7% market share ($300 million).  While the market for PDE5 inhibitors will continue to represent a sizable market opportunity for Vivus, we shall factor in the competition the company will face as well as how fast and aggressive Vivus is able to market its product.   

Finally, another important point to make is that most of Vivus’ patent portfolios for Qnexa and Stendra (disclosed in 10K) only cover the U.S. and Canada.  This suggests that the major sales and revenue source for Vivus products will be from North America.  This was factored into our stock valuation.

Risk

A number of risk factors could affect VVUS’ stock price estimate.

(1)  FDA approval status.  A delayed approval or even a rejection (a remote possibility) could make the stock price decline.

(2)  Marketing and commercialization strategy.  With 38 employees, Vivus must seek pharmaceutical partners for commercialization and marketing of its products.  It has not disclosed any partnership agreement with any pharmaceutical companies yet in its annual report; however this could change in the next few months after the FDA decision on Qnexa. 

(3)  Patent position and barrier to entry.   Vivus is the exclusive licensee of 31 patents and 13 published patent applications, all in the U.S. and Canada.  Thus, the marketing rights are primarily in North America.  Unless Vivus also applies for patent protection in other developed or emerging markets, it will not be able to defend its products worldwide.

(4)  Competition:  As described in the market information section, the anti-obesity and erectile dysfunction markets have multiple competing products.  The opportunities for Vivus to expand market share depends on its products’ superior features or competitive advantages as well as its marketing strategies.  Qnexa appears to have better efficacy than Belviq and other anti-obesity products.  Once approved, it should have a better value proposition than other products.

(5)  Business risks:  At present, Vivus has secured the commercialization right for Stendra.  However, it has limited revenue potential due to competition in the ED market. Thus, the company’s valuation is largely hinged on Qnexa approval.  Furthermore, with few staff, Vivus must seek commercialization partners to expedite its sales.  Alternatively, Vivus may strategically seek acquisition and merger partners.     

Valuation

We used the FCFE valuation as the primary model for estimating VVUS stock price.  We used median gross profit margin and net profit margin from comparable companies (e.g. HGSI, SGEN, DNDN, VRTX, RGEN, or BMY) as a guide to estimate revenue growth, gross profit, net income, and free cash to equity for a five-year period (2013 to 2017).   Based on FEFE model with 15% discount rate, the estimated stock price is $33.5, $42.5, and $9, respectively, for three scenarios (baseline, optimistic, pessimistic).   The weighted fair value of the stock is $33-$34, after assigning probabilities to each scenario.

Baseline Scenario: This assumes that FDA approves Qnexa for obesity treatment in July 2012 and the company is able to launch the product in Q4 2012 with a pharmaceutical partner(s).  Our estimate of Qnexa revenue is the following. 

The estimated market for weight loss prescription drugs is ~$7B, as described above.  We can also derive the market size by other method.  Assuming the cost for weight loss drug is $2-4/day and each person is on the regime for average 150 days, it amounts to average $450/yr/person.  Assuming 20% of obese people (16M Americans) use prescription drugs, the total market size for weight loss drugs is $7.2B. 

Due to competition from Belviq and other existing anti-obesity drugs (Xenical, alli, phentermine), our assumption for maximal market share of Qnexa (if approved by FDA) is 20% ($1.44B) over next few years.  Thus, our estimate for Qnexa sales is $25M (2012), $100M (2013), $220M (2014), $440M (2015), $750M (2016), and $1.12B (2017).  This represents a gradual increasing in market penetration rate of ~1.4%, 3.1%, 6.1%, 10.4%, and 15.6%, respectively from 2013 to 2017.  

As for Stendra, due to keen competition, we assume the lowest estimate of maximal sales of $380M by 2017, equivalent of ~9% market share of $4.2B.   Our estimate for Stendra sales is $20M (2012), $40M (2013), $70M (2014), $130M (2015), $230M (2016), and $380M (2017).

Combined both revenue numbers and assume a linear decline of revenue growth from high growth stage to a normalized 8% over a 4-year time after 2017, our estimated stock price for VVUS is $33.5 by the end of 2012.

Optimistic Scenario:  Build upon the baseline scenario assumption, the company could potentially grab larger market share for both products.  Assuming an extra 10% increase in sales, this will boost company valuation to an estimated stock price of $42.5. 

Alternatively, the company may be acquired by other pharmaceutical company.  This may represent the best scenario as the merger and acquisition will expedite the commercialization of its products and maximize shareholder value. 

Pessimistic Scenario: This represents the worst outcome if FDA rejects Qnexa approval or issues another CRL. Under this scenario, the revenue is mainly from Stendra.  An estimated stock price is $9.

            If we assign probability for each scenario, 60% for Baseline, 30% for Optimistic, and 10% for Pessimistic, then the weighted stock price is ~$33-$34. 

Disclosure

We have no position in the stocks mentioned, but may initiate a long position on VVUS over the next 72 hours.   We are independent analysts.  We receive no compensation to write about any specific stock.  

Equity Analysis: Amarin (AMRN)

Equity Analysis: Amarin (AMRN)

Summary and investment decision

The purpose of this report is to analyze and valuate Amarin stock ahead of an FDA decision on its AMR101 clinical trial data on or before July 26.  The phase III data presented by the Company is impressive regarding the clinical benefits of reducing triglyceride (TG) and LDL levels. 

Based on our research, it is highly probable (>95%) that the FDA will approve the drug for its designated uses.  Such an approval will significantly enhance Amarin’s valuation.  We have a price target of $18 for Amarin by the end of 2012, assuming FDA approval on or before July 26^th with a market launch by Q4 2012 through partnership with pharmaceutical companies (Baseline Scenario). 

We also present other scenarios that might affect company valuation.  In the Optimistic Scenario, the assumption is that FDA approves the use of AMR101 in patients on statin therapy in 2013, thus expanding market size for the product.  The estimated stock price is $32. 

The initial market size for AMR 101 is approximately $1B, encompassing more than 3.8 million people with TG levels greater than 500 mg/dL in the United States alone.  Currently, only 3.6% patients are treated with drugs.  AMR101 also has the potential to expand to 36 million adults in the U.S. who have medium to high TG.  Worldwide, patients in the high TG categories are 2-3 times the US market.  Amarin also plans to market the drug globally. 

Risks associated with the stock include delayed approval by the FDA, management’s business strategies, and patent positions.  A potential upside is that the company may be acquired by another pharmaceutical company.  Given its small number of employees and no other drugs in the pipeline, merger and acquisition may be the best strategy to expedite the commercialization of AMR101 and maximize shareholder value.  This may occur after AMR101 is approved for a second indication in 2013, as its value will get a significant boost from expanding its target population.

Business Summary

Amarin is a small-cap biopharmaceutical company focused on reducing the risk of cardiovascular disease through lowering triglyceride levels.  Its leading product candidate AMR101, a pure-form of Omega-3 (96% EPA (icosapent ethyl)), is currently seeking FDA approval for treating patients with very high triglyceride (PDUFA date 7/26/12).

Although many fish-oil derived dietary supplements or health products contain Omega-3, their impurity precludes them from being used as a prescription medicine.  For a compound to be used in the US as a drug, it must first meet purity standards as a New Chemical Entity before conducting clinical trials.   Furthermore, the drug must demonstrate efficacy and safety to gain FDA approval before it can be marketed.

Current FDA-approved treatments for patients with very high triglycerides (TG> 500 mg/dL) are fish-oil derived omega 3 (Lovaza, containing 84% EPA, 16% DHA) and fibrates.  However, these drugs also increase LDL levels by 40%.  (The LDL elevating effect was due to the presence of DHA in Lovaza).  Fibrates are frequently used as an add-on with statin to mitigate its LDL effect.  Lovaza and fibrates have ~$1B sales each in 2011.   AMR101 has clear competitive advantage over the existing drugs in that, while it decreases TG level, it does not elevate the LDL level.

It is important to note that Amarin is not the only company that produces pure-form Omega-3.  In fact, a Japanese company, Mochida Pharmaceutical, was the first to launch a pure Omega-3 product, called Epadel, which was approved for hyperlipidemia in Japan in 1994.  Mochida may not have conducted clinical trials following FDA criteria, thus presenting an opportunity for Amarin to conduct clinical trials in the U.S.  The fact that a pure EPA product has been approved as a prescription drug in Japan and has been used by numerous patients for over 18 years is indicative of the overall safety of AMR 101 and its high probability of receiving FDA approval.      

Clinical trial data

Amarin has completed two Phase 3 clinical trials to evaluate AMR101.  Both studies (MARINE, ANCHOR) showed that AMR101 significantly lowered the TG levels without increasing LDL levels.  In addition, both studies show safety profiles similar to the placebo group.   If approved, the drug will have an advantage over Lovaza and fibrates as a single agent for treating patients with high TG levels that have a high risk of developing cardiovascular disease.  

The MARINE studies evaluated AMR101 in patients with very high TG levels (>500 mg/dL).  The trials were conducted on 229 subjects from 2009 to 2010.  At a 4 gram dose of AMR101, a statistically significant reduction in triglyceride levels (-33%, p<0.0001) was achieved without increasing LDL levels. 

Other favorable benefits of AMR101 include statistically-significant reduction in other lipid and inflammatory biomarkers, including Apo-B (-8.5%), non-HDL-C (-18%), Total-Cholesterol (-16.3%), VLDL-C (-28.6%), Lp-PLA2 (-13.6%), and hs-CRP (-36%). 

The ANCHOR studies evaluated AMR101 in patients defined as high TG/mixed dyslipidemia (TG level between 200-500 mg/dL) who are under statin treatment.  The trials started in 2010 and ended in 2011, involving 702 study subjects. 

In the study group taking AMR101 and statin, there was a statistically significant decrease in TG level (-21.5%, p<0.0001) and a further reduction of LDL-C levels (-6.2%, p<0.0067) compared to the placebo group (statin alone). The 4 gram dose was also associated with statistically significant reductions in non-HDL-C (-13.6%, p<0.0001), Apo B (-9.3%, p<0.0001), Lp-PLA2 (-19%, p<0.0001) and high-sensitivity C-reactive protein (hsCRP) (-22%, p<0.001), at week 12 compared to placebo.

AMR101 also appears to be rather safe: its safety profile is comparable to a placebo.  The superior efficacy, its safety profile, and other beneficial effects, are the primary determining factors that we believe the drug has greater than 95% probability of receiving FDA approval by July 26, 2012.   

In December 2011, Amarin started enrolling patients in a preventive clinical trial, titled REDUCE-IT (Reduction of Cardiovascular Events with EPA— Intervention Trial).  It is designed to evaluate the efficacy of AMR101 in reducing major cardiovascular events in a high risk patient population on statin therapy. This will be a multi-year program involving tens of thousands study subjects.  Since the outcome of this program is years away, we do not factor this into our valuation model. 

Nonetheless, it is interesting to note that Mochida Pharmaceutical has already conducted similar clinical trials (JELIS) in Japan to evaluate the use of Epadel (pure EPA) as preventive medicine for coronary diseases.  In November 2006, Mochida reported two studies on pure EPA plus statin vs statin alone with over 18,000 enrolled patients.  The studies show that the combination of EPA+statin reduced 19% CV disease over five-year period.  Among a subgroup of study subjects with very high TG levels and low HDL, there was a 53% reduction in CV disease.  We will follow up on future updates on the trial results to gauge its potential as preventive therapy. 

Market size information

There are 3.8 million people in the U.S. with TG level greater than 500 mg/dL.  Currently, only 3.6% patients are treated with pharmaceutical medicines.  This suggests that if AMR101 is approved, it could have potentially larger market share than the current $1B in LOVAZA sales.  Worldwide, patients in this very high TG category are 2-3 times the U.S. market.  Amarin also plans to market the drug globally.  The NDA for the first indication was submitted in Q4 2011 and will receive an FDA response on 7/26/12.  If approved, the Company plans to launch the product before Q1 2013.

AMR101 may also be used in people with medium-high TG level (< 500 mg/dL, >200 mg/dL).  This was evaluated in the ANCHOR studies.  There are 36 million adults in US in this category.  Less than 4% of people in this category are currently treated with fibrates, which had $1B sales in 2011.  Therefore, if AMR101 is approved, it could compete with fibrates and potentially expand the market size.  Amarin has submitted a supplemental NDA (sNDA) for the second indication in June 2012 (check the date).  FDA decision is pending till next year. 

The preliminary data from the REDUCE-IT study group in Japan looked encouraging.  More updated data will be reported toward the end of 2012.  Since the trial is still years away, its potential impact is not factored into stock valuation.

Risk

Below are risks that could affect the AMRN stock price estimate.

(1)  FDA approval status.  A delayed approval or even a rejection (a remote possibility) could make the stock price decline.

(2)  Marketing and commercialization strategy.  At the Jefferies 2012 Global Healthcare conference, CEO Joseph Zakrzewski stated that the company would commercialize the AMR101 on its own or partner with pharmaceutical companies and that the company has received significant amount of interest from pharmaceutical companies.  With only 30+ employees, it will be extremely challenging if the company does not seek pharmaceutical partners to commercialize its product.

(3)   Patent position and barrier to entry.   Amarin has filed 25 patent applications.  It is extremely important that the company seeks patent protection to exclude competition.  According to CEO, the compound is not easy to manufacture, thus creating an effective barrier to entry.  Nonetheless, patent protection is an integral part of the company’s profit and valuation.  In Q3 2011, when the USPTO rejected one of its patents, the stock tumbled 20% in one day and continued to slide over several months.  The company appealed the decision and the patent was finally awarded in March 2012 for the use of AMR-101 for treating high TG levels.  The stock price jumped 14% in one day on that news.

(4)  Competition: Amarin competitors include GSK and Provona, who market and hold the patents for Lovaza.  Abbott Laboratories currently markets Tricor and Trilipix for the treatment of very high TG and mixed dyslipidemia.   Several biotech companies are also developing omega-3-based products, some in phase 3 clinical trials.  The products, if approved, could compete with AMR101 for market share.  However, these threats would be 3-4 years away.

(5)  Business risks:  At present, AMR101 is the only lead product of the company.  In the 2011 annual report, the company disclosed that Amarin completed a private placement of $70 million (with private equity and venture funds) in 2009.  The proceeds were used primarily to fund the AMR101 clinical trials.  In connection with the agreement, Amarin has essentially ceased the development for other programs, including Huntington’s, Parkinson disease, and Myasthenia gravis. This suggests that AMR101 is the sole product of the company in the foreseeable future.  The success or failure of this product determines the fate of this company. 

Valuation

We used the FCFE valuation as the primary model for estimating stock price.  We used median gross profit margin and net profit margin from comparable companies (e.g. HGSI, SGEN, DNDN, VRTX, RGEN, or BMY) as a guide to estimate revenue growth, gross profit, net income, and free cash to equity for a five-year period (2012 to 2016).   Based on FEFE model, the estimated stock price is $18 and $32, respectively, for two scenarios (baseline, optimistic).

Baseline Scenario: This assumes that FDA approves AMR101 for very high TG patients on 7/26/2012 and the company is able to launch the product in Q4 2012.  Revenue growth reflects market penetration rate of ~0.6%, 3.6%, 9%, 16%, and 26%, respectively from 2012 to 2016, in a total global market size $3B for very high TG patients.  We also assume a linear decline of revenue growth from high growth stage to a normalized 8% over a 4-year time after 2016.  The slower growth rate after 2016 reflects competition from other products entering the market with similar benefit.  Estimated stock price: $18.

Optimistic Scenario:   This assumes that FDA approves AMR101 for very high TG patients on 7/26/2012 and the company is able to launch the product in Q4 2012.  Furthermore, FDA approves the use of AMR101 for second indication (sNDA) in mid 2013.  The approval enables the expansion of the drug to a larger patient population.   Revenue growth reflects market penetration rate of ~0.3%, 2%, 6%, 12%, and 18%, respectively from 2012 to 2016, in a total global market size $6B.  Estimated stock price: $32.

Other possible outcomes include a delayed response from FDA on the approval or an outright rejection.  This will be a major setback for stock and company value.   

On the other extreme, a potential unexpected surprise is that the company may be acquired by other pharmaceutical company.  This may represent the best scenario as the merger and acquisition will expedite the commercialization of AMR101 and maximize shareholder value.  The takeover may occur after AMR101 is approved for the second indication in 2013, as its value will get significant boost from an expanding target population.