great articlePfizer's Next Target?
Esperion, swallowed by Pfizer last year, shares many similarities with Atherogenics. Investors in the latter, however, should not count on being acquired any time soon by a big pharmaceutical.
Biotech Unclogs Arteries The Cholesterol Wars
By David Nierengarten
January 27, 2004
When I wrote about Esperion (Nasdaq: ESPR) in November, I mentioned that it would be a good fit for Pfizer's (NYSE: PFE) blockbuster heart disease franchise. Not too long after, Pfizer bought Esperion in a $1.3 billion deal, pricing it at a hefty 54% premium.
Since then there has been much speculation among investors and analysts as to the next biotech takeover target. One company that has benefited from this rumor mill is Atherogenics (Nasdaq: AGIX), whose stock price has risen almost 50% since the Esperion deal was announced in December. Will it follow in Esperion's footsteps?
The statin sinkhole
There's a big problem facing Big Pharma these days. Lipitor, the $9 billion superstar (we're talking Elvis-size here, not American Idol) of Pfizer's portfolio is coming off patent in 2006. Merck's (NYSE: MRK) Zocor ($5.6 billion in '02 sales) patent also expires in 2006, and Bristol-Myers Squibb's (NYSE: BMY) Pravachol ($1.8 billion in '02 sales) expires even earlier, in October of 2005.
These companies are racing to find new formulations, combination drugs, and new targets to replace their plain-vanilla statin (cholesterol-lowering) drug revenues. And so, in addition to their research and development efforts, we are seeing -- and I think we will continue to see -- the big pharmas looking outside their own pipelines for promising targets that smaller biotechs are pursuing.
Target-rich environment
Fortunately for these companies, the coronary artery disease/heart disease market is the very definition of a "target-rich environment." The first targets were LDL, or "bad" cholesterol, that is a large part of the greasy goo that clogs arteries. Reduce those LDL levels and you'll reduce heart attacks, the thinking went, and studies have confirmed that thought process.
But researchers have discovered many other causes of atherosclerosis. One of these is low levels of HDL, the "good cholesterol" that not only helps stop the grease from building up but may also even help clear it out -- something that statins don't do very well, if at all. Building up HDL is the goal of Pfizer's drug candidate torcetrapib and, of course, also the goal of Esperion's lead candidate, ETC-216. (For a great introduction to cholesterol and statins look here.)
Another target receiving more attention lately has been inflammation. Researchers have noticed that inflamed arteries swell up and narrow the passage for blood, making a heart attack more likely. In fact, about half of people who suffer heart attacks have normal cholesterol levels, demonstrating the huge potential of a drug that combats this inflammation. Furthermore, there is potential for a synergistic effect of reducing LDL cholesterol as much as possible while simultaneously decreasing inflammation. Atherogenics' lead candidate, AGI-1067, aims to reduce that inflammation and help widen narrowed arteries.
Esperion vs. Atherogenics
At first glance, Esperion (before Pfizer's offer) and Atherogenics seem pretty similar. Esperion's lead compound had just finished a phase II trial that showed unprecedented 4.2% arterial plaque reduction, and the company had begun a phase III trial that is scheduled to finish (drum roll) about 2006 -- not coincidentally about the time Lipitor will come off patent. Additionally, before the buyout offer, Esperion traded around $750 million in enterprise value, and Atherogenics is trading around $720 million in EV.
Atherogenics' lead drug has also just completed a phase II trial. According to the post-study analysis, plaque size was reduced about 2% (but by comparison, Lipitor reduces plaque size just 0.5%). In another bit of good news for Atherogenics, AGI-1067 not only increased arterial volume around the plaque, but it also seemed to increase it elsewhere in the artery. This effect on plaques is not as spectacular as Esperion's drug, but AGI-1067 is a pill, whereas ETC-216 is an intravenous infusion.
That's a huge difference for Atherogenics' franchise. Where ETC-216, if approved, would primarily be used to stabilize and reduce arterial plaques in hospitals, AGI-1067 could presumably be formulated in a combination pill with a statin for long-term use. Or it could be a separate, stand-alone pill for those with narrowed arteries but normal cholesterol. Again, interestingly enough, the pivotal phase III trial is scheduled to finish in the closing quarter of 2005. Before that date, though, another phase II trial examining plaque size should be completed in the third quarter of this year.
The differences
Naturally there are several other differences between the companies. Esperion already had a right-of-first refusal agreement with Pfizer to co-develop ETC-216. Atherogenics has no similar agreement, but is actively looking for a partner to help develop AGI-1067.
Also, while Esperion's pipeline drugs are concentrated on HDL-raising compounds and therefore heart disease, Atherogenics pipeline is based on anti-inflammatory drugs that have other applications. To that end, the company is developing a pill for rheumatoid arthritis that is entering phase III trials, in addition to an earlier stage drug designed to combat the organ rejection in transplant patients.
Atherogenics' rheumatoid arthritis pill, AGI-4207, looked promising in the company's most recent presentation. It showed a greater than 90% reduction in ESR scores for patients in between infusions of Johnson & Johnson's (NYSE: JNJ) Remicade. However, I would have preferred seeing the effects of AGI-4207 by itself. This issue will be addressed in another phase II trial, though, with results expected in the third quarter. Again, because AGI-4207 hits a different target than Remicade or Amgen's (Nasdaq: AMGN) Enbrel, it has potential as both a monotherapy and combination therapy.
A co-development opportunity?
Given the fact that there is no prior agreement in place with another pharma, the company's expressed desire for a pharmaceutical partner to co-develop AGI-1067, and the varied pipeline, I feel that Atherogenics is more likely to stay independent.
Furthermore, it has already signed a co-development agreement with Fujisawa Pharmaceutical for its phase I drug to lessen transplant rejection, complicating a take-over scenario. Although these complications can always be sorted through, I feel it lessens the likelihood of a buyout.
While investors hoping for a quick exit through acquisition might be disappointed, long-term holders of this company will be richly rewarded if Atherogenics' share of AGI-1067's revenues come in at just a fraction of the statin market, not to mention the potential of its rheumatoid arthritis and transplant rejection drugs adding to future revenues. With the results of two significant phase II trials coming out later this year, 2004 should be an exciting year for Atherogenics.
David Nierengarten, Ph.D., works with a biotechnology venture capital fund. He often contributes to Fool.com and is an active member of the TMF community as DavidMN. He owns shares of Johnson & Johnson. He appreciates your comments at davidnierengarten@mac.com and on the