This one is speculative, outside of the broken-biotech basket, but I still think it could be interesting in a small position size or LEAPs.
Esperion Therapeutics (ESPR) ($182MM market cap, ~$700MM EV assuming cash is fully burned) is a pharmaceutical company focused on developing non-statin medications for high cholesterol. Statins (e.g., Lipitor, Crestor) are cheap and effective, but many people are statin intolerant, muscle pain is the number one complaint and as a result, patients either don’t take the necessary dosage amount or falloff altogether (WSJ article discussing ESPR and other statin alternatives). Esperion has FDA approved treatments utilizing bempedoic acid under the brand names Nexletol and Nexlizet that are currently only labeled for a narrow use case. Following the success of their completed study (“CLEAR Outcome”), Esperion is set to significantly broaden their addressable market by 8-10x with a new label for cardiovascular risk reduction. Nexletol/Nexlizet could be a “blockbuster drug” with the new label, meaning annual sales above $1B. In Q2, the company officially submitted their expanded label applications in the U.S. and Europe, Esperion expects to receive approval in ~April 2024 (approval likelihood appears high, but open to pushback there).
Like many other biotech firms, Esperion has burned through a lot of money to get this point. To raise cash they’ve partnered with larger pharmaceutical companies that will market and distribute their drugs outside the United States. As part of these arrangements, Esperion received upfront fees and negotiated milestone payments, while also retaining a royalty on sales. Daiichi Sankyo, the second-largest pharmaceutical company in Japan, is the largest of these partners, with agreements to distribute throughout Europe and Asia ex-Japan. Following the release of the CLEAR Outcome study results, the two are in dispute over a $200-$300MM milestone payment tied to the range of relative cardiovascular risk reduction. Obviously, it’s not a great situation to be in a dispute with your largest commercial partner (reminds me a tiny bit of RIDE/Foxconn) when you’re a cash burning enterprise.
Below is the contract language at the heart of the dispute:
I’m not a lawyer, but I do stare at a fair amount of legal agreements in my day job, this is certainly poorly written and vague language. Relative risk reduction is not a defined term, a $200-$300MM payment left up to interpretation looks poorly on Esperion management and their legal counsel. If they meant any endpoint would trigger the payment, they should have included that clarification.
Anyway, the results of the CLEAR Outcome study are viewed positively by the scientific community, Esperion’s drug reduces:
- 27% reduction in non-fatal heart attacks
- 23% reduction in the composite of nonfatal and fatal heart attacks
- 19% reduction in coronary revascularization (sever blockage of the arteries)
- 15% reduction in fatal and nonfatal strokes
- 15% reduction in MACE-3 (a composite of cardiovascular death, nonfatal heart attacks, or nonfatal stroke)
- 13% reduction in MACE-4 (a composite of cardiovascular death, nonfatal heart attacks, nonfatal stroke, or coronary revascularization)
Esperion argues that their drug reduces “cardiovascular risk” because of the first two results, Daiichi Sankyo is pointing to the last one, MACE-4 which is the broadest goal post and misses the 15% minimum level for a milestone payment altogether. Esperion is in a precarious financial position, they currently have $138.5MM in cash and securities, projected to get them to mid-2024, leaving a tight opening to turn cash flow positive assuming the new label is approved a few months earlier. This milestone payment is key to Esperion’s future, otherwise they may need to do dilutive financing or auction themselves off in a firesale.
The smoking gun might be Esperion’s claim that Daiichi Sankyo (“DSE” in the below) put MACE-4 in a draft of the document but then agreed to take it out:
11. The Negotiating and Drafting History of the Agreement. Because the language of Section 9.2 is unambiguous, there is no need to go beyond the four corners of the Agreement. In any event, the extrinsic evidence is fatal to DSE’s reading of the Agreement. During the negotiation and drafting of the Agreement, DSE proposed making Esperion’s regulatory milestone payment contingent on a reduction in the specific MACE-4 endpoint—the contract term DSE now says was agreed to. But Esperion expressly rejected this proposed contractual term and DSE agreed to remove it. In other words, the parties specifically considered adding language to the Agreement to make MACE-4 risk reduction a specific requirement for Esperion to receive the full milestone payment and decided not to add this requirement. DSE’s position that MACE-4 is the contractual north star is a naked attempt to re-trade the parties’ deal and obtain through bad-faith repudiation what it failed to achieve at the negotiating table.
12. DSE’s motive is clear. At the time of DSE’s bad-faith repudiation, Esperion was on the eve of closing an offering to raise capital. DSE knew that given the materiality of the $300 million payment, Esperion, a publicly traded company on NASDAQ, would be required to publicly disclose DSE’s repudiation of its payment obligation to the investing public. On information and belief, DSE timed its repudiation to put maximum financial pressure on Esperion, in a transparent attempt to drive down Esperion’s stock price and pressure it to re-negotiate the financial terms of the parties’ license agreement.
13. DSE’s repudiation inflicted immediate and substantial harm to Esperion. When DSE’s repudiation became public, Esperion’s stock plummeted, dropping 54% in a single day. The harm to Esperion is ongoing and its stock price remains below $2 per share.
Assuming this is all true, which it appears to be as Esperion provides screenshots in their response, it’ll come out during the discovery phase of the trial that is set for April 2024, around the same time Esperion expects to receive approval for the expanded label.
I expect them to settle for some discount prior to the trial as it would lift a big cloud from Esperion and allow themselves to sell to a larger pharma company that isn’t starting a sales and distribution operation from scratch like Esperion. Esperion does also have a similar $140MM milestone payment tied to their partner in Japan where the labeling date is a little farther out (1-2 years).
I don’t really have a price target for ESPR, but would anticipate a positive outcome could be a multi-bagger from today’s prices. Open to any opinions on this situation, especially from those with more experience in biotech/pharma disputes or the science behind Esperion’s drugs.
Disclosure: I own shares of ESPR
