Description

Summary

Amryt Pharma PLC (“Amryt” or the “Company”) is a UK-listed small cap orphan drug company. It recently completed a transformative acquisition of the bankrupt subsidiary (“Aegerion”) of a mismanaged US-listed Canadian company (“Novelion”). The acquisition, which has a strong strategic rationale, was consummated in combination with an associated capital raise and has given Amryt the scale to reach breakeven in the near-term, with profitability shortly thereafter. Historical financials bear virtually no relationship to what the pro forma entity will look like going forward, helping to obscure the investment opportunity. Moreover, the Company is pursuing a US listing, which we expect will become effective within the next couple of months. This listing will materially increase the company’s profile and has the potential to lead to meaningful multiple expansion as US biotech investors gain familiarity with the underlying business. Today, you can purchase Amryt shares at something between a modest and meaningful discount to the value of its current revenue-producing franchise drugs. Approval of either its pipeline (development) assets, or expansion of its existing drugs for additional indications, could lead to a share price that is a multiple of the current trading level.

Business

Prior to Amryt’s acquisition of Aegerion, it had two primary assets: 1) rights to sell lomitapide (trade name Lojuxta) across the EU and MENA, and 2) a development stage (Phase III) drug candidate, AP101. Lomitapide is an orphan drug approved to treat a rare cholesterol disorder, Homozygous Familial Hypercholesterolaemia ("HoFH"). AP101 is a potential treatment for Epidermolysis Bullosa ("EB"), a rare skin disorder with no currently approved treatments. Amryt pre-acquisition was subscale, generating just $15-20mm of annualized revenue while trying to support an operating structure focused not only on maximizing the commercial potential of Lojuxta, but on bringing AP101 (and other development candidates) to the finish line. This all changed with the mid-2019 announcement of the Aegerion acquisition.

Aegerion was the primary operating subsidiary of publicly listed Novelion. Aegerion had two primary assets: 1) right to sell lomitapide (trade name Juxtapid) in the US, Japan, and several other regions where Amryt did not hold the rights, and 2) global rights for metreleptin (trade name Myalept). Metreleptin is an orphan drug approved for the treatment of lipodystrophy. These two franchises were generating sales of roughly $130mm; however, in early 2019 Aegerion sold off the Japanese rights to metreleptin, lowering the revenue run-rate modestly.

In May of 2019, Amryt announced its intention to acquire Aegerion. Aegerion had an untenable capital structure, and it agreed to facilitate the acquisition through a Chapter 11 filing with the support of its primary creditors. The acquisition had a strong strategic rationale for the following reasons: 1) it reunited the lomitapide franchise under single ownership with the acquiring management team having a deep understanding of the drug through its experience implementing a successful commercialization program in the EU market, 2) it immediately catapulted the new PF Amryt to a $135mm+ revenue run-rate business (which is growing nicely), raising its capital market profile and providing a significant revenue base to support both its commercial and development infrastructures, 3) $25-40mm of estimated expense synergies (duplicative corporate o/h, sales, etc.) which, when implemented, should bring the company to profitability. In conjunction with the acquisition announcement, Amryt announced a combination of new loan facilities, a convertible debt issue, and a $60mm equity raise in order to fund the acquisition. The equity raise was backstopped by a number of Aegerion’s large creditors, who had also agreed to have large portions of their holdings equitized into new Amryt equity. These creditors were generally large healthcare-focused and distressed investors, including Athyrium, Highbridge, UBS, and Whitebox.

The original acquisition press release:

https://otp.investis.com/clients/uk/amryt_pharmaceuticals_dac1/rns/regulatory-story.aspx?cid=1375&newsid=1266308

The most recent investor presentation:

https://www.amrytpharma.com/investors/reports/

The Aegerion acquisition and capital raise were completed in late September 2019. This has yielded a business that now includes:

• Roughly $135mm in run-rate revenues generated by the global rights (with a few regional exceptions) to lomitapide/Lojuxta/Juxtapid and metreleptin/Myalept
• Development candidate AP101, a phase III development candidate with a potential >$1bn market opportunity
• Development candidate AP103, an earlier stage gene therapy for Recessive Dystrophic EB and other indications
  

Post-merger, management has confirmed that expected merger synergies are on track, and that AP101 clinical studies are progressing well with an expected read-out by late summer 2020.

Capital structure

Note that today, Amryt equity trades in the UK (£ denominated), but financials are reported in US$. We have converted where appropriate.

Equity:

171.7mm shrs @ £1.29/shr = £220mm = $285mm

Debt:

$82mm gross PF for merger

Less: $57mm cash raised

Plus: $20mm assumed cash burn to breakeven

Plus: $22mm remaining DoJ fine (from Aegerion)

= $67mm net debt

Convert:

$125mm face; converts @ £2.00/$2.59/shr (48.3mm shrs)

Projections and Valuation

In-line with UK regulatory strictures, Amryt does not provide public forward-looking guidance. Instead, it works closely with its brokers of record to funnel expectations through published sell-side estimates. As such, we are using Stifel estimates through 2023 for the existing franchises (lomitapide and metreleptin), followed by three years of 5% growth, and rapid declines thereafter as patent protection rolls off. We have had multiple conversations with management, and believe that our estimates are reasonable, and arguably conservative. Broadly speaking, growth expectations for the existing franchises over the next few years are based on reimbursement approval in new (currently uncovered) geographic locales, as well as continued penetration of the existing patient base in existing markets. The sales approach for an orphan drug company is radically different than that for a traditional (non-orphan) drug company. Success is a function of finding and penetrating the existing (usually small) patient base, helping them secure access to the drug, and then closely monitoring their compliance with the treatment regimen. Amryt’s management team has proven its abilities in this regard with its EU commercialization efforts for lomitapide, and it expects to bring its successful approach to bear in the US market where Aegerion had historically fallen short due to misexecution of the necessary orphan drug sales playbook.

With respect to AP101, estimates are necessarily more speculative given its developmental status. Initial results have been extremely favorable (see the Company IR presentation for additional detail), but clinical data and regulatory approval is obviously a binary event. We believe that our estimates, assuming approval, are reasonably conservative as we max out at a $350mm revenue run-rate on a drug which has a $1bn+ market potential.

Below are our projections and unlevered DCF calculations for both the Core (lomitapide + metreleptin) and, separately, AP101. We use a 10% discount rate. To keep all comparisons apples-to-apples, we will assume conversion of the $125mm in convertible debt, which yields a fully diluted share count of 220mm.

So, unlevered core value today is £1.94/shr, with an additional potential value of £3.12/shr for AP101 if approved. The $67mm in net debt (@ breakeven) knocks £0.24/shr off that value.

Thus, adjusted for debt you are paying £1.29 today for a DCF-based core value of £1.70/shr (£1.94/shr less £0.24/shr net debt) (~30% upside), and getting the £3.12/shr in AP101 option value for free (240% of additional upside).

However, with a US listing in the pipeline, we think that the market could end up taking a more optimistic view of value. A diversified group of orphan and non-orphan comps currently trades at 4-5x revenue (trimmed average, excluding high and low). At 5x revenue, the Core alone has an indicated value of £3.20/shr (150% upside). Note that one of the companies listed in the comp (but excluded from the average) is Krystal Biotech (“Krystal”), which has a current market cap of >$1bn and trades for >17x 2023 revenues. Krystal is the leading company today whose primary pipeline asset is focused on EB, the condition that AP101 is targeting.

There are a couple of other sources of upside optionality worth mentioning:

• Metreleptin is focused on treatment of lipodystrophy. There are two forms of lipodystrophy: partial lipodystrophy (“PL”) and generalized lipodystrophy (“GL”). Metreleptin is currently approved for only GL in the United States, but for both GL and PL in the EU. Amryt is currently seeking approval for PL in the United States using the existing data (which was used for GL approval). If the Company receives approval on this basis, it will drive accelerated time to market and could roughly double the current US metreleptin sales of $50mm in the near-to-medium term. Barring approval with the existing data, the Company will need to run a full Phase III trial which would push regulatory approval out further. At a 5x revenue multiple, $50mm of incremental sales would represent an additional £0.90/shr of value (~70% of additional upside).
• Lomitapide is currently being tested as a possible treatment for Familial Chylomicronemia Syndrome (FCS), a rare genetic disorder. The FDA has granted it an orphan drug designation, and Amryt expects to initiate a Phase III trial for FCS treatment this year, with results expected in 2022. If successful, this could double lomitapide’s revenue potential. An additional $75mm in revenue at a 5x revenue multiple would represent an additional £1.30/shr of value (~100% of additional upside).
• With an expected near-term shift to breakeven, and profitability thereafter, Amryt should soon be generating cash. Redeployment of this cash can create further upside optionality with successful in-licensing of additional orphan drugs. Management’s strategy to-date, inclusive of both the original lomitapide in-licensing and subsequent Aegerion deal, seems well thought out and, notwithstanding significant execution that needs to take place in the near-to-medium-term, we have been impressed with management’s thoughtful approach to value creation to-date.

Other Notes

On Feb 19, Amryt submitted a draft registration statement to the SEC in advance of a planned US NASDAQ listing. This sets the clock ticking on what we believe should be a 6-8 week comment and response period prior to the listing becoming effective. We expect that the US listing could be a major catalyst for revaluation, as it opens the Company up to a much broader group of potential investors, including more experienced biotech investors willing to more aggressively value both orphan drug companies, as well as development stage assets. In addition, we would expect a US listing to drive increased sell-side coverage, which is currently scant.

Amryt CEO Joe Wiley and CFO Rory Nealon have each been with the Company for roughly four years. They are responsible for implementing the orphan drug strategy, which began with the late 2016 in-licensing of the EU and MENA rights to lomitapide. They own 4.2mm and 1.9mm shares, respectively. Rory, in particular, is very accessible and the management team (in aggregate) has been reasonably aggressive about working to get the Amryt story out in advance of the US listing.

Risks

• Company has not yet reached cash breakeven, although we expect this milestone in the near future
• AP101 fails to garner regulatory approval
• Fairly thin/illiquid stock; selling pressure from large equitized shareholders (Athyrium, JPMorgan/Highbridge) could pressure shares

Catalyst

US listing, AP101 approval, metreleptin approval in US for PL, lomitapid approval for FCS, reaching cash flow breakeven, sell-side coverage launches