Description

Despite the risk of developing a “drug approval junkie” stereotype by posting another small, binary, drug approval play - I believe the quality of this risk reward represents one of the better investments we’ve found this year.  We think LEVP has the potential to be a 3 to 6 bagger.  

In a nutshell, Lev Pharmaceutical is a bet on a tried and proven European treatment for a rare disease that shows a high likelihood of gaining FDA approval, 7 years market exclusivity, and has a clear market need, desire and strong industry support/history for high pricing potential.  It’s so safe and effective it was approved for use in Europe 20 years ago with little pushback.   It’s shocking that no one has tried to bring this treatment to the US sooner.  Baxter failed a few years back and decided to scrap the project despite what was an easily solvable trial design flaw with robust underlying results (public statements & experts support this conclusion).  At the time, the FDA was less aware of HAE and the pressure from advocacy/patent groups/& doctors was too minimal to have an impact.  It’s a much different story today.    

The majority of risk (and bet) lies in the ultimate treatment price, race against competitors, co. size and experience, and size of patient market, and to a lesser degree approval.   There are competitors pursuing the market with the same and different drugs, but not for the key prophylactic (or regular treatment use for prevention) indication.  In addition, competition has stumbled in the last few months.  Mgmt. has skin the game with reputable backgrounds given the company size and goals.  Wall Street has not discovered the investment because it’s small, trades over the counter, has no analyst coverage, and is targeting a very rare (almost unheard of) disease.  It went public through a reverse shell (usually a red flag) and recently secured PIPE financing from respectable funds.  We view the company’s formation as more of an “ah ha!” in spotting a treatment anomaly between two countries rather than a “long shot” new drug start up - and therefore lower risk.  We expect key trial information to be released in the next 3-4 months followed by a package submission to the FDA for approval.    

Investment Case:

Lev Pharmaceutical is ahead in the race to win FDA approval for the treatment of Hereditary Angeodema (HAE) using a tried, proven, and safe treatment that has been used in the EU for more than 20 years.  If it is first to approval Lev will have seven years market exclusivity of the 100-375m US market under Orphan Drug Status provisions.  As with any bet on pharmaceutical treatments, there is approval and market sizing risk but we are conservatively assuming a 75% chance of approval in 2007 to early 2008

 Investment points:

1) Industry contacts indicate Lev is ahead in the race for approval and is the only player pursuing the key prophylactic market

2) Using the US patient database & Spanish / Italian registries the market opportunity seems large with a best guess of around 200m sales

3) Annual $ of 175-350k/patient is reasonable for orphan disease treatments with support from advocacy & high tolerance from insurance

4) Former Baxter trials, treatment history in Europe, industry expert views, support from patient community suggest low approval risk

5) C1 is the gold standard for treatment of HAE and has been used for 20 years in Europe 

HAE primer:

HAE is a rare disorder that causes severe swelling of body limbs due to a deficiency in C1 esterase inhibitor, a blood protein that helps limit the production of kalikrinin.  Too much kalikrinin/bradykinin in the bloodstream leads to massive uncontrolled inflammation when triggered and often requires a trip to the ER for monitoring and alleviation.  Major attacks are extremely painful, often requiring pain killers.  Attacks to the throat can block the air pathway and result in death.  Patients range from 1-3 attacks per year in mild cases to weekly attacks in severe cases.  Attacks last anywhere from 1-5 days and current treatments available in the US offer little benefit/prevention. 

There are two ways to treat HAE with C1 esterase: Acutely - after an attack has occurred.  Or prophylactically - a regularly scheduled dose to prevent attacks by maintaining elevated C1 esterase levels in the blood stream.  Lev is pursuing both market indications but is focused on developing the prophylactic market, the key value driver, where they are the only player in trials for that indication.  We believe the competing treatments will win around 3/4s of the acute market longer term due to preference for an injectable formula vs. IV for C1. 

HAE is considered an Orphan disorder in that it affects a very small % of the population with debated US population estimates between 1/50,000 to 1/10,000, or 6 to 30k patients, with most quoting 6 to 15k.  Given the small market and significant cost of development drugs pursuing orphan disorders are granted a seven year exclusivity period upon approval. 

Lev is ahead in the approval race against indirect/direct competitors and is the only player pursuing the key Prophylactic market

-       1^st drug to win race secures the market with that treatment compound for seven years. Other compounds have hit major FDA snags in last two months and consensus was these competitors were ahead 

-          Lev and ZLB are only players pursuing C1 treatment approvals and this is the key battle Lev must win

-          Other players have different compounds that seem to work well & safely that we view as more a “when” not “if” they get approved   

-          Lev is only player focused on the key prophylactic market while the battle for acute indication is intense with 5 players

-          C1 is the only compound that will work in the prophylactic market due to its long half life.  Oddly, ZLB not pursuing prophylactic

-          The prophylactic market must be developed. Some risk to this as not widespread prophylactic use internationally but clear market need

Though there are a number of treatment types all battling it out for the acute market, Lev seems to be in the lead for acute and by default of being the only player pursuing the prophylactic market, in lead for that indication as well.  Conversations with distributors, doctors, and other industry participants have indicated that Lev has a conservative 9 month trial lead on the acute indication. Oddly, ZLB, the only other company that could feasibly pursue the prophylactic market given drug half life requirements is not pursuing it (half life requirements - must stay in the blood stream multiple days to prevent attacks – non C1 treatments have short half lives of < 1 hr).  ZLB believes acute is the low hanging fruit and they don’t want to devote more resources to target prophylactic at this time.  While there is risk to developing the prophylactic market, common sense, support from advocacy group, support from reimbursement plans, & prophetic claims from a prominent German HAE doctor for C1 use prophylactically all support the prophylactic market being developed. 

On top of having a clear road to winning both markets against the direct competitor, the competing treatment types by Jerini and Dyax recently hit snags with the approval process, possibly clearing a path for temporary dominance of the acute market. 

The last player competing for the HAE market is Pharming – “The Rabbit”- based in the Netherlands, with a transgenic (rabbit milk) C1 product.  Experts brushed off “The Rabbit” citing a lower probability of FDA approval for animal products (low if any historical precedence) and a short half life of 3 hrs. ruling out prophylactic use.  The only real advantage is animal C1 helps alleviate fears of disease transmission from human blood derived products and it might be suitable for international market where there is a bigger public fear.

US patient database and Spanish/Italian registries help pin the market size.  Market estimates for rare disease are imprecise but the HAE advocacy group in the US claims to have at a minimum 370 severe patients who have monthly/weekly attacks out of only 1100 documented patients.  On top of this, the Italian registry backs the claim with roughly 150/500 total patients who suffer severe cases of HAE. Thought leaders were more cautious and pegged the incidence of severe cases at around 10-15%, or 600 to 900 on the lowest population estimates.  We used 3 estimates for total patient population @ 300, 600, and 1000 after factoring in a 50% adjustment for: Compliance (70%), insured (90%), dropouts/Resistance (10%), & other complications (10%).  It should be noted that nearly all of Genzyme’s initial market projections for orphan disorders under shoot the size by a wide margin.  As awareness grows in a poorly documented disorders this phenomenon is expected.  The table below details our market size analysis.  Far right box is the final range for # of patients.

Strong pricing in the $175k-350k annual treatment cost per prophylactic patient is likely with high tolerance/reimbursement from insurance and support from advocacy groups. 

-          Many orphan drugs btwn $100-400k annual treatment.  Pricing more art than science.  Advocacy group is the $ check & balance

-          Hemophila, the direct comp. for Lev can be 2-300k in acute or > $1m annual treatment cost for prophylactic.

-          Only real tool insurance has to contain costs is make MDs sign off on the severity of the patient prior to reimburse – not a big hurdle

-          Dyax plans to price DX-88 at 6-8k per vial.  Even at 275k annual treatment cost for prophylactic, implies $3,500 vial price for Lev

Two pricing consultants and executives at health care organizations explained that orphan diseases have significant pricing power with the real check and balance being advocacy groups.  With the risk of bad publicity and lawsuits in the event of deaths insurance doesn’t fight.  Pharmaco-economics, while helpful, do not have to be completely justified.  It should not be a surprise that Genzyme (GENZ) has built a $20B business with the success from a handful of orphan drugs.   HAE patients and industry leaders have told us that $300k annual pricing would be fine for C1.  Even at 200k annual pricing we’re well below the direct hemophila prophylactic comps - which can be above 500k annual treatment cost in severe cases.  Chart below shows comparable orphan disease metrics.

C1 has been the gold standard treatment for HAE in Europe for more than 20 years and has proven safe / incredibly effective. 

- Mechanism of action simple: replaces the C1 missing in the blood stream by infusing purified human blood

- Within 1 hr of C1 administration the symptoms begin to dissipate and after 4 hours 90% of patients are significantly better

- Current treatment in the US with steroids.  Slight help but with severe side effects and long term liver damage. 

- Some public fear of infusing another humans blood for risk of disease transmission.  Perception rather than fact.  C1 is very safe. 

Not to our surprise, C1 is in such demand we have heard stories of severe US HAE patients who have had C1 imported from Europe through brokers for compassionate use in the US, albeit paying out of pocket. 

Conclusion:

We believe Lev is winning the race for an HAE treatment and that the prophylactic market will be theirs for the taking along with roughly ¼ of the acute market longer term.  The free cash flow from the business during the protected 7 years and with rapid fall off the years thereafter with competition entering - should yield a probability weighted valuation of ~$2 and change a share with potential for $6 a share in the better case scenario for pricing and market size.  For the record - we think it’s very probable that we’ve been overly conservative on market sizing and that the co. can pursue new iniatives in the future if C1 is successful, possibly creating a business with more terminal value. 

Risks:

-          Trial could fail, lose our 9 mos lead over ZLB in acute, possibly open window for ZLB to pursue prophylactic

-          Market size could be smaller than estimates.  Dyax acute product could steal “on the fence” prophylactic patients

-          Development of prophylactic market – little to no prophylactic use (conflicting data points) in other countries. Socialized medicine

-          Lack of manpower for getting FDA docs properly prepared- risk they fumble

DISCLOSURE:  

We and our affiliates are long Lev Pharmaceutical (LEVP.OB) and may long additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of LEVP.  This is not a recommendation to buy or sell shares.  

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