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Too Many Questions Make This Thursday Mover a Sell

Sunday - 5/19/2013, 2:36pm  ET

Shares of Aegerion Pharmaceuticals rallied an incredible 31.37% on Thursday after a series of bullish notes that painted a clearer picture for its newly approved (rare-cholesterol disease) drug Juxtapid. While the company’s current market capitalization of $1.75 billion suggests that Aegerion has a potential blockbuster on its hand, the reality is not quite so bullish.

What created the movement?

Aegerion Pharmaceuticals had previously reported that patient cost would be between $200,000 and $300,000 annually for Juxtapid. According to slides from the company’s presentation on Wednesday, maintenance with the drug will now cost around $295,000 annually, which is significantly greater than the previously expected $235,000. Thus considering the price boost it makes sense that investors would be optimistic, pushing shares higher by 31%.

At a Bank of America Merrill Lynch healthcare conference, Aegerion said it sees a potential $1 billion global market opportunity for its Juxtapid treatment for the rare disorder homozygous familial hypercholesterolemia. To many, this provides clarity, as investors have often wondered the ultimate size of its targeted market. According to the company, the drug has a patient target population of 3,000 domestically and 4,000-5,000 globally. Therefore, if we multiply $295,000 by the 5,000 patients representing its peak global market then we can see how the company figured its $1 billion global market.

Questionable sales potential

If you invest in biotechnology then you should know that very few products ever reach peak sales and none ever capitalize on the entire market for a disease. For example, the domestic breast cancer and COPD market is estimated at $11 billion annually, while HIV is $13 billion, and diabetes a whopping $25 billion annually. Yet despite these massive markets, there is not one product that commands the entire market, as some patients will not receive treatment or others may elect to receive alternative treatments. Therefore, when Aegerion says that it has a “global” market of more than $1 billion, it will NEVER capitalize on that entire market.

If the domestic market is really 3,000 patients and “if” the company was able to have every single one of those patients at the maintenance stage at the same time, then it could create sales of $885 million annually. However, the true size of this market has been constantly debated, as the FDA estimates the disease’s occurrence at one in one million people, or 315 people, which is just one-tenth the size of what Aegerion claims. Thus it’s fair to suggest that the actual size of the market is somewhere in the middle, let’s say 1700 cases just to be fair. Hence dragging peak sales lower to $500 million annually.

Aside from being in a super small industry, the company also has competition from a super company, Sanofi . Sanofi recently won an FDA approval for its drug Kynamro, which treats the same disease, meaning that Aegerion will have to compete with a company that has many times more resources in order to successfully market its drug. While Aegerion’s drug showed slightly better results (in a smaller trial), its drug also showed risk of liver toxicity while Sanofi’s drug did not. Furthermore, Sanofi’s drug is priced at just $176,000 per year, about 60% the cost of Aegerion’s drug. Therefore, each has advantages and disadvantages, meaning the two companies will most likely share the market equally, thus cutting Juxtapid’s peak market in half, from $500 million to $250 million annually.

Aegerion is a “Sell” the News

Based on my estimates, using an average market size from both the FDA and Aegerion combined with a shared market between two drugs, I believe that Juxtapid has “peak” sales of just $250 million. As I mentioned above, no drug ever commands its total market, and I think Aegerion will face a lot of bumps in the road because of its market size. If the company reaches its goal of having 300 patients on Juxtapid by the end of the year, it would create a revenue run-rate of $88.50 million for 2014, and at that point I don’t believe the company can continue to create explosive penetration into this market (as the number of patients begin to diminish).

With all things considered, I would not invest in this company. Currently, it is trading at seven times (my) peak sales, and almost 20 times next year’s sales. In my opinion, this is way too expensive for a company that has so many questions. I prefer a company such as ACADIA Pharmaceuticals , a $1 billion company with a product in a market that has no established size, due to it being a large unmet need. Its drug Primavanserin treats Parkinson’s disease psychosis, which represents 40% of those with Parkinson’s disease, thus having peak sales estimates of $1 billion (with both on and off-label uses).

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