Description

Albireo Pharma, Inc

Long Equity

Albireo (ALBO) is a clinical stage biotech focused on IBAT inhibitors (Ileal Bile Acid Transporter inhibition) with several large shots on goal, a fortress balance sheet, impressive management and their platform technology was recently validated by way of its first approval.  For a $400M market cap, ALBO provides:

• $193M of cash ($15.50/share) representing runway through 2021, past a number of significant clinical data points

• A Phase 3 study in PFIC (Progressive Familial Intrahepatic Cholestasis) with its A4250 molecule in the US and Europe.  PFIC is a horrific disease with an orphan indication and the 60 patient trial is expected to read out toward the end of 2019  

• If A4250 is approved, ALBO should receive a freely tradable priority review voucher, with recent transactions producing $100M to $300M in cash value

• Ex-Japan rights to Elobixibat.  ALBO licensee Eisai advanced Elobixibat through approval in Japan for CIC (Chronic Idiopathic Constipation).  ALBO subsequently sold its Japanese royalties to Healthcare Royalty Pharma for $45M plus additional milestones

• ALBO is initiating a US/European Phase 2 trial in NASH with Elobixibat in H1 2019

• ALBO is initiating a Phase 2 trial for A3384 in BAM (Bile Acid Malabsorption) in H1 2019

While not explicitly binary, Albireo is a development stage biotech and consequently carries a level of risk.  We think the collective value of trials and assets create opportunity for significant upside while a cash pile, comparable valuations and multiple shots provide some margin of safety. However, this is not a value investment in the strict traditional sense.  Feel free to classify it as a mispriced option.

Albireo was privately spun out of AstraZeneca in 2008 with the Gastrointestinal (GI) research division’s management and a $40M Series A round from well-known venture healthcare funds.  Management has been working on IBAT inhibitors for 20 years and now has an approval to show for it. ALBO has largely flown under the radar as it came public by way of a reverse merger into failed a diabetes biotech, Biodel, Inc, in November 2016.

A4250 in  PFIC

A4250 in PFIC is Albireo’s near-term phase 3 asset and value driver.  Cholestatic conditions (disruption of bile acid flow) in general affect an estimated 30K-50K children with no approved drugs.  Progressive Familial Intrahepatic Cholestasis (PFIC) is rare subset that impacts approximately 10K infants annually (~3,200 US and ~5,000 Europe). It is genetic disorder where bile acid collects on the liver rather than be circulated away in normal liver function.  PFIC leads to Cirrhosis and liver failure. Symptoms include pruritus (extreme itching) resulting in no sleep.

Without PEBD surgery or a liver transplant 50% die by age 10 with effectively 100% mortality by age 20.  Partial external biliary diversion (PEBD) surgery entails drilling a hole and mechanically draining the bile acid into a permanent external stoma bag.  While it is an effective solution, it is less than ideal given the need for a stoma bag and a 25% failure rate. Transplants come with their own set of risks, complications, and lifelong medications.

The mechanism of action of A4250 prevents the reuptake of bile acid back to the liver from the small intestine effectively draining the liver of bile acid, however pharmacologically rather than mechanically with PEBD.  PFIC patients typically have 20-30x normal bile acid levels in the liver.

A 20 patient Phase 2 showed 60% reduction in serum bile acid in 4 weeks in all cholestatic patients with a daily oral treatment and a 70% reduction in a PFIC patient subset.  No serious adverse events were related to the treatment. The reduction in pruritus and increase in sleep are notable secondary endpoints presented in phase 2, and it looks to us that A4250 is a potential antidote to a horrible disease.  The Phase 2 data is promising:

The 60 patient Phase 3 trial design has three arms with 20 patients taking 40 micrograms/kg/day orally, 20 patients taking 120 micrograms/kg/day orally and 20 patients in the placebo group over a 24-week period (versus 4 weeks in Phase 2).  The primary endpoint is different for FDA vs. EMA with the FDA endpoint based on change in pruritus and the EMA endpoint is based on serum bile acid reduction. In our opinion the dual endpoints provide a better outcome ratio. The first patient enrolled in May 2018 and the trial is expected to read out at the end of 2019.

Intellectual property goes to 2031 in the US and 2034 in Europe for method of use and orphan designation provides 7 years of exclusivity in the US and 12 in Europe. A4250 has been granted orphan drug designation for PFIC in the United States and the European Union, granted rare pediatric disease designation by the FDA and granted access to the PRIority MEdicines (PRIME) program of the European Medicines Agency (EMA) for the treatment of PFIC.

Management expects A4250 to be applicable in a number of other cholestatic indications including Bilary Atresia and Alagille Syndrome (ALGS).  Note that Albireo scientists have spent many years of intellectual and monetary capital developing the proper potency for A4250. Management expects sales of hundreds of millions, and we concur.  

Priority review voucher

If A4250 is approved in PFIC, management believes it qualifies for receipt of a priority review voucher.  A priority review voucher is granted by the FDA to companies that develop drugs for rare pediatric diseases and entitle the holder to a 6 month FDA drug review time for any indication they choose.  The vouchers are fully saleable and represent a 4 month time saving with the FDA. Recent priority review voucher transactions have shown a decline in price:

• May 2018: $110M sold from Sparks Therapeutics to Jazz Pharmaceuticals

• Dec 2017: $130M sold from Ultragenyx to Novartis

• Feb 2017: $125M sold from Serapta to Gilead  

• Aug 2015: $350M  sold from United Therapeutics to AbbVie

• May 2015: $245M sold from Retrophin to Sanofi

Elobixibat in NASH

Non-alcoholic steatohepatits (NASH), commonly referred to as “fatty liver” affects approximately 15.9M Americans (5% of the population).  It is associated with obesity, type 2 diabetes and high blood pressure. Exercise and diet are currently the only treatments available as there are no medications approved for NASH.  NASH has become a hot topic in the biotech space. It’s a huge unmet need with a very large market. A few highlighted NASH transactions include

• Gilead acquired a Phase 2 NASH compound program from privately held Phenex Pharmaceuticals for $470M in January 2015.

• Merck signed a $200M collaboration NGM Biopharmaceuticals for multiple NASH compounds in 2015

• Gilead paid $1.2B ($400+200M milestones to date with another $600M potential) for Nimbus Therapeutics in April 2016    

• Allergan paid $1.7B for Tobira in September 2016

Madrigal Pharma recently rocketed to a $4.3B market valuation on Phase 2 data and subsequent takeover chatter.  Other public NASH comparables include Intercept Pharma ($2.8B market cap), Cymabay ($730M mkt cap), Viking Theraputics ($560M mkt cap), Galmed ($240M mkt cap), and Durect ($240M mkt cap).

NASH is a progressive disease and many KOL opinions differ on what will be the most successful approach.  We believe there will be several NASH drugs that come to market and combination therapies will most likely be employed.  Madrigal’s drug is a thyroid hormone; imagine giving someone amphetamine, they will eat less and move around more. Madrigal produced solid data in Phase 2 lowering cholesterol and triglycerides in addition to lowering liver fat on MRI.  We question the uniqueness of a thyroid hormone and what the long-term effects of such treatment will be. However, the Phase 2 was impressive, and the stock price has rewarded shareholders.

Durect Pharmaceuticals has a unique epigenetic regulator program with DUR-928.  DUR-928 has shown efficacy in pre-clinical models on reducing bio-markers associated with cell death and fibrosis, which may play a critical role in NASH.  It is possible that Durect has a completely new class of corticosteroids which also has a metabolic impact on cholesterol and triglycerides. We see potential in DUR-928 (for multiple indications in addition to NASH), and wanted to highlight how a multi prong approach may be necessary in tackling NASH.  

Another multi-billion dollar mkt cap belongs to Intercept, who is developing Ocaliva (OCA).  OCA recently approved in Primary Biliary Cholengitis (PBC) will be presenting Phase 3 data in two NASH subsets in 2019 and we are looking forward to seeing the data as we interpolate what impact bile acids may play in treating NASH.  This is especially important as it may relate to Albireo. Increased Serum Bile Acid is an associated symptom of NASH.

With Elobixibat’s mechanism of reducing bile acids, it logically has potential in treating the disease.  Since it is already approved for CIC in Japan and has been dosed in over 1,500 individuals, Elobixibat has a good, well known safety profile.  Albireo plans on initiating a Phase 2 trial for Elobixibat in NASH in the first half of 2019 while simultaneously developing additional preclinical IBAT inhibitors for its two-pronged NASH approach.    

We are excited by novel molecules, and a drug that can lower serum bile acids may play an important role in treating NASH.   We look forward to seeing more data on Elobixibat’s impact on relevant NASH biomarkers.

Elobixibat  in CIC

ALBO’s licensee EA Pharma (Eisai) received approval in Japan in January 2018 for Chronic Constipation. It represents the first IBAT inhibitor approved worldwide and triggered a $45M payment from HealthCare Royalty Partners to ALBO.   Prior to approval, ALBO monetized its royalties (HSD+) on Elobixibat in Japan from Eisai to HealthCare Royalty Partners. ALBO could earn an additional $15M in sales milestones and HRP gives back the royalty stream if HRP earns 175% of the amount paid to ALBO.  

A3384 in Bile Acid Malabsorption (BAM)

Albireo developed a reformulated version of cholestyramine that is inert in the small intestine and active in the large bowel which could allow for higher efficacy in a formulation with a more favorable tolerability profile.  A Phase 2 trial for BAM will launch in H1 2019. The development pathway is 505(b)(2) which is a faster cheaper FDA process that piggybacks on well-known existing clinical data of cholestyramine. There are 4M patients in major markets with no drug approved.  ALBO has patents pending for A3384 that go to 2037 upon issuance.

Management, Burn Rate, and Valuation

Ron Cooper joined Albireo in September 2015 from Bristol Myers. Ron had a 25 year career at Bristol-Myers Squibb and was most recently President of Europe.  He has been busy building the Albireo executive management team and has just hired Dr. Patrick Horn as CMO to succeed Dr. Paresh Soni. Dr. Horn has extensive pediatric orphan development experience and FDA NDA preparation and submission experience.  He has served as SVP of Clinical Development at Orphan Technologies, the CMO at Tetraphase, and clinical program director of Dyax. Former CMO Dr. Soni remains as a consultant primarily in the capacity of new trial designs, his specialty. Tom Shea CFO joined Albireo in July 2016 and was the CFO at Cubist which was acquired by Merck for >$8B in 2014.  The original scientific team remains at Albireo. They are the brains behind the pipeline and having come from AstraZeneca, it is our contention that they are some of the best GI minds in the world.

ALBO burned $12M in Q1 2018 which is expected to remain consistent going forward totaling $50M for the year 2018.

At $32.30, ALBO has a $402M market cap and a $210M enterprise value.    For that valuation, investors get a clinically validated platform underpinned by IBAT, a unique and novel mechanism of action. It was brought forward by the best science has to offer in bile acid biology.  We believe ALBO is cheap relative to the comparable set, number of clinical trials, and sales potential.

Catalysts

• Phase 3 trial in pediatric orphan indication PFIC with A4250 reading out at the end of next year (2019)

• Elobixibat Phase 2 trial starts in NASH with a compound that has already been approved in CIC (H1 2019)

• Phase 2 trial starts in Bile Acid Malabsorption in A3384 (H1 2019)

• Potential priority review voucher with the ultimate approval of A4250

• Potential royalties in Elobixibat in Japan again if Healthcare Royalty earns 175% return

• Pre-clinical molecules pipeline (ALBO has multiple)

Risks

• Clinical failure of A4250

• Clinical failures of Elobixibat in NASH or A3384 in BAM

• Cash burn leading up to data read out

Catalyst

• Phase 3 trial in pediatric orphan indication PFIC with A4250 reading out at the end of next year (2019)

• Elobixibat Phase 2 trial starts in NASH with a compound that has already been approved in CIC (H1 2019)

• Phase 2 trial starts in Bile Acid Malabsorption in A3384 (H1 2019)

• Potential priority review voucher with the ultimate approval of A4250

• Potential royalties in Elobixibat in Japan again if Healthcare Royalty earns 175% return

• Pre-clinical molecules pipeline (ALBO has multiple)