Tuesday, January 26, 2010

Amlylin Pharma (NASDAQ:AMLN): Upgraded to Buy at Citigroup; Street high target of $27

Amylin Pharma (NASDAQ:AMLN) is getting lots of very positive commentary this morning after the FDA issued a press release announcing the approval of Novo Nordisk’s Victoza (liraglutide), a once-daily GLP-1 for diabetes.

- Citigroup is upgrading AMLN to Buy from Hold with a $27 price target (prev. $14) saying they are optimistic that FDA will approve LAR at some point. Firm believes this considerably raises Amylin's value. Citi's new Ttarget of $27 is based on new ’13E non-GAAP EPS of $1.28 (previously $0.63 on '12E) and 30x P/E (same multiple) discounted back 20% to ‘11E.

Assuming LAR approval, Amylin should become profitable in 2011, thereby raising its value as M&A target for the lucrative diabetes market.

Higher Price — Both the 1.2mg and 1.8mg Victoza doses were approved. Novo Nordisk will price the 1.2mg dose at ~$8-$9/day and 1.8mg dose at ~$12- $13.5/day. Given that LAR is more potent , Citi now prices it in-line with Victoza’s high dose. Previously, they priced it at parity to Byetta. Byetta is priced at $8.21 (5mcg) and $9.63 (10mcg) per day.

1st Line Use — Bear argument on LAR is that it won’t sell in 1st line. This is amplified by the boxed warning and lack of FDA approval of Victoza in these pts. To be conservative, they do not model sales there. However, FDA did approve Byetta w/o box warnings while did not approve Victoza in these pts. Thus, FDA views these drugs differently and this may be a positive for LAR.

Conservative Approval Timelines — There is a good chance that FDA will not approve LAR on the upcoming March 5 deadline. In their model, the firm envisions that LAR will be approved in Q4:10.

- Goldman Sachs expects Amylin shares to trade up significantly, as they believe the news increases the likelihood of approval for Amylin’s exenatide once-weekly (EQW).

They believe EQW appears to have less preclinical cancer risk than liraglutide, and the Byetta safety history may give the FDA increased confidence in the safety of EQW. Therefore, the firm believes the safety hurdle for FDA approval of EQW should be lower than that for liraglutide. Goldman believes the FDA approval deadline is 3/5/10. Although they are optimistic about approval of EQW, several factors could delay approval, incl. delays in manufacturing clearance, requirement for an Advisory Committee review before approval, or a request for additional data by the FDA.

- Jefferies is raising their target on AMLN to $26 (prev. $22) and reiterating their Buy rating as they see an increased chance of EQW approval later this year.

Victoza approval bodes well for EQW's prospects, both on approval and commercial prospects. Firm notes they have even higher confidence in approval, since they believe EQW has an even better profile on thyroid cancer risk (only one gender of rat affected and a higher safety margin in terms of the dose exposure at which tumors occur) and an overall more compelling efficacy and safety profile relative to Victoza. Commercially, the lack of onerous post-marketing requirements as part of the REMS for Victoza gives us increased confidence in the potential for significant GLP-1 market expansion. Jefferies estimates that global GLP-1 sales could reach $6b by 2015.

- Barclays is reiterating otheirOverweight rating on AMLN and increasing our price target to $24 following approval of competing long acting GLP-1 agonist Victoza. They believe approval of the first long acting GLP-1 drug bodes well for AMLNs once-weekly exenatide LAR and suggests a pragmatic approach by FDA to class related safety issues heading into AMLNs March 5th PDUFA.

Notablecalls: The Victoza (liraglutide) approval was surely a surprise, expecially for the 11 million shares strong Amylin short base (25%+ short interest), I suspect. Make no mistake about it - Victoza is no match for LAR as the Novo's drug is dosed once daily vs. once weekly for LAR.

The shorts must have been betting on further delays for the whole GLP-1 class of drugs but now it looks like it's not going to happen. The approval of LAR will put Amylin in the profitable biopharma camp & set it up as a possible takeover candidate for partner Lilly. Remember Lilly is facing a horrendous patent cliff and is desperate to make up for the lost revenues.

All this effectively puts Amylin stock on track to at least double over the next couple of years. Look at it this way - AMLN has $2-3 in EPS power after LAR is approved. Putting a conservative 15x multiple on that EPS yields a $30-$45 stock (vs. current $18). Considering the takeout potential, the risk is clearly towards the $45 (or higher). A short's nightmare, if you will. They have to cover. No way around it.

In the very short term I suspect the shares will have 10%+ upside towards the $19-$19.50 level. Note that Goldman put their rating Under Review overnight which probably means they are going to upgrade the stock. Goldman's blessing will surely serve to help the long case in AMLN.

Note that Alkermes (ALKS) is set to get royalties on LAR. Could see some buy interest.

Also, I think it's time to give kudos to Barclays' biopharma research team for upgrading AMLN back in Nov 2009 (see archives). Well done guys!

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