Description

Summary 

As the overall stock market continues its bull run heading into the year's end, ESPR is an event-driven opportunity that presents a solid asymmetric profile. At the current price of $2.30/share, ESPR can potentially be a near-term double with the ruling of 12(c) motion, entitling them to their $300m milestone payout (~$2/share). The motion has been fully briefed and ESPR could get a ruling any day now.  

Litigation set-up 

ESPR is a pharmaceutical company with 2 commercialized drugs today – NEXLETOL and NEXLIZET. Both are non-statin drugs that can help reduce low-density lipoprotein cholesterol (“LDL-C”), a complicated term for what is effectively ‘bad’ cholesterol.  

The current set-up is focused on the ongoing litigation between ESPR and DSE (Daiichi Sankyo Europe GmBH). 

The dispute arises out of one of DSE’s payment obligations to ESPR under a milestone agreement. Under the Agreement, ESPR is entitled to the Regulatory Milestone Payment if two conditions are met: 

1. Grant of regulatory approval in the DSE territory of a licensed product. 

2. Regulatory approval “includes cardiovascular risk reduction in the label that correlates with the relative risk reduction rate” equal or greater than 15%, which itself is contractually tied to the results of the CLEAR Outcome Study. 

The CLEAR Outcome Study was completed in Nov 2022 and announced by ESPR on Mar 4, 2023. The result is as follows: 

• 13% reduction in MACE-4 (composite of cardiovascular death, non-fatal heart attacks, non-fatal stroke, or coronary revascularization) 

• 15% reduction in MACE-3 (composite of cardiovascular death, non-fatal heart attacks, or non-fatal stroke) 

• 27% reduction in non-fatal heart attacks 

• 23% reduction in the composite of non-fatal and fatal heart attacks 

• 19% reduction in coronary revascularization (severe blockage of the arteries) 

• 15% reduction in fatal and non-fatal strokes 

The point of contention is whether the CLEAR Outcome Study has achieved a relative risk reduction rate (RRR) of equal or greater than 15%. 

ESPR argues that any key measures of cardiovascular risk that achieve equal to or greater than 15% will entitle them to the milestone payment. 

DSE argues that the only result that matters here is the primary endpoint, MACE-4. And since MACE-4 composite risk reduction is lower than 15%, ESPR is not entitled to any milestone payment. 

Although the reduction of MACE-4 is below 15%, I believe ESPR is in a strong position to win based on the Agreement drafting history and the plain language of the Agreement.  

Specifically, on May 4, 2023, DSE proposed making ESPR’s regulatory milestone payment contingent on a reduction in the specific MACE-4 endpoint, but ESPR expressly rejected this proposed contractual term and DSE agreed to remove it. See below the proposed revised agreement by DSE which was rejected: 

In other words, the parties specifically considered adding language to the Agreement to make MACE-4 risk reduction a specific requirement for Esperion to receive the full milestone payment and decided not to add this requirement. This to me is the strongest evidence against DSE: the fact that DSE agreed to Esperion’s edits to Section 9.2, reflects the parties’ mutual intent and understanding that the regulatory milestone payment is not contingent on the specific reduction of risk of MACE-4. 

To ESPR’s complaint, DSE’s answer is the following and is weak at best. 

Even if the drafting history of the Agreement relates solely to the second element (i.e., what the approved label needs to say), why wasn’t RRR made explicit as MACE-4 by DSE? If DSE had understood the only metric that matters is the primary endpoint, DSE would and should have made the agreement condition on MACE-4 and not simply stated “relative risk reduction rate”. To a general reader, the plain language of the agreement bears no indication that only MACE-4 endpoint matters. MACE-4 was never mentioned in the Agreement; DSE’s interpretation of the Agreement is contrary to its plain language.  

As of today, the judge has approved ESPR’s motion to 12(c) -- move for judgment on the pleadings based on the unambiguous terms of the parties ‘written contract’. The fact that the judge allowed 12(c) to move forward is highly positive for ESPR. Based on the plain language of the Agreement, ESPR pointed out Section 9.2 using the indefinite article “a” in “a result of the CLEAR Outcome Study”. By using “the indefinite article ‘a,’” the Agreement confirms “the modified noun”—here, “result of the CLEAR Outcome Study”— “is but one of several of that kind.”  

If 12(c) is ruled against ESPR, the trial will remain scheduled for trial in April 2024. A trial with extrinsic evidence(s) considered would, in my opinion, put ESPR in an even stronger position. In addition, the judge has also allowed for the deposition of Martin Furle which DSE had tried opposing. 

In short, I believe ESPR will be able to receive the $300m milestone payment regardless of the result of the 12(c) motion.  

Sales inflection in 2H 2024 

With the positive result from the CLEAR Outcome Study, ESPR has applied for label expansion of their drugs which significantly increases their addressable market. 

The FDA has recently approved an updated LDL-cholesterol lowering indication for NEXLETOL and NEXLIZET to include the treatment of primary hyperlipidemia as a qualifier for existing approved populations. Additionally, the maximally tolerated qualifier for statin use has been removed, and the prior limitation of use stating “the effect of NEXLIZET or NEXLETOL on cardiovascular morbidity and mortality has not been determined” has also been removed. The label approvals for cardiovascular risk reduction indications for NEXLETOL and NEXLIZET remain on track for anticipated approval in the first quarter of 2024. 

As such, 2H’24 should see meaningful growth in sales both domestically and internationally. ESPR has sold their international rights to the larger pharma companies overseas in exchange for milestone payments and tiered royalty fees. 

DSE, which holds the rights to Europe, is the only partner ESPR is receiving royalty from today – 15% of DSE’s sales. Europe sales are doing ~20% higher than the US. As ESPR continues to build their sales team and infrastructure to market their drugs domestically, I believe sales mix will converge toward 50/50.  

Besides Europe, Japan is also a big market in which ESPR has sold their rights to Otsuka. I expect the first milestone payment to be received in 2025.  

Eliminating risk of default 

Along with sales growth and the 300m milestone payment which is expected to be received in 1H’24, solvency risks will be largely mitigated. 

ESPR has a very poor capital structure. In addition to a convertible note maturing Nov 25 that is trading on 47 cents on the dollar, ESPR has a ‘Revenue Interest Liability (RIPA)’ maturing in 1Q’26. The current amount required to redeem the RIPA in whole is 377m. Interest is currently 10% of total net revenue which will see a step-up such that total obligation is met by 1Q’26. Given where the convertible note is trading, ESPR is effectively a distressed security. 

With the 300m in milestone payout in 2024 and sales inflection of ESPR’s drugs, concerns of default will be removed.  

Including the 300m milestone payment from DSE, I believe ESPR could do ~140m in cash earnings in 2024. Part of the 300m proceeds will be used to pay down RIPA’s obligation. Management is also confident in their ability to restructure the ‘25 converts on flexible terms. 

Valuation 

On my base case valuation, I reckon ESPR could do 400m in core revenue in 2025. On a 3x rev multiple, ESPR would be worth $3.70/share on current capital structure (using DSO of 158m assuming outstanding warrants are exercised). In addition to $2/share in DSE’s milestone payout, ESPR is worth at least $5.60/share.  

Catalyst

300m milestone payment from litigation 

Sales inflection in 2024 from label approvals

Mitigation/Elimination of solvency risk

Torque driving share price growth from high short interest