Investors waiting for M&A activity in the controversial purified pharma-grade fish oil market got some Tuesday morning, but probably not with the company they were expecting. AstraZeneca (NYSE:AZN) announced the acquisition of third-in-line pharma-grade fish oil company Omthera (Nasdaq:OMTH) for up to $443 million in total consideration. Although the deal offers a significant premium to where Omthera was trading and makes sense as a platform/portfolio addition, it's not exactly a risky high-value deal for AstraZeneca.
AstraZeneca announced on Tuesday morning that it had reached an agreement to acquire development-stage purified pharma-grade fish oil developer Omthera in an all-cash deal. Given that shareholders owning more than 60% of Omthera shares have already pledged to support the deal, it is hard to imagine that the deal will not close as presently structured.
AstraZeneca will be paying $323 million in up-front cash ($12.70 per share) and giving Omthera shareholders contingent value rights worth up to $120 million (or $4.70 per share) tied to the success of Omthera's Epanova product.
An Affordable Line Extension Opportunity For AstraZeneca
Although there are some risks and uncertainties tied to Epanova, this looks like a relatively low-risk opportunity for AstraZeneca to shore up its lucrative cardiovascular drug franchise.
Omthera has not yet filed its new drug application (NDA) for Epanova, but the the company has the data from two successful Phase III trials in hand. As has been the case before in this space, Omthera will first look for approval in patients with very high triglycerides (500mg/dL) and then try for approval in mixed dyslipidemia (200 to 499 mg/dL).
AstraZeneca is not looking at Omthera as just a way of entering the pharma-grade EPA/DHA (the purified “active ingredients” of fish oil) market. AstraZeneca will be looking to create a fixed-dose combination of Epanvoa and its own successful statin drug Crestor. This would not only potentially distinguish Epanova in the market, but could also extend the effective life of the lucrative Crestor franchise. With Crestor still accounting for over $1 billion in quarterly revenue (and about 20% of AstraZeneca's total revenue), that's no trivial detail.
A Sizable Premium, But Not A Rich Valuation
It's interesting to look at what AstraZeneca paid for Omthera and what it may mean for the independent pharma-grade EPA company Amarin (Nasdaq:AMRN).
On one hand, paying an 88% premium for Omthera looks like a rich valuation at face value. Then again, Omthera has been weak since its IPO at $8/share. What's more, a total enterprise value of $380 million (assuming all of the contingent value rights are achieved/exercised) is only a fraction of the $500 million in potential one-year revenue that sell-side analysts have projected for Omthera's Epanova post-approval.
I'll be curious to see how the market processes Amarin's valuation in light of this deal. Amarin is much further ahead of Omthera – Amarin's Vascepa is on the market today, and Epanova is not likely to be on the market until mid-2014. Apart from the 18-24 month time-to-market advantage, though, the two companies and compounds are pretty similar.
The make-up of Epanova and Vascepa are different, but the compounds have shown similar ability to lower non-HDL cholesterol levels, while Epanova is better at raising HDL. On the negative side, Epanova does raise LDL levels and there were higher reported side-effects and discontinuations in the Phase III studies. On the administration side, Epanova's effective dose is smaller, only needs to be taken once per day, and does not have to be taken with a meal. All told then, I think the argument can be made that Vascepa is better (though not overwhelmingly) from a clinical perspective, but Epanova closes the gap some with an easier usage profile.
The Bottom Line
Time will tell if these purified EPA (Amarin) and EPA/DHA (Omthera) drugs suffer from the growing concerns about the efficacy of fish oil in controlling heart disease. While the relevant studies are using non-purified forms of fish oil (as opposed to purified EPA or EPA/DHA) and lower dosages, the fact remains that the stream of negative data on niacin, fibrates, and now fish oil has doctors questioning their prescribing habits for patients with high cholesterol.
Given AstraZeneca's solid presence in cardiovascular drugs, I like the company's chances of making the most of what the market will yield for these purified omega-3 fatty acid compounds. Time will tell for Amarin, but the company now has more pressure to really establish Vascepa before AstraZeneca's presumed launch of Epanova, and I have real questions as to whether the shares can maintain such a premium to the implied value of the AstraZeneca-Omthera deal.
At the time of writing, Stephen Simpson did not own any shares in any of the companies mentioned in this article.