Four Months After IPO, Enanta Pharmaceuticals Carries A Compelling Valuation Next to Hepatitis Peers

Since making their market debut in March, shares of Enanta Pharmaceuticals (ENTA) have remained virtually flat, excluding a post-IPO pop (shares closed at $17.18 on March 21, their first day of trading, and at $17.20 on July 23). We don’t believe this will be the case for long. Backed by a strong balance sheet, a compelling valuation next to its industry-peers, and a solid pipeline, Enanta is well positioned to offer investors meaningful returns.

A Backdoor HCV Play

Enanta, for those unfamiliar with the company, is developing a slate of HCV compounds via two collaboration agreements with AbbVie (ABBV) and Novartis (NVS), the most advanced of which is currently in Phase III trials. The compelling proposition Enanta offers can be highlighted in large part by simply examining its valuation. With 17,818,796 outstanding shares, Enanta carries a market capitalization of just over $300 million. The smallest of the mid- to late-stage HCV developers, Achillion Pharmaceuticals (ACHN), carries a market capitalization of nearly $600 million, and we believe that, despite being bullish on ACHN, Enanta should rival Achillion in size.

Some investors and industry observers believe that Gilead Sciences (GILD) is the only viable HCV play due to the clinical profile of sofosbuvir, as well as the fact that the drug is already under FDA review. While we freely admit that Gilead is almost certain to capture a majority of the global HCV market [its future prospects in HCV are part of the reason that Gilead has captured the title of “world’s largest biotechnology company by market cap” from Amgen (AMGN)], the global HCV market is large enough to accommodate multiple players. And with a valuation of just over $300 million, less than $200M on an EV basis, it doesn’t take much to meaningfully move the needle at Enanta.

Enanta and its partners are currently developing three HCV treatments, the most advanced of which is ABT-450, a protease inhibitor now in Phase III trials (more on the economics of this collaboration later) in genotype 1 patients, with a primary completion date of September 2013. We note that in May, Enanta and AbbVie secured Breakthrough Therapy Designation for ABT-450, potentially allowing ABT-450 to reach the market alongside or just behind Gilead’s sofosbuvir (Enanta and AbbVie intend to file an NDA for ABT-450 by mid-2014). ABT-450 is currently being tested in 4 separate clinical programs in several “HCV cocktails. The 4 programs include:

  1. ABT-450 with ABT-267 and ABT-333 (2 proprietary HCV treatments in development by AbbVie; ABT-267 is an NS5A, and ABT-333 is a non-nucleotide), as well as ribavirin
  2. ABT-450 with ABT-267 and ABT-333
  3. ABT-450, ABT-267, and ribavirin
  4. ABT-450, ABT-333, and ribavirin

Given that patients taking these drugs will need to take at least three medicines, it’s easy to see that convenience is not ABT-450‘s selling point. But existing clinical data suggests compelling efficacy and safety. In May, Enanta and AbbVie released new Phase IIb data from AbbVie’s Aviator trial. The results showed that ABT-450, when combined with AbbVie’s two proprietary direct-acting antivirals, resulted in minimum SVR’s (sustained viral response) of 83%, with the highest SVR’s coming in at 99% after 12 weeks of treatment. Phase IIb efficacy data is summarized below (ribavirin will be referred to as RBV.

Phase IIb ABT-450 Regimen Efficacy

Treatment-Naïve Null Responders
Duration 8 weeks 12 weeks 24 Weeks 12 weeks 24 weeks
Regimen ABT-450/rABT-267ABT-333RBV ABT-450/rABT-333RBV ABT-450/rABT-267RBV ABT-450/rABT-267ABT-333 ABT-450/rABT-267ABT-333RBV ABT-450/rABT-267ABT-333RBV ABT-450/rABT-267RBV ABT-450/rABT-267ABT-333RBV ABT-450/rABT-267ABT-333RBV
Number dosed 80 41 79 79 79 80 45 45 43
Breakthrough 0 1 1 1 0 0 0 3 1
Relapse 10 4 8 5 1 2 5 0 0
SVR12 (ITT) 89% 85% 91% 90% 99% 93% 89% 93% 98%
SVR24 (ITT) 88% 83% 89% 87% 96% 90% 89% 93% 95%

ABT-450 was most effective when combined with ABT-267, ABT-333, and ribavirin in treatment-naïve patients, with SVR12 of 99%, and SVR24 of 96%. Compelling efficacy was also seen in null responders, with SVR24 rates as high as 95% in the 450/267/333/RBV arm of the trial. We note that in its Phase III NEUTRINO trial, Gilead’s sofosbuvir showed an SVR12 of 90% in genotype 1-treatment naïve patients, lower than the 99% seen in the four-pill regimen tested here, and equal to the 450/267/333 regimen. ABT-450 also showed acceptable safety; just 4 of the 247 patients enrolled in this Phase IIb trial discontinued treatment due to adverse events. Enanta and AbbVie recorded serious events in four patients, although only one (an incident of arthralgia) was believed to be drug-related.  Common side effects included headache, fatigue, insomnia, diarrhea, and nausea. One incident of elevated ALT levels and six incidents of abnormal bilirubin were reported as well, but Enanta notes that all seven cases were resolved within the trial, with no dosing interruption. Investors should note that the safety profile of Enanta and AbbVie’s regiment is comparable to that of Gilead’s sofosbuvir; in its own Phase III trials, sofosbuvir also saw less than 2% patient discontinuation, as well as fatigue, nausea, and headaches.

As data from the Phase IIb trial of ABT-450 show, Enanta and AbbVie’s HCV candidate offers acceptable efficacy and safety, both on a standalone basis and in comparison with Gilead’s sofosbuvir. And ABT-450 is not the only HCV compound Enanta and AbbVie are developing. The two companies are also developing ABT-493, a protease inhibitor designed to serve as a successor to ABT-450. ABT-493 is in Phase I trials, and the two companies are specifically targeting it to have higher barriers to resistance than ABT-450 or other treatment regimens. Co-dosing of ABT-450 and ABT-493 will occur in Q3 2013, with Phase II trials set to begin in mid-2014. Enanta’s third HCV asset is EDP-239, developed in collaboration with Novartis. EDP-239 is now in Phase I trials, with a primary completion date of June 2013. The trial will test EDP-239 in several doses versus placebo, with changes in HCV viral loads serving as the primary endpoint, and with safety, changes in HCV RNA log, and EDP-239 plasma concentrations serving as secondary endpoints. Early data for EDP-239 has suggested the compound warrants further development; Enanta notes that EDP-239 has shown solid ability to overcome resistance in vitro, and has been shown to be synergistic and additive to interferon and direct acting antivirals (also known as DAA’s). In addition, EDP-230 has not show cytochrome P450 interactions, and Enanta has determined that the drug is “amenable” to fixed-dose combination regimens. We expect further updates on EDP-239, as well as ABT-450 and ABT-493 when Enanta reports Q3 2013 results in August (the company’s fiscal year ends in September).

Partnerships & Financials: The True Upside

Although the clinical data for ABT-450, and early data for both ABT-493 and EDP-239, have been acceptable, the true upside lies in Enanta’s collaboration agreements with both AbbVie and Novartis (NVS). As we have noted in our previous coverage, Achillion is one of a few development-stage biotechnology companies that has been able to maintain full global rights to its entire pipeline, meaning that the full upside potential of sovaprevir and its other HCV programs belong to Achillion. That makes the company’s $600 million market capitalization quite palatable. Enanta, however, has traded away most of the upside potential of its HCV pipeline. But, it has done so on highly favorable terms, and when those terms are combined with a market capitalization of just over $300 million, they become highly compelling.

Enanta inked its collaboration agreement with AbbVie (then Abbot Laboratories) in November 2006 in exchange for a $57.2 million upfront payment (inclusive of the purchase of Enanta preferred stock). Since then, Enanta has received an additional $55 million in milestone payments and is entitled to a additional $275M in potential milestone payments ($195 million in development and regulatory milestones, $80 million tied to the development of follow-on products). Enanta will be entitled to tiered royalties on global sales of ABT-450 (ranging from low double digits to twenty percent; Enanta states that the blended royalty rate is in the high teens).

With peak sales of ABT-450 forecast to reach $2 billion, this equates to royalties of $300 million assuming a 15% royalty rate (which in fact may be conservative). However, perhaps the most compelling provision of the AbbVie agreement is the fact that under the terms of the agreement, AbbVie is responsible for all global development, manufacturing, and commercialization costs for ABT-450. Enanta can simply collect potential royalties without contributing a dime to ABT-450’s development. Furthermore, Enanta holds an option to co-develop and co-promote ABT-493. Should it exercise the option, Enanta will be required to fund 40% of domestic development and commercialization costs in exchange for 40% of domestic profits. The option may only be exercised after the completion of Phase IIa trials within a pre-determined (but undisclosed) time frame.

Enanta’s agreement with Novartis, struck in February 2012, was also done on highly favorable terms. Under the terms of the Novartis agreement (covering EDP-239), Enanta received $34.4 million upfront and $11 million in January 2013 when Novartis initiated Phase I trials of EDP-239. Enanta is entitled to $395 million in potential milestones (the breakdown has not been disclosed), as well as double-digit royalties on sales of EDP-239, ranging from low double digits to high teens. As with ABT-450, Enanta need not contribute a dime to developing EDP-239; all development, manufacturing, and commercialization costs are to be paid by Novartis. 

Investors may be curious to note that Enanta still spends millions on research & development (nearly $4 million in Q2 2013). If Enanta’s partners are funding all of the costs of its HCV assets, then where is this spending going? R&D spending is tied to Enanta’s third collaboration agreement and proprietary programs. In addition to its HCV collaborations with AbbVie and Novartis, Enanta has an agreement in place with the National Institute for Allergies and Infectious Diseases (also known as NIAID). Under the terms of the agreement, struck in November 2011, NIAID will fund pre-clinical and early-stage costs for developing EDP-788, a bicyclolide antibiotic being developed to treat MRSA. Biocyclolides are a new class of macrolide antibiotics developed by Enanta that have been designed to overcome resistance more effectively than existing macrolide products such as Biaxin or Zithromax. IND-enabling studies are now in progress, and Enanta expects to initiate Phase I trials in the first half of 2014. The NIAID contract expired in March 2014, and NIAID has the right to extend it six times, through September 2016. Enanta received $14.3 million when the contract was first signed, and is entitled to up to $42.7 million in payments should NIAID exercise all six options. Enanta’s remaining R&D expenses are tied to two pre-clinical programs: one for a cyclophilin inhibitor, and another for a nucleotide polymerase inhibitor. Candidate selection for both is expected to occur by the end of the year.

Enanta’s recent IPO, as well as milestone payments from its collaboration agreements, have fortified its balance sheet. Enanta ended its most recent quarter with nearly $122 million in cash and investments, and only $1.8 million in debt (tied to a warrant liability related to Enanta’s preferred stock). Based on currently outstanding shares, Enanta holds $6.73 in net cash and investment per share. Notably, Enanta’s IPO was the company’s first equity raise since 2006, and management has stated that the company’s present balance of cash and investments will be enough to fund operations for at least 2 years. Enanta’s historical financials (those filed in its S-1) offer some insight into its historical burn rate. Enanta generated positive operating cash flow in both 2011 and 2012 due to the receipt of milestone payments. Enanta’s maximum operating expenses in fiscal 2010-2012 were $25.299 million, and even if the company’s expense run rate were to double, the company would have well over 2 years of capital on its balance sheet. In our view, Enanta may be conservative in its capital and liquidity forecasts, especially in light of the fact that consensus forecasts call for the company to post a profit of 64 cents/share in fiscal 2014 (the year ending September 30, 2014).


The upside potential embedded in Enanta Pharmaceuticals can be simplified into several key financial figures. Enanta, with a market capitalization of less than $307 million (as of the close of trading on July 23) is entitled to up to $670 million in further milestone payments from its agreements with AbbVie and Novartis, and peak ABT-450 royalties of $300 million annually (assuming a 15% royalty rate). That’s without ascribing any value to EDP-239, ABT-493, or any of Enanta’s earlier stage pipeline assets. Enanta has a solid balance sheet, a set of compelling collaboration agreements, as well as several early stage pipeline assets, assets that have likely been ignored by the market to date. In our view, this sets the stage for meaningful upside heading into Phase III ABT-450 data. Enanta is a compelling long-term holding.

In connection with ENTA, PropThink has taken a long position.