AZRX: EPI Treatment in the News

By John Vandermosten, CFA


Infectious Disease

With the concerns related to the emergence of the novel coronavirus in the news on a daily basis, attention to animal-sourced product used in medicines has also come in to focus. Fears are also rising related to the transmission of animal viruses passing to humans, similar to what happened in the Avian Flu outbreaks from 2013 to 2017 in China. Last year throughout Asia millions of pigs either died or were killed as a result of infection with the highly transmissible African Swine Fever. Some estimated as many as 200 million infections in pigs. These events highlight the risks of using animal based products and demonstrate one of the primary benefits of AzurRx’ (NASDAQ:AZRX) treatment for exocrine pancreatic insufficiency (EPI), MS1819. As we discuss in our initiation of AzurRx, MS1819 is a lipase produced by a yeast host in contrast to the porcine-based product now used in pancreatic enzyme replacement therapy (PERT). All available PERT is sourced from pig pancreases and while there has not been a reported case of viral infection attributable to pigs from the therapy, animal sourced products risk containing pathogens. Supply of PERT could also be impacted if a pandemic pig virus occurs.

MS1819 has demonstrated safety and efficacy in early clinical trials and provides several benefits as compared to PERT, including lower pill burden, improved efficacy in acidic environments and the avoidance of porcine-based sourcing. As we mentioned in our last report, we expect to see initial results from the cystic fibrosis (CF) combination study around the end of 2Q:20.

ZenPep Transaction

Also published the news were details regarding the anticipated sale of ZenPep, one of the main competitors in the pancrelipase space. In June 2019, AbbVie (ABBV) bid $63 billion in cash and stock for Allergan (AGN). AbbVie owns Creon, the dominant pancrelipase product in the market with estimated 2019 sales of near $1 billion which the Federal Trade Commission (FTC) would not allow to be combined with other pancrelipase products as part of a merger. On January 27th, Allergan announced a deal to divest Zenpep to obtain FTC and European Commission approval. Nestlé will buy the $270 million revenue product for an undisclosed amount. Chatter suggests that the transaction was valued between $1.0 and $1.2 billion, and at ~6x EBITDA, implying a ~75% EBITDA margin. In our discussions with investors and management teams, we also heard that a high single digit number of bidders were vying for the asset, suggesting broad interest. The PERT assets are expected to transfer to Nestlé with a 20 – 30 person commercialization team that will help the consumer staples company learn the ropes in the pharmaceutical market.

Nestlé’s Health Science division is focused on nutrition and offers a broad stable of brands.

Nestlé Health Science Brands1

Since many of these products are intended for patients whose nutritional needs are not being met, Nestlé’s strategy for this acquisition is to add a complementary product to the current portfolio of nutrition products. Some of Nestlé products that focus on health nutrition, such as Peptamin, Resource and Nutren Junior function as a supplementary nutrition option for those with EPI. Nestlé is not a pharmaceutical buyer and will likely have a different approach to commercialization, leveraging its own consumer staples logistics with the help of the dedicated ZenPep sales team that is expected to transfer with the asset. Nestlé’s global reach combined with its nutrition angle may be able to expand penetration in this mature market.

Pancrelipase Revenues 2012 (Act.) – 2024 (Est.)2

The transaction provides a helpful indicator of interest in the space with what commentary suggests are healthy valuations and multiple bidders. Since Nestlé does not have a dominant presence in pharmaceuticals, but does have deep pockets and an interest in enhancing its nutrition segment, we see a slow but steady approach that may expand the market both by end user and geography. The activity in the space is a positive for potentially improved approaches to addressing EPI such as MS1819 that avoid some of the shortcomings of PERT.

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1. Source: Author’s own work sourced from Nestlé company materials.

2. Source: Evaluate Pharma ®, accessed January 2020, Evaluate Ltd.