Acute Coronary Syndrome doesn’t sound very pleasant, and it isn’t. This umbrella term covers a range of symptoms that occur when blood flow to the heart is suddenly blocked. Whether this leads to a little chest pain or a full-blown heart attack, it’s a big problem: your heart tissue is dying.
ACS causes more than 2.5 million hospitalisations in the USA each year and nearly half-a-million deaths. In fact, it’s the world’s leading cause of death. The American Heart Association estimates that ACS costs America alone more than US$150bn a year, with more than half of that due to patients needing to go to hospital multiple times.
CSL-112 could add US$1bn to NPAT
Large market; Low probability of success
Results positive so far but late stage failure is common
ACS is typically caused by a narrowing of the arteries, which itself is due to a build up of ‘plaque’ on the edges – a hardened cake mix of fat, calcium and cholesterol.
You may recall from science class that there are two types of cholesterol. ‘Bad’ cholesterol causes plaque, but the other, well-behaved type of cholesterol – so called HDL cholesterol – is the crime fighter of the body’s arteries, sweeping away bad cholesterol and reducing your risk of heart disease.
More than a decade ago, CSL realised that the blood plasma leftover from making its antibody products was loaded with this ‘good’ cholesterol and set about purifying the active component.
Dubbed ‘CSL-112’, early research suggested that when it was injected into patients, it would flush out bad cholesterol from their bodies, dissolve life-threatening plaques and reduce the overall chance of heart attack.
CSL-112 appears to work much faster than existing cholesterol-lowering drugs, which are slow-acting and so offer little benefit in the weeks following a heart attack – right when a patient needs them most.
Historically, CSL has focused on therapies that treat people suffering from rare illnesses. In olive-sizing terms, the market for CSL’s haemophilia and antibody products is small and medium, respectively. The market for CSL-112 would be super-colossal.
For context, the current cohort of cholesterol-lowering drugs, known as ‘statins’, is led by Lipitor. Over its 20-year history, Lipitor was the world’s best-selling drug and generated more than US$140bn in sales for its owner, US-based Pfizer.
With this in mind, it’s no surprise that chief executive Paul Perreault thinks that CSL-112 ‘will just be transformational for the company’ if the product makes it to commercialisation.
A very big if
A couple of years ago we described how CSL-112 was beginning the second phase of the clinical trial process. The research involved 1,200 patients globally and monitored the effect of multiple administrations of CSL-112.
The study was completed in April and the results are to be presented to the American Heart Association during its next session on November 12–16, though CSL may make an announcement earlier.
Be warned: CSL’s share price movement that day will probably look a lot like the EKG of someone having a heart attack, so you should prepare yourself mentally. A lot hangs on these results.
If the study fails to show a significant effect, CSL will have wasted years of research and a good $70m in Phase 2 clinical trial costs. If the result is positive, it will mean the company is likely to proceed with the final leg of the approval process – the infamous Phase 3 clinical trial.
A Phase 3 clinical trial for CSL-112 will require 12–15,000 patients – 10 times as many as necessary for Phase 2 – and may take four years to complete. At the lower end of expectations, it will cost US$250m but may cost as much as half-a-billion. And, still, there’s no guarantee it will be successful and result in a marketable product.
No news is good news
When it comes to clinical trials, failure is the norm. It’s worth noting that products similar to CSL-112 that were designed to raise the amount of good cholesterol in the blood have failed in late stages of development.
In 2012, Swiss-based Roche ended development of an HDL cholesterol-boosting drug part way through its Phase 3 trial after it became apparent that it wasn’t having a significant effect. This followed 13 years’ worth of Phase 1 and 2 trials that all pointed in the right direction.
And in 2006, another drug that increased levels of good cholesterol in the body, known as Torcetrapib, had its Phase 3 trial cut short by Pfizer when participants started dying unexpectedly.
Just three days prior to the cancellation, Pfizer’s chief called it ‘one of the most important compounds of our generation,’ which shows how quickly the tide can turn. Pfizer had spent US$800m developing Torcetrapib before it was abandoned.
Even for CSL, things have ended badly at the last turn. In 2007, CSL’s Phase 2 clinical trial of its previous cholesterol-fighting candidate – CSL-111 – was aborted early due to the development of liver abnormalities in a number of patients.
It’s encouraging that the CSL-112 trial didn’t end ahead of schedule due to safety concerns, though that still doesn’t mean the result will be enough to justify the enormous time and expense necessary for Phase 3.
How to value hope
Though it's a long shot, we can’t ignore CSL-112’s potential. Citigroup research estimates that the therapy could add around US$1.0bn to net profit within five years of launch.
That seems reasonable – if not conservative – given that the current market for cholesterol-lowering drugs is around US$30bn a year and the margins on CSL-112 would be mouthwatering because CSL would manufacture it using the waste portion of its existing plasma supply.
Taking CSL’s current forward price-earnings ratio of 27, an extra billion in net profit might mean another US$27bn added to the company’s market cap – or $77 per share.
But let’s not get ahead of ourselves. Between 2005 and 2015, some 9,985 clinical trial 'phase transitions' were registered with the US regulator. Only around a quarter of the drugs related to cardiovascular disease that were in Phase 2 clinical trials proceeded to Phase 3, and – even then – around half of those in Phase 3 failed to reach commercialisation. With these grain-of-salt statistics to work with, CSL-112 may only have a 1-in-8 chance of success.
That means we need to multiply our imaginary US$27bn by the totally hypothetical 1-in-8 chance of it working out, which gives us a valuation of about US$3.4bn.
However, because the Phase 3 results won’t be ready until around 2021, and it could take another few years to really ramp up sales, we need to discount that US$3.4bn back to today’s dollars – the result being that CSL-112 is worth about US$1.5–2.0bn at this stage of the game, or around $5.00 per share. If next month's Phase 2 results are positive, that valuation would at least triple.
As you can see, there’s a wide range of outcomes when valuing blockbuster drug candidates, which is one reason we've been reluctant to sell CSL despite its seemingly high valuation.
And this says nothing of the extra juice that can be squeezed from the company's current product lineup, nor other novel treatments CSL is working on. In 2016, CSL’s research and development (R&D) spending increased 32% to $614m thanks to several therapies reaching more costly, late-stage clinical trials – and if the news for CSL-112 is positive, that number will get a lot bigger in coming years.
Management expects net profit to rise 11% in 2017, while earnings per share are likely to grow slightly faster due to the company’s ongoing share buyback. The stock has more than tripled in the five years since our initial Buy recommendation and – with a clean balance sheet, several competitive advantages and significant growth potential – we continue to recommend you HOLD.