Why Investors Continue to Flee Aegerion Stock

Although it's easy to generate huge commercial expectations for rare disease drugs (especially with orphan drug pricing in the United States), many companies report very underwhelming sales figures once the drug is brought to market. Even for drugs that target only a few thousand or even a few hundred patients, the process of finding and giving treatment to these people can be very challenging.

For small pharmaceutical companies, the transition from an R&D-based business model to a commercial pharmaceutical model can also be tough, especially since they are sometimes forced to complete the process in a short period of time.

The process of transition also seems to be an issue for Aegerion Pharmaceuticals (NASDAQ: AEGR  ) – a rare disease company that owns the world's most efficacious Homozygous Familial Hypercholesterolemia (HoFH) drug -- Juxtapid (lomitapide).

Although the company has a best-in-class product, the slower-than-expected launch and the rapid progression of Aegerion's future competitors in the HoFH space continues to erode investor confidence. Short sellers have also increased their stake in Aegerion steadily throughout the last few months, hinting that there may be more downside to come.

The increased bearishness becomes visually apparent when you look at Aegerion's 12-month performance. Throughout this period of time, the NASDAQ Biotech Index moved up by nearly 30% while Aegerion dropped by 65%.

What went wrong here?
Juxtapid was approved as a treatment for HoFH in December 2012 by the FDA, and once again by the EMA (Europe's FDA) in August 2013. Although it was clear that Aegerion had the best LDL-lowering drug out there, it wasn't until Aegerion announced the pricing of the product that the market got very excited about the commercial prospects in HoFH.

At the reimbursed rate of $295,000 per patient, 1,000 patients would mean $295 million in sales, enough to justify a billion-dollar valuation with a price/sales ratio of less than four. And based on JP Morgan's estimates of the size of the US/EU HoFH population, the drug could reach about $500 million in sales at its peak. Aegerion believes that there may be as many as 3,000 targetable HoFH patients.

But, after seeing Aegerion's recent quarterly earnings, Wall Street seems to acknowledge that it overshot Aegerion's forward-looking valuation (previously around $2 billion to $3 billion) by quite a bit.

The high cost of marketing Juxtapid has also added significant drag to the company's bottom line. In Q1 2014, Aegerion reported a quarterly net loss of $15.8 million – just a bit less than in Q1 2013 despite a 2,100% jump in revenue.

Why is there such a shortage of HoFH patients, and why is it so expensive to market what appears to be the world's best HoFH drug to the few dozen patients that are being treated?

Juxtapid's lifespan may also be shorter than expected
In theory Aegerion could still reach this peaks sales figure (quite easily) given that there are many more reimbursable HoFH patients out there, but it appears that Amgen's (NASDAQ: AMGN  ) exciting PCSK9 inhibitor evolocumab may dethrone Juxtapid before that happens.

Evolocumab, like Juxtapid/lomitapide, is a another drug that lowers LDL cholesterol in patients. In recently completed phase 3 trials, evolocumab showed an incredible LDL-C reduction of 55% to 76% (versus placebo) in patients with hyperlipidemia after 52 weeks. Evolocumab was also tested in HoFH patients in the TESLA study, where patients saw LDL-C reduction of 23.1% after 12 weeks.

In its own phase 3 trials, lomitapide lowered LDL-C by 40.1% after just 26 weeks, but this LDL-lowering effect seemed to taper off later into the trial. At 126 weeks, patients who were still participating in the trial saw an absolute 45.5% reduction in LDL-C.

In stark contrast to Juxtapid – a drug with a black box warning for hepatotoxicity – evolocumab also appears to be safe and tolerable for patients. And Amgen, as a much larger company, has greater experience with commercialization -- experience which could be critical for winning market share in this specialized market.

So based on what we know, it appears that evolocumab could become the HoFH drug of choice once it is launched by Amgen. And because of its price, it's very possible that Juxtapid will be squeezed out of HoFH.

This is a tough pill to swallow for Aegerion, considering that the company's HoFH-based business model is already underperforming expectations (as evidenced by the share price drop).

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