Is Esperion Therapeutics Inc. a Buy on the Dip?

Heart disease still claims the lives of around 600,000 Americans every year, and uncontrollable cholesterol plays a big role. Esperion Therapeutics Inc. (NASDAQ: ESPR) became one of 2017's best-performing biotech stocks because it's developing a drug that could lower this number.

Unfortunately, Esperion recently revealed some disturbing safety data from one of several ongoing late-stage clinical trials. The stock price was quickly cut in half, and there's still a chance it could come back in a big way.

Does that make this risky biotech a buy on the dip? Let's weigh opportunities against apparent risks to see if this stock makes sense at its new low price.

Reasons to buy

Before Lipitor lost patent protection, it raked in $13 billion annually for Pfizer, and several similar drugs in the statin family were big sellers in their day. This class of drug is usually effective, but unpleasant side effects such as muscle weakness affect most patients to some degree. An estimated 15% of people treated for high cholesterol can't get their scores low enough with statins because some form of intolerance limits their dosage.

Esperion's lead candidate, bempedoic acid, works like a statin, but it doesn't do much until it reaches the liver. Staying quiet on the way to the organ that absorbs most cholesterol is an important feature that allows the candidate to do its job without causing a lot of the side effects that limit statin dosages.

During a 2,230 patient pivotal trial, called Study 1, adding bempedoic acid to maximally tolerated statin therapy lowered cholesterol 20% compared to the group given a placebo. Serious adverse events were reported in 14.5% of the group treated with bempedoic acid versus 14% in the placebo group. Investors had a little trouble focusing on this positive-looking comparison because a far more troubling one popped up, but we'll get to that later.

Zetia is a popular pill that blocks cholesterol absorption at the intestine, and it's a popular option among the statin intolerant. A big pivotal study testing Zetia plus bempedoic acid or a placebo will produce some data this August that could improve the drug's popularity. If approved for a broad population, Esperion's candidate could generate annual sales that top out around above $1 billion annually.

Biotech stocks tend to trade at mid-single-digit multiples of their total annual sales. At recent prices, Esperion sports a $1.1 billion market cap that could swell several times over if the company successfully launches its drug.

Reasons to hide under the covers

The aforementioned trouble that popped up during Study 1 was a heavy shock that could derail Esperion's entire program. The company reported an imbalance in patient deaths between two groups taking maxed-out statin doses. Just two out of 742 people in the placebo group passed away compared to 13 of 1,487 in the group given bempedoic acid.

Esperion stock crashed but didn't burn, because it looks like bempedoic acid wasn't to blame. I think the candidate's overall safety profile will hold up once all of the data is in. That said, investors need to understand that the FDA takes a guilty-until-proven-innocent approach to new drug candidates that millions of relatively healthy patients could end up taking for years on end.

The company finished March with a healthy cash balance of around $240 million, which management thinks will see it through the first quarter of 2020 -- right around the time the FDA could be wrapping up a review of a submission slated for the first half of 2019. If the agency wants another long-term safety study before issuing a thumbs up for patients who intend to use it in combination with statins, raising more capital could get awfully difficult.

A new threat from 2015?

Sanofi (NYSE: SNY) and Regeneron (NASDAQ: REGN) launched a cholesterol-lowering treatment in 2015 that could be a big problem for bempedoic acid, even if its safety profile remains intact. Praluent is a remarkable drug that can turn stubborn liver cells into cholesterol sponges, but at an initial list price of around $14,000 per year, its launch was a huge disappointment.

Rosy sales forecasts for bempedoic acid have long assumed it would be pricey, but far cheaper than drugs like Praluent. Unfortunately, Sanofi and Regeneron may have found an economical solution that lowers Praluent to just a few thousand each year. Even if all goes well with bempedoic acid on the safety front, Esperion may have to accept a far lower price than expected.

Of course, if another trial shows a serious event imbalance, it could mean game over, because Esperion has nothing in its clinical-stage pipeline to fall back on. Despite the reduced price, investors would probably be much better off cheering for this stock from the sidelines.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.