citi:
Today, Neurocrine reported Q3 2006 earnings, but given Neurocrine’s recent setbacks with
its lead pipeline candidate, Indiplon, reported quarterly financial results are not the key
driver for the stock. Rather, investor focus remains on the potential fate for Indiplon and the
financial state of the company.
Update on Indiplon Regulatory Status. On the company’s earnings call today,
management indicated that the development of both versions of Indiplon are now delayed
even further than anticipated, with the earliest timeframe for a potential market launch of any
version of Indiplon being late 2008 or early 2009. As a reminder, Neurocrine had previously
announced that the FDA requested an additional pharmacokinetic and food effect study for
the Indiplon IR (immediate release) capsule formulation prior to a re-submission, as well as
a reanalysis of data previously submitted to the FDA. This version is the shorter acting
version, which the company initially planned to develop for sleep induction (falling asleep)
and middle of the night awakenings, which represents a more competitive market. However,
today the company indicated that it plans to develop the IR version for sleep maintenance as
well after the company received positive feedback from the FDA on positive efficacy data
for sleep maintenance with both the capsule (IR) and tablet (MR) versions. On this basis the
company is considering pursuing a sleep maintenance claim for both versions. However,
given the shorter half-life of the capsule version, we remain skeptical as to whether the IR
capsule version will be sufficiently competitive to other sleep maintenance agents, even if
the FDA label supports this claim.
The company indicated that it now plans to conduct another efficacy and safety study (3
month study) for the IR version, rather than just a pharmacodynamic and pharmacokinetic
study (PK/PD study) as initially expected. Given this additional study, the company is
targeting a resubmission to the FDA for the IR version in the summer of 2008, which is at
least 12 months later than the company had previously indicated. Initially, we had originally
anticipated a potential approval by mid-2007 if no additional studies were required and the
end of 2007 if a PK/PD study was necessary. We also note that this type of study will need
to achieve targeted efficacy endpoints, compared to a PK/PD study, which tests blood levels
under varying conditions and the rate of elimination from the body. As such, this may
increase the potential risk in the development and approval process for this compound.
In regards to the MR 15 mg. tablet version which received a non-approvable letter, the
company indicated that the FDA requested additional long-term safety and efficacy data for
the adult population, as well as a different dose determination for the elderly population.
This will require a full Phase III development program with extended dosing and follow-up
to establish both efficacy and safety. The company did not give guidance on the timeframe
necessary to satisfy these requests, but we estimate that the MR version may be delayed well
into 2010, if the company continues to develop the drug. On Neurocrine’s conference call,
the company did not preclude attempting to pursue a maintenance indication with the IR
version alone, if that becomes more pragmatic than developing both versions, although they
did state that the MR version is still considered to be a very important product in regards to a
product line extension for the maintenance setting.
Uncertain Outlook for Indiplon in the Insomnia Market. With increasing competition in
the insomnia market, we continue to believe Indiplon-IR will be at a disadvantage in the
market upon its launch, especially with the extended delay. Furthermore, we believe the
company may have difficulty negotiating attractive terms with a new commercial partner for
Indiplon, an option that was notably absent in the company’s comments today. In our
opinion, the company’s decision to conduct another efficacy and safety study for the IR
version suggests that the agency may have greater concerns about the safety and/or efficacy
under various conditions than originally anticipated. In addition, if the company is able to
only gain a label for sleep initiation only and fails to obtain an approved indication for
middle of the night dosing for the IR formulation, we believe Indiplon-IR would be deemed
similar to existing compounds,Wyeth/King Pharmaceuticals’ Sonata and Takeda’s Rozerem.
Rozerem as a melatonin receptor agonist has the distinction of being the only non-controlled
substance. Consequently, we believe the IR form of Indiplon may command at most $100-
$150 million in peak sales. In terms of the MR version, we believe the company may decide
to terminate the development of this agent if the FDA grants a sleep maintenance designation
to the IR version, as the necessary Phase III trials could delay the MR tablet release until
2010, at which time we expect that generic Ambien and Ambien CR will have captured a
majority of the insomnia market. Given the short half life of the IR version, we do not see
the agent as being competitive in the marketplace for sleep maintanence.
Summary of Quarterly Results. Excluding stock option expenses of $3.2 million
Neurocrine reported a net loss of $36 million, or $0.95 per share, for the third quarter, below
our forecast of a net loss of $29.6 million, or $0.78 per share. Stock option expenses of $3.2
million represented approximately $0.08 per share. Total revenues were $1.1 million for the
quarter, below our estimate of $1.5 million. Aggregate revenues from sponsored research
and development were $348,000 for the quarter, lower than our estimate of $500,000.
License fees and milestones for the quarter totaled $726,000, lower than our estimate of $1.0
million. During the third quarter, R&D expenses were $25 million and SG&A expenses
were $13 million compared to our estimates of $25.3 million and $6.5 million, respectively.
These line items included severance payments of $2.8 million and $6.7 million that were
allocated to R&D and SG&A, respectively. The company ended the quarter with $200
million in cash, cash equivalents and marketable securities. Management indicated that they
expect to end the year with $180 million in cash, cash equivalents and marketable securities
assuming a net cash burn of $100 million for fiscal 2006. The company re-emphasized its
goals to reduce its cash burn to $80 million for fiscal 2007.
Revising Our Financial Model. We have fine-tuned our financial model given recent
financial results and the company’s revised financial guidance.
As mentioned, the company indicated that it expects to end fiscal 2006 with approximately
$180 million in cash, with a non-GAAP net loss of approximately $110-$115 million and a
GAAP net loss of approximately $130 million. We note the GAAP net loss includes stock
option expenses, which would account for more than half of the difference between the non-
GAAP and GAAP net loss along with non-cash charges including a severance charge from
the termination of the sales force. Previously, the company indicated that it would lower its
forward cash burn to approximately $80 million, not including any Indiplon market launch
activities or any expenses related to clinical trials necessary for Indiplon approval. On the
call today, the company indicated that the net cash burn will be ~$80 million for FY 2007,
which may be difficult given the Phase III development program now planned for Indiplon.
Outlook for the Stock. We continue to believe the company faces significant strategic
challenges with the uncertain fate of Indiplon and the multiple regulatory delays. Although
Neurocrine is taking initial steps to control its operating expenses, its pipeline is relatively
early in development.We estimate a current base value may represent the net cash position
of ~$5.00 per share. We believe the company will face significant competitive hurdles in
launching Indiplon, particularly if only the immediate release formulation is approved for the
market. Even with a maintenance label, we do not think the IR version will have a
competitive profile in the marketplace.We highlight that competition in the insomnia market
continues to intensify with Somaxon Pharmaceuticals' Silenor and Merck/Lundbeck's
Gaboxadol in advancing in clinical development. We believe the company may have
difficulty negotiating attractive terms with a new commercial partner for Indiplon if it deems
it strategically prudent.
PRODUCT PIPELINE UPDATE
Gonadotrophin-releasing hormone (GnRH) antagonist for prostate cancer/
endometriosis (NBI-56418). Neurocrine is developing orally active GnRH small molecules
for the treatment of certain reproductive disorders, such as endometriosis, as well as for
prostate cancer. Data previously released from the 3-month treatment period of this trial
demonstrated a 5 point reduction in the Composite Pelvic Sign & Symptoms Score (CPSSS)
for the highest dose of the GnRH compound. According to the company, achievement of at
least a four-point reduction in CPSSS is regarded as clinically significant. Other data that
had been previously reported indicated dose-related reduction in pain as measured by the
Visual Analog Scale (VAS) of 14 in the 75 mg group, 21 in the 150 mg group and 5 in the
placebo group. The mean baseline data for this endpoint were 34.9 in the 75 mg group, 33.5
in the 150 mg group and 31.2 in the placebo group.
The longer term results at 6 months (3 months follow-up off treatment) confirmed the safety
and efficacy of the compound. Specifically, the company indicated that the reduction in pain
as measured by VAS was on average 13.1 in the placebo arm, 25.8 in the 75 mg group, and
37.4 in the 150 mg group. The trial was not sufficiently powered for a statistical analysis
between the arms of the trial and the company did not provide a comparative analysis.
Menses was suppressed in a small subset of patients, and the safety did not differ
significantly from the previously reported results.
Future development plans. The company initiated a six month Phase IIb trial for the
treatment of endometriosis that is targeted to enroll several hundred patients. This trial will
assess the effect of NBI-56418 on endometriotic pain but is primarily designed to assess if
the GnRH compound induces bone loss (bone mineral density measurements via DEXA),
like currently available treatment options for endometriosis. Neurocrine previously
announced that it planned to initiate partnering discussions when the Phase IIb study begins.
The company does not expect Phase III studies to begin until 2008 after completion of this
study, which is expected in mid-2008. The company also completed enrollment in a second
Phase II study in endometriosis to explore different dosing regimens (once versus twice daily
dosing). This study enrolled 68 patients and is assessing safety and efficacy over a 3 month
period with a primary endpoint of reduction in endometriotic pain as measured by CPSSS
and VAS. Top-line results are expected to be available at the end of Q4 2006. We await
further data from randomized, controlled studies to assess the viability of this program and
the market opportunity. Because of the nature of this disease and the lack of objective
diagnostic tools, the utilization of a subjective evaluation methods like VAS and CPSSS, can
result in a high placebo effect, which can elevate the hurdle for achieving significant results.
Neurocrine also filed an IND in Q4 2005 to initiate Phase I studies for the treatment of
Benign Prostate Hyperplasia (BPH) in males by assessing the impact on testosterone levels.
These studies are now ongoing and are designed to assess pharmacokinetic and
pharmacodynamic effects as well as tolerability of 14 days of NBI-56418 in males. Dosing
in the Phase Ib study has been completed, and data is expected shortly. This would be a
precursor to a Phase II study that would commence in late 2006. The company’s back-up
compound entered Phase I studies in October 2005.
Corticotropin-Releasing Factor (CRF) antagonist for anxiety, depression and IBS.
Neurocrine has been on the forefront in establishing the role of inhibiting the corticotropinreleasing
factor (CRF) receptor for use in the treatment of depression and anxiety, two large
market opportunities. CRF antagonists may provide a new treatment option for use in these
conditions that is mechanistically distinct from current therapies that involve inhibiting
serotonin reuptake (SSRIs). CRF is a neurotransmitter that is a central mediator in the
body’s response to stress and data have shown that CRF is overproduced in patients that
suffer from depression. Furthermore, preclinical data have suggested that serotonin may act
by influencing CRF levels. The CRF stress actions are largely mediated through the CRF-1
receptor subtype; thus inhibition of this receptor could provide a more direct and rapid onset
of action, with a more favorable side-effect profile. The company and its collaborator,
GlaxoSmithKline, have identified unique pre-clinical compounds that are in various stages
of development for anxiety, depression, and irritable bowel syndrome (IBS). The two
companies have selected a lead compound for anxiety and depression and began Phase I
studies in December 2004. The Phase I studies are double-blind, randomized, placebocontrolled,
single-dose and multi-doses studies aimed at evaluating the safety and
pharmacokinetics of a range of higher doses in healthy volunteers. The two companies
expect to evaluate this compound in extended Phase I trials and Phase II proof-of-concept
studies. Phase I studies being conducted by partner GlaxoSmithKline are underway for the
CRF program in IBS and depression/anxiety. The company indicated that GlaxoSmithKline
is expected to begin Phase II “proof of concept” clinical trials in IBS and anxiety in Q4
2006. A back-up compound, which successfully completed a Phase I single dose study, has
advanced into a Phase I multi-dosing study.
While early, in our opinion, the CRF antagonist program provides the potential for upside in
our valuation for Neurocrine, as it represents a novel new class of compounds that addresses
a broad market opportunity. Given the large potential market opportunity for CRF receptor
antagonists, we believe any positive developments in this area, scientifically or clinically,
will continue to foster increased investor interest.
Urocortin 2 for congestive heart failure (NBI-69734). The company has licensed
Urocortin II from the Clayton Foundation/Salk Institute. This compound is a recently
discovered endogenous peptide ligand of the CRF-R2 receptor that the company will assess
for use in endocrine, metabolic and cardiovascular disorders. Neurocrine completed dosing
in the Phase IIa study in the third quarter of 2005, and initiated a Phase II dose ranging study
in mild to moderate CHF patients. The company indicated that at the 25 and 100 microgram
doses infused over 1 hour (n=8), the agent has demonstrated a decrease in diastolic blood
pressure, a 20-40% dose-related increase in cardiac output, and a modest increase in heart
rate (6% -15%). In general, the company indicated that the majority of patients exhibited
improvement in cardiac ejection fraction with minimal increase in cardiac work (as
measured by the Pressure Rate Product). Patients enrolled in this study were Class II/III
CHF patients on beta blockers or ACE inhibitors The Phase II study underway is assessing
the administration of Urocortin 2 over a longer period (4 hour infusion) in stable CHF
patients with final results expected in Q4 2006. The company has indicated that preliminary
results suggest Urocortin 2 is well tolerated and that predicted hemodynamic effects on
systolic and diastolic blood pressure, heart rate, cardiac work and cardiac output, occur over
the entire 4-hour infusion. These data will be utilized to optimize the dosing strategy in
planned Phase II studies in acutely decompensated CHF (ADHF) patients. The first study is
expected to include two treatment arms consisting of patients for whom heart catheterization
is required and another for those patients not requiring catheterization. These studies will
assess the effect of Urocortin 2 on a range of endpoints, including cardiac hemodynamics via
heart catheterization, kidney function, dyspnea and laboratory biomarkers. Results of the
ADHF study are expected in the second half of 2007.
INVESTMENT THESIS
We rate the shares of Neurocrine Biosciences (NBIX) Sell / Speculative (3S) with a target
price of $5 per share. The company's lead pipeline candidate, Indiplon, has experienced
significant setbacks in the regulatory process after receiving an approvable letter for the
immediate release formulation and a non-approvable letter for the modified-release
formulation. Additionally, Pfizer decided to terminate the worldwide co-development
agreement, which further places the future of this product in jeopardy and imposes a
significant financial burden on the company. Even though the company has indicated that it
will continue development of Indiplon independently while it searches for another partner, it
is our opinion that this delay to market will allow competing products to become more
entrenched. Additionally, there are several promising pipeline candidates from other
pharmaceutical companies that are in advanced stages of clinical development. Neurocrine's
other pipeline candidates are in relatively earlier stages development, and as such, do not
significantly add value to the company at this time
VALUATION
With the prospects of profitability now far from clear for the company, we note that our
traditional approach to assesssing valuation using a discounting earnings analysis based on
the first full year of profitability that incorporates sales projections for the company’s latestage
products cannot be applied in this case. Thus, we have applied two different
approaches to assess the potential valuation of the company. First, we believe that a current
base valuation may be represented by the company’s net cash position of approximately
$5.00 per share. This represents a depleting asset given the company’s lack of profitability.
Second, we have applied a sum of the parts analysis of the company’s pipeline. Although
the company does have a pipeline of products, we note that the products are relatively early
in development and therefore, we apply a high discount rate to our estimates of potential
peak sales for these products. Our analysis of the pipeline is provided below with an
estimated aggregate value of approximately $5.00 per share.
RISKS
We believe a Speculative risk rating is warranted for Neurocrine given the material impact
regulatory issues and clinical results with Indiplon are likely to have on the shares and the
high volatility of its shares. Risks we see to the price of NBIX’s shares also include the
following: any further delays in the regulatory approval timelines and clinical trial setback
with Indiplon (NBI-34060) for insomnia, as well as other clinical programs, will likely have
a negative impact on the shares of Neurocrine. On the other hand, we may have
overestimated these risk factors and the stock could increase significantly more than we
expect. We also note a positive meeting with the FDA that suggests no additional clinical
trials are necessary and therefore, a short regulatory timeline for final approval of Indiplon
could represent opportunities for the stock price to materially surpass our target price.
ANALYST CERTIFICATION APPENDIX A-1
I, Elise Wang, research analyst and the author of this report, hereby certify that all of the views expressed in this research report.. |
