SSB take on q:
Neurocrine Biosciences (NBIX)
First Quarter Financial Results; Upcoming 2S (In-line, Speculative)
Events; Revising Estimates
Soham Pandya
Robert Rapaport
OPINION
Today, after the market close, Neurocrine Biosciences reported first quarter
results of a net loss of $13.4 million or $0.43 per share, which was
significantly wider than our forecast of a loss of $5.3 million or $0.17 per
share. Significantly higher operating expenses than forecasted were the
primary drivers for the variance in the reported results relative to our
forecast for the quarter. The company will be holding a conference call and
webcast to discuss its financial results on Wednesday, April 30th, at 11:00AM
EST.
Total revenues, largely from sponsored research and development and milestone
payments, were $37.7 million for the first quarter and were higher than our
estimate of $31.3 million. Revenues from the collaborative agreement with
Pfizer for Indiplon totaled $34.3 million were higher than our forecast of
$29.5 million. The company is amortizing the upfront license fee of $100
million over a two-year period beginning as of February 26 when Hart-Scott-
Rodino clearance was achieved for the Indiplon transaction with Pfizer.
Consequently, only $6.7 million of this fee was recognized in the first
quarter versus our estimate of $12.5 million. According to the company, this
amortized portion of this license fee should be an estimated $15 million per
quarter. All development costs for the Indiplon program are recorded by
Neurocrine. We estimate that the R&D expense reimbursement for the Indiplon
program from Pfizer, as recorded in sponsored R&D revenues, totaled
approximately $27.7 million. R&D expense for the quarter of $48.3 million
was significantly higher than our forecast of $35 million as patient
enrollment in the various Phase III trials for Indiplon is progressing more
rapidly than expected. Neurocrine is responsible for approximately $15
million of R&D expenses per year for the Indiplon program. SG&A expense of
$4.7 million for Q1 was also higher than our forecast of $3.7 million. This
expense item included certain one-time items that are not expected to
continue on a going forward basis. The company ended the quarter with $308
million in cash and cash equivalents.
In our view, given the company's stage of development, quarterly earnings
results are not the primary driver for the shares; rather, the focus of
investor interest remains on the continued progress of the company's pipeline
event. Therefore, we are maintaining our12-month price target of $50.
Neurocrine currently has seven programs in clinical development.
Fiscal 2003 financial guidance: On the company's year-end conference call in
January, Neurocrine had provided financial guidance for fiscal 2003. The
company indicated that although all clinical development costs for the
Indiplon program would be recorded by Neurocrine, the majority of these
expenses would be reimbursed by Pfizer (with no lag time on the P&L) and will
appear in the sponsored R&D line. The company provided total revenue
guidance of approximately $130 million, including approximately $75 million
in sponsor R&D reimbursement from Pfizer. Other income guidance, primarily
consisting of interest income, is expected to be $10 million due to an
expected increase in cash balances of $100 million representing a license fee
from Pfizer for Indiplon. In addition, the company provided total expense
guidance of $180 million. Based on our discussions with the company at that
time, we estimated R&D expenses would be approximately $130-160 million,
consisting of expenses associated with the Indiplon program as well as the
GnRH and APL programs. Total expenses associated with the Indiplon clinical
program are expected to be approximately $90 million, with $75 million
reimbursed by Pfizer. Of these, 90% of these expenses are expected to be
recognized in the January to September timeframe. Neurocrine will be
responsible for the remaining $15 million, which will be equally distributed
over the four quarters of the year. We estimate that an additional $14-$15
million in R&D expense will be spent on the company's other programs,
including the GnRH and APL programs. We believe the remaining balance in R&D
expenses will be used for any potential in-licensing opportunities. SG&A
expenses are not expected to significantly increase until the fourth quarter
of 2003 upon the filing of an NDA for Indiplon. Under their agreement with
Pfizer, Neurocrine plans to develop its own sales force, which will be funded
by Pfizer. The company indicated it expects net loss for fiscal 2003 to be
in the range of $40-$45 million.
Revising Our Fiscal 2003 Estimates. We are updating our forecasts for fiscal
2003 to reflect Q1 reported results as well as to reflect a change in the
treatment of the amortization for the $100 million upfront license fee for
Indiplon from Pfizer. Based on conversations with company management,
Neurocrine indicated that the amortization amount for the upfront license fee
should be approximately $15 million per quarter. The company indicated it
began recognizing this fee upon Hart-Scott-Rodino clearance on February 26,
2003. As a result, the company recorded $6.7 million as the portion of
amortization for this license fee representing an approximate one month
period in Q1. Our total revenue forecast for fiscal 2003 is adjusted to
$130.5 million from a previous forecast of $134.5 million. Our revised
revenue estimate includes approximately $72.7 million in R&D reimbursement
from Pfizer and approximately $52 million representing the recognized portion
of the upfront license fee from Pfizer. In terms of operating expenses, we
are increasing our R&D expense forecast to $162.6 million from a previous
forecast of $157.3 million. Our SG&A expense forecast is reduced to $18.0
million from $22.7 million as the initial sale force buildup will occur
primarily in 2004. The net effect of these changes for fiscal 2003 is a net
loss of $41.6 million or $1.34 per share from a previous forecast of a net
loss of $35.6 million or $1.14 per share.
Revising 2004 & 2005 Estimates Due to Extending the Amortization Period for
Milestone Payments from Pfizer. As previously noted, Neurocrine will receive
approximately $300 million in milestone payments in 2004-2005 for the
completion of Phase III studies for Indiplon, regulatory filings for
Indiplon, and marketing approvals of Indiplon in specific regions. The
company had previously indicated that these payments would be amortized up
till the launch of the product or over an approximate 24-month period.
However, based on recent conversations with the company, the appropriate
approach for amortization of these payments remains unclear. Consequently,
we believe a more conservative approach would be to amortize these payments
over the remaining life of the patent for the compound, which we estimate is
about 10 years. We note that reported revenues in 2004 and beyond will
continue to reflect a significant contribution from these one-time payments
from Pfizer. According to the company, the majority of milestone payments
will likely be achieved in 2004-2005. We have adjusted our model to reflect
$35 million as the portion of milestone payments recognized in fiscal 2004
(reflecting a 10-year amortization schedule) compared to our previous
forecast of $191.5 million (reflecting a 24-month amortization schedule).
Thus, our forecast for total revenues in fiscal 2004 is significantly reduced
to $155.6 million from a previous estimate of $302.1 million. We are also
adjusting our forecast for operating expenses for fiscal 2004 to $172.4
million, including an R&D expense forecast of $130.1 million, from our prior
forecast of $240.9 million, including an R&D expense forecast of $188.8
million. The net effect of these revisions is a net loss of $7.7 million or
$0.24 per share compared to our previous forecast of net income of $66.9
million or $2.02 per share. With this change in treatment of the milestone
payments from Pfizer, our fiscal 2005 EPS estimate is adjusted to a loss of
$0.92 per share from $0.61.
UPDATE ON INDIPLON
According to Neurocrine, to date, Indiplon has been studied in over 3,000
subjects and patients. The company has initiated a comprehensive Phase III
program that is anticipated to enroll approximately 4,000 subjects in eight
clinical trials, five studies for the immediate release (IR) formulation and
three studies for the modified release (MR) version to assess the short term
and long term treatment in both adult and elderly patients with chronic or
transient insomnia. The first of these Phase III trials was initiated in
November 2001, in a study that enrolled approximately 600 patients and
evaluated two doses of an IR formulation of Indiplon for long-term use in
patients with chronic insomnia. Two additional double-blinded, placebo-
controlled trials were initiated with the IR formulation in patients with
chronic insomnia and in adult subjects with transient insomnia. The primary
endpoint for the chronic insomnia studies will be Latency to Sleep Onset
(LSO) as measured by patient self-reported outcomes over a six-month period.
The Indiplon MR program has enrolled over 600 patients in 14 clinical studies
to date and has initiated all the Phase III studies for this product. The
focus of this program is to provide a differentiation strategy of providing
total sleep maintenance. The Phase III studies include over 1,300 adult and
elderly patients in a variety of settings. A summary of all the Phase III
studies for Indiplon IR and Indiplon MR are presented in the table below.
<snip>
On April 21, Neurocrine announced positive Phase III results with the
immediate release (IR) formulation of Indiplon for the treatment of primary
chronic insomnia from a 35-day treatment study. This trial was the second
positive Phase III study released on Indiplon IR so far. In summary, the
results indicated that treatment with Indiplon, at the two doses evaluated
(10 mg and 20 mg), when compared to placebo was effective in sleep initiation
in these subjects. The results were statistically significant in terms of
the primary efficacy endpoint of latency to persistent sleep (LPS) as
objectively measured by polysomnography (PSG) as well as in a variety of
secondary efficacy measures. The company indicated that there was no
evidence of next day residual effects. Most importantly, the company
indicated that the efficacy results were consistent over the entire 35-day
treatment period with no loss of treatment effect noted. This aspect is
noteworthy as such a sustained treatment effect has not been consistently
demonstrated with other sedative hypnotic agents for insomnia, such as Ambien
and Sonata. Neurocrine has indicated that additional data on the issue of
rebound insomnia with Indiplon may be released in the next few months.
The company will present results from the Phase I and Phase II studies from
the Indiplon program at the upcoming American Psychiatric Association (APA)
meeting in May 2003 and the Associated Professional Sleep Societies (APSS)
meeting in June 2003. The company indicated that 6 abstracts will be
presented at these meetings. Specifically, data with Indiplon will be
presented from an alcohol interaction trial in healthy adults and from a
transient insomnia model at the APA meeting. Neurocrine indicated the more
significant data will be presented at the APSS (Sleep) meeting, including a
keynote presentation on the clinical results from the study in elderly
patients with chronic insomnia, and detailed results from two Phase II
studies in transient insomnia. Results from additional Phase II and the
pivotal Phase III trials will be presented at medical meetings in 2004.
Neurocrine is targeting to file a New Drug Application (NDA) for both
formulations with the FDA in early 2004. The company indicated that the CMC
(manufacturing) sections of the NDA filing have already been completed.
Assuming clinical and regulatory success, we believe Indiplon could be
launched in the U.S. by late 2004 or early 2005 and in Europe in 2005. In
our opinion, because of the more comprehensive clinical dataset being
collected as compared to currently available products, Indiplon has the
opportunity to capture a significant portion of the market for insomnia
products. We forecast that Indiplon could achieve $800 million in sales
worldwide by fiscal 2007.
Sepracor's Estorra (eszopiclone). On February 3, Sepracor submitted a New
Drug Application (NDA) to the FDA for the approval of Estorra (2 mg and 3 mg)
for the treatment of transient and chronic insomnia. Estorra is a single
isomer form of zopliclone, a drug that is only sold in Europe for insomnia.
Sepracor recently announced that they have a 10-month Prescription Drug User
Fee Act (PDUFA) date of November 30th. Assuming regulatory success, the
company expects to launch the product in the first half of 2004. In our
opinion, Pfizer, as Neurocrine's partner on Indiplon provides a significant
advantage given Pfizer's marketing prowess. We believe marketing savvy and
strength will be critical in this market.
The primary advantage with Indiplon is that Neurocrine has both an immediate
(IR) and modified release (MR) form of the product. As a result, their
product can address a variety of insomnia issues, including Middle of the
Night awakenings (with the MR form). No head-to-head studies have been
conducted for the products. Based on limited Phase III data for Estorra and
Indiplon in transient insomnia, the two drugs appear relatively similar in
efficacy in this indication although Indiplon achieved an apparent better
result in the primary endpoint of latency to persistent sleep while Estorra
appears to have achieved better results in a variety of secondary endpoints.
A key issue is the comparative side effect profile. Estorra has a longer
half-life than Indiplon and typically, next-day residual effects (i.e.,
hangover, sedation, somnolence) and other side effects are typically
associated with a longer half-life. Insufficient peer-reviewed data has been
provided for both products on the side effect profile. Based on Neurocrine's
announcements, it appears the side effect profile is better than current
drugs. Sepracor has made similar claims. We are waiting for detailed data
from both companies on their respective Phase III studies in chronic
insomnia, as this may be more relevant. Sepracor will present results from a
six-month Phase III study in Chronic Insomnia at the upcoming American
Psychiatric Association (APA) meeting in May 2003.
PRODUCT PIPELINE UPDATE
Indiplon (NBI-34060) for insomnia. Indiplon, the company's most advanced
product candidate, has currently completed several Phase III studies for the
treatment of insomnia. Indiplon belongs to the non-benzodiazepines class of
hypnotics, similar to two newer agents approved; Ambien (zolpidem) from
Sanofi-Synthelabo, and Wyeth's Sonata (zaleplon), marketing rights which were
recently acquired by Elan. Similar to these non-benzodiazepines, Indiplon
has been shown to act on a specific site on the gamma amino-butyric acid-A
(GABA) receptor; however, Indiplon is believed to be more potent than both
Ambien and Sonata. Furthermore, Indiplon has been shown to be more selective
than the old-line benzodiazepines, such as Valium, for the specific subtype
of receptors within the brain that are believed to be responsible for
promoting sleep. As such, coupled with the short half-life of the compound,
Indiplon could have fewer side effects such as next-day hangover effects and
memory and coordination impairment. Due to these properties, it is
postulated that Indiplon could offer a superior efficacy and side-effect
profile than existing products on the market.
As Indiplon has a very rapid clearance from the body, with a short half-life
of 1.5 hours, Neurocrine is developing a modified release (MR) dosage
formulation of the compound. This dosage formulation is intended to extend
the therapeutic window of the compound to maintain sleep throughout the
night. The MR dosage form demonstrated positive results in two Phase II
clinical studies, addressing both sleep initiation and sleep maintenance for
the chronic insomnia market. A pivotal Phase III study with Indiplon-MR is
currently being conducted in over 600 patients with primary insomnia (the
SLEEP trial). This study is designed to assess the long-term safety and
efficacy of two different doses of Indiplon-MR relative to placebo over a
period of six months. Key efficacy endpoints include sleep latency and sleep
maintenance as well as quality of life. The results of this trial are
expected to be announced in the fourth quarter of 2003. This type of product
label claim would help differentiate the product from other non-
benzodiazepines, which are approved for inducing sleep and are generally
limited to a maximum of 7-10 days of use.
Market for Indiplon (NBI-34060). Insomnia, defined as difficulty in falling
or staying asleep, is a common neurological disorder in the U.S. According
to the National Sleep Foundation Sleep in America survey, nearly two-thirds
(62%) of American adults report experiencing symptoms of insomnia a few
nights a week or more. The condition may be primary, in which case it is
long-standing with no direct relationship to immediate somatic or psychic
events, or secondary, where emotional problems, pain or use and withdrawal
from drugs are impacting the condition. Dr. Thomas Roth of the Henry Ford
Hospital Sleep Disorder Clinic, a renowned expert in sleep disorders,
estimates that the elderly comprise 15% of the total insomnia population, but
account for 40% of all prescriptions written for insomnia. Furthermore,
sleep factors affect more women than men and there are reports that between
45-60% of women aged 30-60 experience difficulty sleeping. Today, the
current market for hypnotics represents approximately $2.0 billion in sales,
with Ambien commanding approximately $840 million or 42% of the market, and
Sonata capturing about $74 million or 4% of the market.
IL-4 Fusion Toxin (NBI-3001) for malignant glioma. IL-4 fusion toxin is
comprised of linking a bacterial toxin, Pseudomonas exotoxin, with the
cytokine interleukin-4 (IL-4). IL-4, which is produced by a number of cell
types, such as mast cells and T cells, has a variety of important biological
properties, including T cell activation and IgE (immunoglobulin E) class
switching. Neurocrine is utilizing IL-4 fusion toxin to selectively target
and kill those cancer cells that overexpress the IL-4 receptor on their
surface, such as malignant glioma, the most common form of brain cancer.
This program has recently completed Phase II trials for glioblastoma.
Neurocrine has submitted a publication, which has been accepted for
publication in the Journal of Neuro-Oncology later this year. The company
also completed a Phase I safety study in kidney and lung cancer patients. The
company indicated that they plan on pursuing out licensing opportunities for
NBI-3001 in 2003, as the product does not meet their strategic objective of
building a psychiatric portfolio.
Market opportunity. According to the National Cancer Institute, there are
approximately 17,000 new cases of malignant gliomas in the U.S. We estimate
that approximate 30% of these patients develop recurrent glioblastomas per
year and would represent the primary target market for the product. If
successful, we estimate sales potential for IL-4 fusion toxin in malignant
glioma could be in the range of approximately $65 million. Neurocrine is
also evaluating the potential of IL-4 fusion toxin in a variety of other
recurrent solid tumors such as renal cell and non-small cell lung cancer, as
well as breast cancer. Phase I studies in these cancers are ongoing. Given
the broad expression profile of IL-4 receptor, we remain cautious regarding
the safety of systemic delivery of IL-4 fusion toxin in these other cancers.
Corticotropin-Releasing Factor (CRF) antagonist for anxiety, depression and
IBS. Neurocrine has been on the forefront in establishing the role of
inhibiting the corticotropin-releasing 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 announced it 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 be assess for use
in endocrine, metabolic and cardiovascular disorders.
While early, in our opinion, the CRF antagonist program provides the
potential for significant 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, any positive developments in this area, scientifically or
clinically, will continue to foster increased investor interest.
Altered Peptide Ligands technology for multiple sclerosis and Type I
diabetes. Neurocrine is advancing its Altered Peptide Ligands (APL)
technology platform for use in the treatment of various autoimmune diseases,
such as multiple sclerosis and Type I diabetes. While the exact mechanism is
unknown, in these disease types, specialized blood cells called lymphocytes,
primarily T cells, incorrectly react against the body's own tissues.
Neurocrine is using APL to find particular sequences or antigens that are
being inappropriately recognized as foreign and altering these structures to
prevent the T cell from destroying its target. In the case of multiple
sclerosis, Neurocrine has designed an APL from a specific region (83-99) of
myelin basic protein (MBP), called NBI-5788. A Phase II multi-center,
placebo-controlled study was conducted in collaboration with partner
Novartis. A Phase IIb trial in 144 patients is expected to begin in Q2 2003
with results expected in 2005.
For the treatment of Type I diabetes, a condition where the insulin producing
B-islet pancreatic cells are the targets of the immune response, Neurocrine
has re-engineered one of the dominant pancreatic antigens so that it is no
longer recognized by the attacking cells. Neurocrine has partnered its APL
diabetes program with Taisho Pharmaceutical. In addition, Neurocrine has
reacquired the rights from Taisho outside of Japan. As a result, the company
has assumed control of the Phase II pediatric trial in Type I diabetes.
Neurocrine is currently conducting a Phase II trial in approximately 200
adults/ adolescents designed to measure dose response, efficacy and safety of
the approach. Enrollment in this study is expected to be completed by year
end with results to be released in late 2004.
Gonadotrophin-releasing hormone (GnRH) antagonist for prostate cancer/
endometriosis. Neurocrine is developing orally active GnRH small molecules
for the treatment of certain reproductive disorders, such as endometriosis,
as well as for prostate cancer. The company completed an initial Phase I
single-dose study that enrolled 56 normal, healthy post-menopausal women 45
to 65 years of age. This study was designed to evaluate the safety,
tolerability, pharmacokinetics, and pharmacodynamics, including endocrine
profiles, over a range of eight escalating doses. The company is conducting
a two-week multiple-dose, dose-escalating Phase I placebo controlled clinical
trial to further evaluate the safety and endocrine profiles of this compound
in order to properly design a Phase II clinical study. The results of this
study are expected late in the second quarter of 2003. A second-generation
GnRH candidate is expected to enter clinical trials in July. Currently, the
company intends to initially target the product for endometriosis, a serious
disorder in which there is abnormal growth of tissue outside of the uterine
lining in females. A second development candidate has been selected for pre-
clinical evaluation and is expected to enter clinical trials later this year.
The market opportunity for endometriosis is large, representing approximately
five million patients in the U.S.
PNU 142,774 for Erectile Dysfunction. Neurocrine acquired rights to this
compound, which is a selective dopamine D2 receptor agonist, as a result of
the Federal Trade Commission ruling requiring Pharmacia to divest this
product as one of conditions for the closing of its merger with Pfizer.
Neurocrine indicated that is expects to initiate a Phase II proof of concept
study with the compound this year.
COMPANY DESCRIPTION
Founded in 1992, Neurocrine Biosciences is an early-stage biotechnology
company focusing on the discovery and development of treatments for
neurological and endocrine disorders. The company's most advanced product,
indiplon (NBI-34060), which targets the GABA-A receptor, is currently in
Phase III studies for insomnia. Other product candidates in clinical trials
include NBI-3001, a fusion toxin linked to IL-4, for malignant glioma, and a
CRF R-1 antagonist for anxiety and depression. The company has a priority
technology platform, Altered Peptide Ligands, which is being utilized to
develop treatments for certain autoimmune diseases such as Type I diabetes
(NBI-6024) and multiple sclerosis (NBI-5788).
UPCOMING MILESTONES
* Results from GnRH Phase I multi-dose study Q2 2003
* Initiation of additional Phase II study for APL-MS program Q2 2003
* Initiation of Phase II study for APL-Diabetes program in pediatrics Q2 2003
* Results from Phase I study for IV form IL-4 fusion toxin in solid Q2 2003
tumors
* Results from a RESTFUL study of Indiplon IR in chronic insomnia Q3 2003
* Results from a 1-year safety study of Indiplon IR in chronic Q3 2003
insomnia
* Results from a Phase III study of Indiplon IR in elderly patients Q4 2003
* Results from Phase III studies of Indiplon MR in adult/elderly Q4 2003
patients
* NDA filing for Indiplon Q1 2004
VALUATION
In order to value the company, we have utilized a discounted earnings
analysis and applied a discount rate and PE multiple that we believe is
representative of a high growth biotechnology company, to a projected EPS
estimate for the company. We applied a P/E multiple of approximately 40-
45x, which we believe is comparable to the range for mid-cap therapeutic
companies with significant growth prospects, to our 2007 EPS estimate of
$2.07 and discounted at a conservative 25-30% discount rate to arrive at a
12-month price target of $50.
RISKS
Risks to NBIX achieving our valuation target include the following: any
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. As the company
presently does not have any sales or marketing infrastructure, Neurocrine is
dependent on its current corporate partners and the signing of new
agreements. |
