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Neurochem, Inc. (NRMX), incorporated in 1993, is a biopharmaceutical company with three important clinical
programs under way. Neurochem is evaluating Kiacta (formerly known as Fibrillex), an orally administered product,
for the treatment of amyloid A (AA) amyloidosis, a progressive and fatal condition associated with organ failures
(particularly kidney, spleen, and liver). The second candidate under development is Alzhemed, for the treatment of
mild-to-moderate Alzheimer s disease (AD). Cerebril, for the prevention of hemorrhagic stroke caused by cerebral
amyloid angiopathy (CAA), completes the company s impressive pipeline. In addition, Neurochem a pre-clinical
compound under development for the treatment of epileptic seizures following traumatic brain injury (TBI). The
company has no products on the market, and thus generates no revenues from sales. It receives small research
grants and tax credits that help defer the cost of ongoing research and development (R&D). This was the majority
of the revenue reported in 2005. Meanwhile, the company is holding discussions with potential partners regarding
the development, commercialization, and sale of Alzhemed. We expect an announcement in this regard soon.
Neurochem is located in Saint-Laurent, Quebec, Canada, and employs more than 150 people worldwide.
INVESTMENT STORY
One of the company s two promising products under late stages of development is Kiacta (formerly known as
Fibrillex), an oral drug candidate that inhibits amyloid fibril formation. Neurochem is developing Kiacta for Amyloid
A (AA) amyloidosis, a progressive and fatal condition that occurs in a proportion of patients with chronic
inflammatory disorders, chronic infections and inherited diseases such as Familial Mediterranean Fever. The kidney
is the organ most frequently affected by AA amyloidosis, and progression to dialysis and end stage renal disease is
the most common cause of death in this disease. New and effective therapies are urgently needed due to lack of
specific treatment options for AA amyloidosis. Five year survival rates after diagnosis are only 50%. Because of
this, Kiacta has received Orphan Drug Designation status in the U.S. where an estimated 20,000 patients are
impacted by the disease. Although the clinical history on Kiacta has been mixed, we are positive on the drug given
the positive pharmacokinetic profile and lack of overall safety concerns seen in earlier trials. Though Kiacta recently
failed to meet the primary endpoint in a phase II/III clinical trial, it demonstrated certain clear benefits in treating AA
amyloidosis patients. These benefits primarily relate to improved kidney functions such as a fall in creatinine
clearance. Also, no additional adverse effects were observed in Kiacta-treated patients, compared to placebotreated
patients. These results were presented at the meeting of the European League Against Rheumatism
(EULAR) in June 2006.
Neurochem filed a New Drug Application (NDA) for approval on February 13, 2006. The application contained
safety and efficacy data from the phase II/III trial and filed under the rolling NDA strategy initiated under the
continuous marketing application (CMA) Pilot 1 program. Under this program, Neurochem was allowed to file the
application while it completed open-label follow-up studies to be submitted during the review process. Kiacta is also
part of the FDA s Pilot 2 program, allowing for close scientific discussion between the FDA and Neurochem on the
application. The FDA also granted priority review on the Kiacta NDA allowing for a quick response. As we
expected, on August 11, 2006, the company received an approvable letter from FDA for Kiacta. In its action letter,
the FDA requested additional efficacy information, as well as a safety update. Although the FDA stated that this
efficacy information would probably need to be addressed by one or more additional clinical trials, the FDA also
stated that significant findings obtained from a complete follow-up of patients in the existing study could be
persuasive. The FDA also asked for further manufacturing and pharmacokinetic information, and acknowledged that
a QT clinical study should be submitted as part of a phase IV (post approval) commitment. On October 16, 2006
Neurochem submitted a complete response (CR) letter to the FDA containing data on safety and efficacy from a
follow-up of all 183 patients who were enrolled in the phase II/III clinical trial. Following the suggestion of the FDA
in its approvable letter, Neurochem successfully retrieved the most recent health information (i.e. dialysis/end stage
renal disease (ESRD) or death from all causes, regardless of when the clinical event occurred) for all 183 study
subjects, including patients currently enrolled in the open-label extension study and all patients who discontinued
their participation in the study. The median time of follow-up was approximately 36 months. The statistical
methodology, as discussed with the FDA, includes the analysis (log-rank test) to compare the time required to
progress to dialysis/ESRD and to progress to a composite endpoint of dialysis/ESRD or death (all causes) between
the two groups originally randomized to either Kiacta or placebo. The data demonstrates that fewer patients on
Kiacta progressed to dialysis/ESRD (18 vs. 32, p=0.018) death (25 vs. 31) vs. placebo. Updated safety information
along with long-term exposure data was also positive for Kiacta vs. placebo. At this time we expect a six-month
class-II review. We are cautiously optimistic that this will be enough to gain approval.
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Since there are no approved treatments currently available for AA amyloidosis, we believe Kiacta will be able to
gain sizable market share in the roughly $500 million market. The company also has a strong partner in Centocor,
a wholly owned biotechnology subsidiary of Johnson & Johnson, which will provide global reach and market muscle
for Kiacta. We expect the European filing for Kiacta later in 2006. Neurochem will receive milestone payments
from Centocor, as well as an escalating distribution fee, the percentage of which will be based upon annual sales of
Kiacta over the life of the agreement.
The biggest potential product in Neurochem s pipeline is orally administered Alzhemed for Alzheimer s disease
(AD). Alzhemed works by reducing the amount of amyloid-beta (plaque) typically found in the brain of AD sufferers.
There are nearly 4.5 million people suffering from AD in the U.S., and it is estimated that about 360,000 new cases
will occur each year in the U.S.
Neurochem presented a positive phase II clinical trial (interim), demonstrating encouraging results, specifically in
patients with mild symptoms. Neurochem initiated its North American large-scale (n=1050) randomized, doubleblind,
placebo-controlled phase III trial in June 2004. The company recently finished enrollment of all 1052 patients
in July 2005. These patients are distributed evenly between three arms of the trial placebo, 200mg Alzhemed,
and 300mg Alzhemed. The 18-month trial should be completed in January 2007, with data shortly thereafter.
Patients will be allowed to remain on therapy for an additional 18-month to conduct longer-term efficacy and safety
data. Neurochem also initiated a phase III program in the E.U. in September 2005. This 900+ trial should complete
enrollment before year-end. In total, Neurochem will study Alzhemed on 1,950+ patients in both phase III trials.
Given the previous positive benefits seen in the interim phase II trials, Alzhemed could become part of the first-line
therapy for the treatment of AD. We believe the drug could be used as both a monotherapy or in combination with
acetylcholinesterase inhibitors such as Aricept (Pfizer) or Reminyl (J&J), or NMDA receptor antagonist Namenda
(Forest Labs). Beta-amyloid aggregation inhibition could become a major category in the treatment of AD by 2013.
We also expect news on a partnership soon. We believe the company is seeking a 50/50 joint venture in North
America and a royalty-based agreement for the rest of the world for this product. We would not be surprised to see
the company form an alliance similar to the one signed with J&J s biotech arm, Centocor. Alzhemed peak sales
could approach $0.5 1.0 billion. The results of the ongoing two 18-month phase III trials on Alzhemed are what
will determine the long-term future of Neurochem. Strong clinical data will probably place Alzhemed into the firstline
setting. This could make our peak estimate of $1 billion easily achievable. However, less efficacious data may
relegate Alzhemed to the second or third-line setting for patients failing drugs like Aricept or Namenda.
Unfortunately it is too early to tell just how successful Alzhemed will be until the data is out. We have seen
pharmaceutical industry research predicting the drug will be a blockbuster, but as of right now we model more
modest sales to the peak area of $500 million.
One wildcard in the pipeline is Cerebril, a phase II candidate under development for hemorrhagic stroke drug to
cerebral amyloid angiopathy. The company completed a phase II study evaluating the safety, tolerability, and
pharmacokinetic profile for the drug. Yet, management stated that future development is currently on hold while
they focus on the approval for Kiacta and the phase III trials for Alzhemed.
At September 30, 2006, the company had cash of $24.0 million. In Q2 of 2006, the company entered into a
securities purchase agreement in respect of an equity line of credit facility with a 24 month term for $60 million of
funds in return for the issuance of common shares at a discount of 3.0% to market price at the time of draw downs
over the term. Management has yet to use this line of credit as of the end of the third quarter. In November 2006,
the company announced a private placement of US$40 million aggregate principal amount of 6% senior convertible
notes due in 2026, with a conversion premium of 20%, to a US registered broker-dealer as initial purchaser. A few
days later UBS exercised its option to purchase an additional US$2.085 million aggregate principal amount of the
notes, brining the total to just over $42 million. Neurochem will pay interest on the notes until maturity on November
15, 2026, subject to earlier repurchase, redemption or conversion.
This should be enough to get the company into 2008, but we estimate a dilutive draw down of the credit line in late
2007. Management said that R&D expense will decline once the phase III trials for Alzhemed begin to wrap-up.
This should work to reduce cash burn and allow management to focus on the pipeline. However, until that time
cash burn will remain high and diversification outside of Kiacta and Alzhemed will be limited.
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RECENT NEWS
November 9, 2006: Neurochem announced the closing of the previously discussed private placement announced
on November 3, 2006. On November 16th the company announced that UBS Securities LLC will purchase an
additional US$2.085 million aggregate principal amount of the notes. Neurochem will pay interest on the notes until
maturity on November 15, 2026, subject to earlier repurchase, redemption or conversion.
November 8, 2006: Neurochem Inc. reported financial results for the third quarter 2006. Total revenues, in U.S.
dollars were $0.7 million. This consisted of $0.5 million in collaborative revenues and $0.2 million in reimbursable
costs. Neurochem reported a net loss of $16.6 million during the third quarter, which equated to a loss of $0.43 per
share in U.S. dollars. At the end of the third quarter Neurochem held cash and equivalents of $26.7 million in
Canadian dollars (around $24.0 million in U.S. dollars).
November 6, 2006: Neurochem Inc. announced that it has received recommendations from both the North
American and European Data Safety Monitoring Boards (DSMB) to continue its two phase III clinical trials currently
ongoing for Alzhemed. In North America, this fifth recommendation by the DSMB was based on the recent review
of the available safety data from 1,052 patients who have been on study medication for an average of 12.9 months.
The Company announced previous recommendations by the North American DSMB in February 2006, and April,
June and October 2005. In Europe, this first recommendation by the DSMB members was based on their recent
review of the available safety data from 333 patients who have been on study medication for an average of 1.8
months.
November 3, 2006: Neurochem Inc. announced a private placement of US$40 million aggregate principal amount
of 6% senior convertible notes due in 2026, with a conversion premium of 20%, to a US registered broker-dealer as
initial purchaser. Neurochem Inc. has granted the initial purchaser a 30-day option to purchase up to an additional
US$2.085 million aggregate principal amount of the notes. Neurochem will pay interest on the notes until maturity
on November 15, 2026, subject to earlier repurchase, redemption or conversion. The sale of the notes is expected
to close on November 9, 2006.
October 16, 2006: Neurochem Inc. announced that it has submitted a complete response to the U.S. Food and
Drug Administration's (FDA) August 2006 approvable letter for Kiacta. The complete response includes the data on
safety and efficacy from a follow-up of all 183 patients who were enrolled in the phase II/III clinical trial. Following
the suggestion of the FDA in its approvable letter, Neurochem successfully retrieved the most recent health
information (i.e. dialysis/end stage renal disease (ESRD) or death from all causes, regardless of when the clinical
event occurred) for all 183 study subjects, including patients currently enrolled in the open-label extension study
and all patients who discontinued their participation in the study. The median time of follow-up was approximately
36 months. The statistical methodology, as discussed with the FDA, includes the analysis (log-rank test) to
compare the time required to progress to dialysis/ESRD and to progress to a composite endpoint of dialysis/ESRD
or death (all causes) between the two groups originally randomized to either Kiacta or placebo.
Source: Neurochem, Inc.
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VALUATION
We maintain our Hold rating on Neurochem with a $22 price target. The stock price fell sharply on the data from the
phase II/III Kiacta trial in 2005. However, it quickly recovered in August 2006 when the FDA granted Kiacta
approvalbe . Management has since filed the complete response letter to the FDA including follow-up analysis
from the phase II/III trial. At this time we are unsure if the FDA will deem this analysis sufficent for approval.
Another approvable letter is a possibility. A phase IV QT safety trial will also need to be submitted post-approval.
In the meantime, an announcement of a global partnership for Alzhemed could have a positive effect on share
prices. Additionally, as Neurochem continues to develop and present data on Alzhemed, we believe the market will
eventually become more comfortable with the company as a fully-integrated biopharmaceutical company capable of
bringing multiple viable products to the market. We were pleased to see Neurochem partner Kiacta with Johnson &
Johnson s biotechnology division, Centocor, in early December 2004. We believe Centocor provides global reach
and market muscle on what could potentially be a $500+ million product. |
