from david woodburn, pru. i wonder if the pfe ad policy speculation might be true.
HIGHLIGHTS
• We view the extension of FDA's review period for NBIX's indiplon as a net positive. NBIX
announced Monday evening that FDA has extended the PDUFA date for the IR (immediate release)
version of indiplon from Feb. 15 to May 15, but also committed to a decision on the MR (modified
release) version by the same date -- only 7 weeks later.
• Our model had been based on a July launch of the drug only because we felt the company would
accept an initial "approvable" decision if necessary to get the best possible label. Thus, increased
odds of a full approval in mid-May with a single label (for IR and MR versions) is good news.
• The news also draws attention to the advantage of indiplon should have over other insomnia drugs --
limited next day effects. FDA is requiring additional time to review full data from a driving study
with indiplon, placebo, and zopiclone to objectively measure "next-day" effects.
• The DEA scheduling process of indiplon is already under way, with final DEA scheduling likely to be
obtained by mid-to-late March.
• We now anticipate an indiplon launch in June, and so we are increasing our 2006 indiplon product
forecast to $120M from $110M. Our 2006 EPS estimate increases to $0.75 from $0.68 (excluding
options expense). Our price target increases to $66 from $62.
DISCUSSION
DESPITE SEVEN-WEEK DELAY, APPROVAL COULD COME EARLIER THAN WE
MODELED. We had been concerned about what might happen to NBIX shares if the company received
an “approvable” decision from the FDA on the IR version of indiplon on February 15. However, the
FDA’s decision to extend the review of the indiplon NDAs alleviates our concern that investor tensions
over the battle of the insomnia drugs -- NBIX’s indiplon and Sepracor’s (SEPR - $51.78; rated
Underweight) Lunesta -- would cause a bigger reaction to a delay than deserved (we believed that full
approval would still come a few months after an “approvable” finding). Thus, we see the seven-week
delay in the PDUFA date for the more-important MR version (from March 26 to May 15) as a small price
to pay for knowing that NBIX is already working on getting the driving study data into the product label
for launch and that a first-cycle approval of a single product label for both versions of the product is now
more likely.
WE HAD BEEN ASSUMING A JULY 2006 LAUNCH. We have no concerns over the safety or
efficacy of indiplon, but we felt that NBIX and partner Pfizer (PFE - $24.44; rated Neutral Weight by
Prudential Equity Group, LLC Senior Pharmaceuticals analyst Timothy Anderson) would willingly take
an approvable finding if it gave the companies additional time to justify a better label for indiplon. This
led to our estimated launch timing of July 2006. With the additional time for FDA to complete the review
(and NBIX to discuss the indiplon label with FDA), we are moving up our launch assumption to June
2006, which also happens to fit well with the entry of generic versions of Pfizer’s Zoloft antidepressant
(also June 2006), which should free up a large number of Pfizer’s primary care and psychiatric sales reps
to promote indiplon. The earlier launch leads us to increase our ’06 indiplon end-product revenue
estimate to $120M from $110M, which with a 28% royalty rate, should deliver $33.6M in royalty income
to NBIX. This results in an increase of our 2006 EPS estimate to $0.75 from $0.68 (excluding stock
option expense). We are not changing our 2007 EPS estimate of $1.04 (excluding options; $0.50
including option expense).
INDIPLON IS ONE PRODUCT, SHOULD GET ONE LABEL. According to NBIX management, an
additional outcome from the single PDUFA date is that FDA has agreed to a single product label that
encompasses both the IR and MR forms of the drug. While some might be confused about how the IR
(tablets) and MR (capsule) forms could easily be described to physicians, we expect that the commercial
positioning will be quite simple: low dose (5 and 10mg) for sleep initiation, higher doses (15 and 20mg)
for sleep initiation and maintenance of sleep. Although it seems a likely accomplishment given the PK
profiles of the lower doses, we can’t be sure that the lower doses will be indicated for middle-of-the-night
dosing. If obtained, however, such an indication would be yet another point of differentiation for
indiplon.
DRIVING STUDIES FINALLY GET SOME ATTENTION. As part of the Q3-05 earnings release,
the company disclosed limited data showing that the effects on next-day driving from indiplon 10 and
15mg doses in 30 male patients age 40 and under were not statistically different than placebo, whereas
there was a statistically significant difference with the 7.5mg dose of zopiclone (p=0.030). We feel that
such objective data (opposed to subjective data, like patient diaries) may be useful in crafting the
warnings section of the indiplon label, though such outcomes remain to be seen. We’ve long felt that this
type of data could be used to show the Achilles’ heal of Sepracor’s Lunesta to be one thing that Sepracor
now touts: the long-lasting effect of Lunesta. Some Lunesta bulls may argue that this head-to-head study
doesn’t mean anything relative to Lunesta, and we don’t necessarily disagree. The zopiclone arm of this
study utilized a 7.5mg dose, which is equivalent to a 3.75mg dose of single-isomer eszopiclone (Lunesta)
– higher than the highest marketed dose in the U.S. of 3mg. We do point out, however, that the 7.5mg
dose of zopiclone has been well-documented in similar tests in Europe over the years that reported driving
impairments comparable to blood-alcohol levels of 0.05%, 0.08%, 0.10%, and higher, depending on the
patient population and delay between dosing and the simulation (minimum 6 hours, typically longer).
DEA SCHEDULING ALREADY UNDERWAY. Even though the indiplon PDUFA date is not until
May 15, the company disclosed that the DEA scheduling process for indiplon as a controlled substance is
already underway. Apparently the required Federal Register notice should appear in 2 to 3 weeks, which
marks the beginning of a 30-day comment period. Adding another 2 to 3 weeks to the conclusion of the
comment period for review and final approvals, final DEA scheduling (as a class IV controlled substance)
should occur in mid-to-late March, well before the PDUFA date.
YES, VIRGINIA, THERE WILL BE INDIPLON DTC ACTIVITIES. We’re often asked about the
likelihood of initial success for indiplon with Pfizer’s commitment to a six-month moratorium on DTC
(direct to consumer) advertising for new products, as insomnia medications are essentially consumer
products (they respond well to consumer advertising). As we understand it, Pfizer will abstain from
product advertising on television for the first six months. That still leaves print and web advertising
available for the indiplon brand, in addition for the potential of “disease education” advertising on
television. Again, with Zoloft going generic in the same month as the estimated indiplon launch, Pfizer
will likely have a significant share of voice in physician offices.
VALUATION
Our 12-month price target of $66 is based on the results of a discounted cash flow. Our DCF
calculations, using the cash flow forecasts from our published model, a weighted-average cost of capital
(WACC) for Neurocrine of 13.4%, and a 10% terminal growth rate, result in a net present value of $66
per share. Note that these cash flow forecasts do not include any contribution from successful launches of
indiplon outside of the U.S. or any other pipeline products.
The $66 price target results in a P/E multiple of 33x our Neurocrine 2008 EPS estimate of $2.30,
discounted back at the 13.4% WACC. The 33 P/E multiple is a premium to the 15-year average P/E of
22.4x for peer specialty pharmaceutical companies, and near the midpoint of the 15-year historical range
of 10-47x, but well below Neurocrine’s estimated EPS growth rate of 120% that year. |
