Evaluating the Implosion in Neurocrine Biosciences (NBIX, DOVP, SEPR, KG)

This situation on Neurocrine Biosciences (NBIX) is quite puzzling, and perhaps outright troubling. The FDA earlier gave only a partial "Approvable" nod to its investigational drug Indiplon for insomnia, a very common sleep disorder. Neurocrine shares are down a massive 59.4% to $22.14 this morning, a level which puts the company at 5-year lows.

Some of this may not even be the company's fault depending on how you read into it, and when you see blow-ups like this it leaves little doubt as to why so many investors avoid development-stage biotech companies.

Here are the guts of the press release:

SAN DIEGO, May 16 /PRNewswire-FirstCall/ -- Neurocrine Biosciences, Inc. (Nasdaq: NBIX) announced today that the Company has received communication from the U.S. Food and Drug Administration [FDA] indicating that the agency has determined that indiplon 5 mg and 10 mg capsules are approvable and the 15 mg XR tablets are not approvable at this time. The FDA indicated that they did not have an opportunity to review all of the information submitted during the NDA review cycles. The Company will accept FDA's offer to discuss the applications via a meeting or telephone conference in order to clarify and determine the next steps required to move indiplon towards full approval.

"While we are disappointed in the FDA action, we will move forward expeditiously to address FDA's outstanding questions regarding the applications," said Gary A. Lyons, President and CEO of Neurocrine. "We are heartened by the approvable action for indiplon capsules and are dedicated to working with the Agency to expedite response to the action letters."

The Current Landscape

The FDA has had a full plate with problems and issues, and now becoming almost entirely unpredictable can be thrown in on the list of problems. It wasn't that the FDA was ever fully predictable, but after recent drug and product recalls it has to make you wonder if they are becoming a Doubting Thomas. Bausch & Lomb's (BOL) recent lens cleaner ReNu With MoistureLoc withdrawal, Merck's (MRK) Vioxx woes, and even the Biogen-Idec (BIIB) and Elan (ELN) withdrawal of Tysabri are possibly ALL contributors to Neurocrine's woes this morning as it may be entirely possible that the FDA may be playing purely a defensive game.

Just yesterday and last week the street bet was that Neurocrine WOULD get at approval for at least the lower dosages of its investigational sleep drug Indiplon. Neurocrine was seeking approval for its 5mg and 10mg capsules, as well as its 15mg extended release tablets. The FDA's "Approvable Letter" for the lower doses signals that they will likely approve the lower doses after meeting with the company and getting more data, but the "non-Approvable" status for the higher dose is the killer. Indiplon had the potential of being a blockbuster drug (sales of over $1 Billion per year), and after perusing many research reports it was the higher dose that was expected to be the main contributor. So the company will still likely get sales from its 5mg and 10mg doses, but the lingering issue is going to be how much it can contribute now.

It was expected that the company would get approval in the lower doses, and the wild card was the higher dose. There was also some risk that the labelling would carry warnings indicating potential risks of addiction, as is the case with almost all sleeping drugs. After running some shock scenarios, this stock really looks as though it is trading even worse than would be expected if ALL doses had been denied.

It is likely that this FDA treatment may call into question how the FDA will respond to all of Neurocrine's programs. The company licensed this compound and it does have a partial "approvable" status, so it may be unfair to count the entire situation as a write-off like the street is doing. Keep in mind that there will be more conflicting data in the coming days and that there will almost assuredly be shareholder class action suits and other negative headlines about the company in the coming days. Historically 85% of these blow-up situations tend to get worse for shareholders before they get better, but this situation may be worth looking into after the dust settles. Trading blow-ups usually requires more patience than guts or ego, so remember to let the dust settle and be sure to do your own homework on this.

Neurocrine's market cap has been severed from over $2 Billion to merely $840 Million as a result of this. The company posted revenues in 2005 of $123.88M and an attributed net loss to shareholders of $22.19 Million, but its March 31, 2006 posted revenues of $19.47 Million and a net loss attributed to shareholders of $25.9 Million. Its current March 31 balance sheet showed liquid cash and short-term investments of about $264.4 Million, with another $97.3M value to its plant and equipment, and $105 Million listed as "other assets" (usually goodwill, which is pretty hard to pay bills with). Its Current Liabilities were listed as $32.75 Million and its Long-Term Debt was put at $52.4 Million.

The trick on evaluating a balance sheet is that they are always backward looking and you can bet what you are sitting on that this could greatly increase expenses and will certainly decrease potential revenues. You have to also discover what financial covenants may be lurking, so you can't just blindly look at the data and say it looks fine. On the surface it does not look like a financial death warrant to be served immediately. This still feels like it will be worth a look after the dust settles, but once again "BE PATIENT!".

At the end of 2005 the company had 9 programs in R&D, 7 of which were in clinical development. The company's other programs include studies on treating Multiple Sclerosis, type 1 diabetes, endometriosis, benign prostatic hyperplasia, anxiety and depression, Parkinson's, and gastrointestinal disorders. It also has two other partners: GlaxoSmithKline (GSK-NYSE/ADR) on CRF Antagonists for psychiatric, neurological, and gastrointestinal diseases, whose shares are actully up 1.4% on positive HIV study data; and with Almirall Prodesfarma, SA for Parkinson’s disease.

Additional Fallout

Dove Pharmaceutical (DOVP) fell over 50% this morning as it licensed the compound for Indiplon to Neurocrine. Dove was set to receive 3.5% of the royalties of Indiplon sales. Pfizer (PFE) had been down 0.5% as it the co-developer of Indiplon, although they are less impacted as they have dozens and dozens of revenue and income sources.

Other makers of insomnia medications are up strongly today. Sepracor (SEPR) shares are up about 11%, King Pharmaceuticals (KG) shares are up almost 2%, and Sanofi-Aventis (SNY) shares are up about 3%. Sepracor makes the recently launched Lunesta, Sanofi-Aventis makes Ambien, and King makes Sonata.

Below are two charts courtesy of Bigcharts.com, one is a one-year and one is a five-year: