On December 16, 2013 Alcobra announced its lead drug compound MG01C1 had TOVA and CAARS Scores equal to if not better than all existing players (this is how the industry measures efficacy in ADHD). Based upon their involuntary read out, I believe the stock is highly undervalued. Since December 20th, the stock has risen 20%; however, as I dig deeper within the December 16th report, it appears to be a major inflection point within their business. Dr. Yaron Daniely (the CEO of Alcobra) has publicly stated that their corporate strategy pending positive phase III results is to sell the company.
ADHD is one of the most common behavioral disorders in the world. Alcobra has stated that the market in the US alone represents $5B in 2013. This has been growing about 10% a year, on top of price increases of 10%, indicating this is a swelling market with no end in sight. ADHD is a treatable condition; the most commonly used therapeutic drugs are stimulants, such as Ritalin, Adderall, Vyvanse and Concerta. All are all dopaminergic (related to dopamine) and noradrenergic (related to norepinephrine) compounds with significant abuse and misuse potential because their use may lead to severe psychological or physical dependence. In addition, stimulants have numerous side effects, such as uncomfortable mental states, interference with sleep and appetite, development of nervous tics and potential cardiovascular effects resulting from increased blood pressure. These side effects have limited effective treatment in those taking the drugs and have also dramatically limited medication adherence rates. Up to 30% to 50% of those who are prescribed stimulants for ADHD either do not respond to or cannot tolerate these treatments, and only about 20% of those prescribed with stimulants renew their prescription the following month.
Alternatives to stimulants:
Atomoxetine, known by its brand name, Strattera (SHPG), is the only nonstimulant ADHD drug sold in the United States-and the first ADHD drug to be approved specifically for adults, in 2002. Research has shown that it is both safe and effective for long-term use, although perhaps not as effective or quick-acting as stimulants. Atomoxetine takes 10 to 12 weeks to be effective. Dose titration remains a major problem as the dose is increased (or decreased) until the desired effect is achieved. In the early days of Strattera, its market share hit 20% in the first 3 years of sales, but it then fell behind due to safety and efficacy concerns. It was later more widely understood that Strattera was a repurposed anti-depressant drug that didn't work as a anti-depressant. It received a black box warning for suicidal thoughts, while additional information surfaced that Strattera had liver toxicity issues and sexual side effects. Physicians soon became hesitant to prescribe this product, as Strattera's market share fell back to current levels of 15% of the US market; it now currently does $700M in sales each year in the US.
There are increasing concerns about the stimulant market and disappointment with the lengthy onset/health concerns of current non-stimulant products have caused major controversy and problems. Parents and physicians do not want to give their kids addictive stimulants that could harm their child in the long term. In addition, they do not want to give their children drugs that take 10 to 12 weeks to kick in that also have black label warnings. The solution to the problem arrived on December 16th, 2013.
The Best Of Both Worlds- A Non-Stimulant With Stimulant-Like Efficacy:
Management released the phase IIb involuntary study to show everyone that not only did their drug prove to have equivalent efficacy compared to the existing stimulant drugs within ADHD, but also that MG01C1 has immediate onset, which current non-stimulants lack. This announcement is enormous as it represents a breakthrough in the ADHD market. The same TOVA and CAARS Scores used by Alcobra in their involuntary phase IIB trial will be the same valuation metrics the FDA will use to evaluate MG01C1 for the two phase III trials.
MG01CI is a proprietary dual-release formulation of Metadoxine. Metadoxine has been available (since the 1980's) in immediate release forms for acute treatment of Alcohol Intoxication and chronic treatment of Alcoholic Liver Disease (ALD) in a few countries (Italy, Portugal, Hungary, Russia, India, China, Mexico and Thailand). In 30 years of product availability no published safety/tolerability issues have arisen.
Since Metadoxine has not been associated with any severe adverse events in several decades of clinical utilization, and given the fact that MG01CI appears to be well-tolerated and very benign from a safety perspective, it seems possible that this drug could become the first agent approved for the ADHD market that would not carry a "black box" warning. Such a labeling advantage could confer a considerable marketing edge to the product.
Alcobra is scheduled to begin enrollment in the first of two Phase III trials of its lead candidate, MG01CI, for ADHD in the first quarter of 2014. This study could complete enrollment by the middle of the second quarter and report top-line data in the third quarter of 2014. A second Phase III trial, this time comparing MG01CI to the non- stimulant drug Strattera, is expected to begin in the second half of 2014. As I have highlighted in the first paragraph of this section, Alcobra has already proved astounding results compared to Strattera in their involuntary December 16th trial, allowing me to believe that phase III results should be identical to their December 16th results. In the volatile space of healthcare, I believe Alcobra remains one of the most favorable Phase III drugs awaiting approval today. The first phase III study will be a double-blind, placebo controlled study with 300 patients including a 6 week follow-up. NDA filing could be expected as early as 2015. Phase III trials are expected to cost $6-7M.
Alcobra has one issued patent covering the composition of the modified release form of MG01C1. The company has filed another "method of use" patent for MG01C1 in ADHD, which has received a notice of allowance. The patent is based upon the company's unique dual-layer tablet combining the immediate-release Metadoxine, allowing rapid-onset, with a delayed-release component to stretch the duration into a once-daily dose. This patent expires July 3, 2032. This patent is very important as competitors cannot copy the early success of their compound that shows great efficacy and safety results.
Management has indicated that statistics show that essentially every drug that has passed phase II trials in the ADHD field has gone on to be approved. Also, no one has done a head to head study comparing their ADHD drug to an active competitor in the space to gain approval. If Alcobra's results are comparable to results from Strattera or better, I am highly optimistic that Alcobra's drug for ADHD should be approved. Alcobra has raised additional funding and now has ~$55M in cash which will be more than enough money to get them through all clinical trials.
Orphan Drug Status Awarded:
In mid-December 2013, Alcobra obtained Orphan Drug status for MG01CI from the FDA in Fragile X Syndrome (Autism). While this was expected because FXS is known to be an orphan disease that affects under 100,000 individuals in the U.S., management is encouraged by the award of Orphan Drug status because it confers seven years of automatic market exclusivity and a rapid path to commercialization for MG01CI early in its development process as an FXS drug. There is currently no available treatment in the market, which makes this a potential big opportunity for Alcobra. Alcobra plans to start a Phase 2 trial of MG01CI in FXS patients in 2Q 2014, potentially prior to release of data from the first pivotal ADHD trial. The firm may also initiate a Phase 2 trial in autism in 2H 2014
Strong Management Team:
In January, they announced a very significant new hire, with the appointment of Mr. David Baker as their Chief Commercial Officer. David joins Alcobra after spending about 10 years at Shire where he was instrumental for building their pipeline at ADHD and CNS brands. He led the launch of Vyvanse in 2007, oversaw the launch of the adult indication for Vyvanse and led the early work that later resulted in the launches of Vyvanse in international markets such as Canada, Brazil, Australia and Europe.
Dr. Rubin joined Alcobra in August of 2013. Prior to Alcobra, Dr. Rubin worked at Shire Development for over six years serving as Medical Director in Global Medical Affairs supporting multiple products within the ADHD portfolio. Dr. Rubin developed and implemented Global Medical Affairs strategic plans and supervised medical launch activities in the United States.
Mr. Howie Rosen was elected as Chairman of the Board in February of 2014. Before working at Gilead, Howie spent about 10 years at ALZA where he served as Vice President of Product Development and also had responsibility for mergers and acquisitions. Interestingly, ALZA was the company who developed and is responsible for Concerta.
In addition, they have Len Adler as the head of the scientific advisory board, who is possibly the most credible medical practitioner in the world on ADHD.
The recent management changes create a solid team at Alcobra that have decades of experience within the stimulant and non-stimulant market for ADHD. Their expertise for successful drugs in the ADHD field, positions Alcobra well in working towards their FDA approval.
Currently, the price for innovative ADHD drugs is about $7 a day. The current ADHD patient population has been growing over 10% a year on top of price increases of 10%. Strattera represents ~15% of the total market within ADHD, and does $700M in sales each year in the US. In the early days of Strattera, they hit 20% market share in 3 years, but then fell behind due to safety and efficacy concerns. Management indicated they believe that Alcobra can do much better given that their drug has a faster response time, is better tolerated and overall, is a stronger drug. I believe the market penetration rate can be very high, given this and management's ability to also make significant strides in markets like Japan and EU, which are growing rapidly but are averse to stimulants.
Although the market share today is dominated by stimulants (90%), I estimate this dynamic will amend as Alcobra's MG01C1 will change the public's perspective within the ADHD field. For revenue if we breakout that Strattera's 15% share of the market generating $750M per year, this gets me a total market size of $5B. I assume within my model that MG01C1 for ADHD will be filed and approved in 2015, first for adult use and then for child use later. I estimate that given the unmet need of a safe non-stimulant, Alcobra could capture 2% of the market in the first year. A conservative 2% of the market in 2016 gets me $100M in revenue. Management has indicated that gross margins should be approximately 80%. R&D expenses for the two ADHD trials should cost ~$10M each for both phase III trials. Alcobra will not pay taxes for the foreseeable future as they carry substantial NOLs. For 2017, I estimate that they capture 8% of the market as they will receive a boost from the ability to sell to the adolescent market that is essentially untapped and the additional year of selling to the adult market. In my 2019 estimate, I assume they will have 18% of the market generating ~$900M in revenue. In addition to ADHD revenue, I believe they will recognize $30M in revenue from their Fragile X venture in 2017. In 2019, I believe they can capture 15% of the market as I believe additional competition will come into the market.
Fragile X represents a valuable opportunity with a prevalence of approximately 60,000 and orphan drug-like pricing. Assuming they can only penetrate 50% of the 60,000 addressable market and assuming they reach 5% of the untapped market in the first year of sales and pricing will be around $20,000 for annual therapy, I believe they can generate $30M in sales by 2017. Phase 2 development cost will be ~$5M and I expect Phase 3 developments to represent the same. Alcobra was granted Orphan drug exclusivity, which granted them seven years of market exclusivity and will make spent R&D dollars eligible for tax credits.
CEO Daniely, while on Bloomberg TV (on December 23rd), stated he felt the best course of action would be for Alcobra to sell itself to a larger pharmaceutical company. I have created a pre-acquisition model based upon relevant acquisitions within the specialty pharmaceutical space to value the company based upon 6 years out from the expected Phase III decision in 2014. I use a 6 year time frame because the valuation of Shire acquiring New River was based upon a similar metric. New River (Vyvanse) was acquired by Shire for $2.6B, Clinical Data was acquired for $1.2B and NextWave was acquired by Pfizer for $700M. The fact that Baker and Rubin both came over to Alcobra from shire, stands to reason Shire would be best suited to acquire them. The EV/Sales multiples range from 1.9X to 2.8X sales. In specific, Shire acquired New River for $2.6B in February 2007. New River did not recognize revenue until later in 2007 and still 6 years later has only recognized half of the purchase price. Bank of America and Barclays made mention that Specialty pharma deals in 2014 would break all previous records and they indicated Shire is "brimming" with cash. I believe the company will eventually be acquired. I believe applying a conservative 1.9X multiple to my 2019 total revenue gets me a PT at acquisition of $67 to $72 per share.
If Alcobra decides to change its strategy and not sell the company, I have a PT $40-$45 based on my DCF analysis (WACC 20%, terminal growth 2%). Below is part of my model that sensitizes multiple areas including: penetration, price per drug, amount of patients, ect. I have provided what I believe the deal is worth over the lifespan of the patent (2032). I would note that increased competition and reimbursement risk is not included in the model. The probability model helps provide insight what the ADHD drug would be worth in different scenarios. I personally believe the probability of approval today should be close to 60% to 70% (value of $27 to $32). If approved, I estimate the price of the stock will trade in the $40 to $45 range.
Downside: Although, I believe Alcobra's ADHD segment has a high probability of being approved, I assume in my base that Alcobra's phase III for ADHD is not approved. I assume that their trial for Fragile X is granted approval based upon the unmet need for a drug in this market. In this case I would expect R&D and SG&A to decrease significantly. For EPS in 2017 I derive $0.40 to $0.48 in earnings. Applying a conservative 20X multiple, which is much lower than the industry average, gets me a downside price of $8 to $10. I would note that the stock could trade lower but given they have over $5 a share in cash and another $2 to $3 from their patent, I would expect Alcobra to trade in the $8 to $10 range. I provide this downside risk to give investors a sense of the volatility of Alcobra as they currently have no products approved in the market. I would advise investors that if your risk tolerance is low, Alcobra is not the name for you to be in. However, given the optimistic outlook of Alcobra, I believe it is in the best position to receive FDA approval by the end of this year.
- FDA could potentially choose not to accept Alcobra's regulatory filings petitioning for approval of the firm's lead drug candidate, MG01CI.
- Possibility that Alcobra's future partners do not invest sufficiently in the commercialization of Alcobra's products; and the risk that the firm's partners may not be the best-positioned competitively to ensure maximal penetration of Alcobra's drugs into their target markets.
- Changes could be made to reimbursement policy that would negatively affect Alcobra, despite what I believe to be the compelling value proposition inherent in MG01CI.
- Alcobra would likely have to raise significant additional capital if their business strategy of being acquired does not work. It would require additional funds to support the commercialization of the drug if it elects to launch the product independently.
- Additional competition can arise in the non-stimulant space if Alcobra's drug proves to be successful.
- They currently have no products on the market. So if their drug does not receive approval, the stock could become highly volatile.
- FDA approval of Alcobra's lead drug candidate, MG01C1.
- Strong partnership that will position Alcobra to maximize penetration into a variety of target markets.
- Potentially acquired prior to phase III approval, or after phase III approval.
- International acceptance could create greater potential as international countries are averse to current stimulants.
- Accelerated approval of MG01C1 for Fragile X Syndrome as there is currently no available treatment in the market.
I believe Alcobra is in position to quickly become recognized as a potential industry leader in ADHD. I believe Alcobra's December 16th results foreshadow what their potential results from their phase III trials will indicate, as the second trial will compare MG01C1 to current non-stimulant products on the market. The medical community has made the assumption that non-stimulants would not be able to compete with the existent ADHD stimulant medications. However, Alcobra has shown that their drug works after the first dose with immediate efficacy and unmet safety. Alcobra can now boast first day first dose efficacy; that's something that no other drug in this category has been able to show. Management has stated that their overall goal is to be acquired. I expect a strong possibility given heavy acquisition activity in the specialty pharmaceutical space. If Alcobra can prove what their phase IIB study has indicated, they could potentially be acquired post-phase III studies. Management indicated that statistics show that essentially every drug within the ADHD market that has passed phase II studies has went on to be approved. I expect Alcobra to be no different. I have a PT of $67 to $71 given a positive phase III trial and Alcobra being acquired at a 1.9X 2019 sales multiple. If their corporate strategy changes and they decide to commercialize and not sell the company, I have $40 to $42 PT based on my DCF analysis.