Neurocrine Biosciences: Solid Financials, Strong Pipeline

| About: Neurocrine Biosciences, (NBIX)

Neurocrine Biosciences Inc. (NASDAQ:NBIX) is a biopharmaceutical company engaged in research and development of medications addressing metabolic system-related diseases and neurological disorders such as anxiety, depression and insomnia.

The company has a goal of advancing one new clinical candidate into development each other year. Its most active program is a hormone receptor antagonist for issues concerning women's health. The lead candidate is elagolix (NBI-56418) for treating endometriosis. In September 2008, the company announced positive Phase 2b data showing reduced loss in bone mineral density, comparable pain reduction and a relatively low incidence of side-effects. Under FDA guidance, a second study was launched in 2010, yielding similarly positive results. (See company press release on the elagolix presentation it delivered June 16th at the World Congress on Endemetriosis.)

Neurocrine Biosences reported that its global partner, Abbott Labs, will advance elagolix to Phase 3 study for endometriosis in late 2011 following a successful end of Phase 2 in March. The partner deal includes treatment options for uterine fibrosis (set for a separate Phase 2 study) and enlarged prostate for male patients. GSK-561679, a compound developed in collaboration with GlaxoSmithKline (NYSE:GSK) is undergoing Phase 2 studies for major depressive disorders and Phase 1 studies for anxiety and depression.

NBIX also reported successful Phase 2a trials on medication targeting movement disorders and is also developing a product designed to address congestive heart failure which is currently completing pre-clinical safety and toxicology studies.

Sources: S&P Compustat Company Report, FY2011Q1 NBIX summary.

In addition to a strong pipeline, Neucrone Biosciences has zero debt and holds $121M in cash, something of a rarity for a small-cap biopharmaceutical. While traditional valuation metrics are, of course, stratospheric, the company has swung into consistent profitability, showing 3 positive quarters. Long-term, NBIX stands to gain up to $500M in milestones royalties from its established licensing contract on elagolix with Abbott Laboratories (NYSE:ABT) while the latter assumes all commercialization and development.

Sources: Yahoo! Finance, FY2011Q1 NBIX Earnings Call

Analysts are mostly bullish on the stock, with Piper Jaffray maintaining an overweight recommendation and Standard & Poor's upgrading it to 4/5 stars as of 06.21. Mean 12-month price target is $12.30, implying a 64% upside potential.

The technicals are murky, with the stock trading near 50 and 200-day SMAs:

(Click to enlarge)

A sharply defined range between $6.50 and $8.50 has emerged in October of 2010 and has continued through recent tops. As with most biotech equities, the beta is very large.

On the basis of its solid financials, strong pipeline and strategic partnerships with well-established companies like Abbott Labs and GlaxoSmithKline, Nurocrine Biosciences is a BUY for intermediate and long-term investors. Revenue from elagolix are estimated to peak in excess of $1B by 2014, implying a $200M yearly revenue stream for the company and sustain potential for stock price appreciation, while the rest of the pipeline looks very appealing.

Traders looking to establish positions should look for the bottom of the currently defined range and expand exposure in small tranches, to ensure cost averaging.

A conservative option strategy to consider would be selling November 19th $7 puts for an estimated $.65 per contract. If the puts are exercised, the effective per-share price works out to $6.35, below the bottom of established price range. If the puts expire, they would return an annualized rate of about $22% (for comparison purposes only.)

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NBIX over the next 72 hours.

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