Crushing disappointment is fairly common in biotech and tends to be the end-game for many stories, but every once in a while there are companies that rebound from major disappointment and go on to considerable success. Not only does Neurocrine Biosciences (NASDAQ:NBIX) look like one such story, but the potential of these shares is such that even a conservative analysis can make an investor do a double-take.
From Bedtime To Women's Health
I owned Neurocrine years ago and profited greatly from the run-up on anticipation of the company's success with indiplon - a insomnia drug that the company developed and eventually partnered with Pfizer (NYSE:PFE). I sold out a bit before the peak, and the stock was subsequently crushed as the FDA refused to approve indiplon and Pfizer killed the partnership.
Now Neurocrine is back with a drug that may not get quite the same attention as a sleep aid, but holds pretty powerful sales potential all the same. Elagolix is a gonadotropin-releasing hormone receptor antagonist that the company has licensed to Abbott Labs (NYSE:ABT) for clinical development, with initial targets in endometriosis and uterine fibroids. With demonstrated efficacy and safety through numerous studies, this could be the blockbuster that both Neurocrine and Abbott need for their respective businesses.
The Elagolix Opportunity
While the causes of endometriosis are still not fully known, it may occur in 10% or more of the female population. Endometriosis leads to pain (debilitating pain in some cases) and may lead to infertility, abdominal adhesions, and bowel obstruction in severe cases. Oral contraceptives (birth control pills) are often effective for mild cases, but more severe cases often require surgery (which carries its own side-effects and is only about 50% effective in ending the pain), medical treatments with significant side-effects, or just learning to live in pain.
While the timelines for the development of elagolix have slipped over time, Abbott is at the very least being thorough with its development program. Six phase 2 studies have been completed to date, all of which showed elagolix to be effective. Safety data has also been encouraging, as elagolix groups have seen lower discontinuation rates. Arguably the biggest safety risks for elagolix involve long-term risks of bone loss and cancer. Data so far have not shown any worrisome signs, but count on this to be a topic of discussion with the FDA.
Abbott is working on getting the FDA to sign off on a Special Protocol Assessment (SPA) with the FDA and will hopefully begin the pivotal Phase 3 study before July of this year. Given the size and follow-up demands of the trial, an NDA filing seems likely in 2015, with approval possibly in 2016.
The market potential for elagolix is considerable. While the number of women who pursue advanced treatment for endometriosis is about one third of a million, I suspect the real number of potential elagolix customers is much higher - once women know that there is a safe and effective treatment for their pain, I suspect the "addressable market" will expand considerably.
For those who find that oral contraceptives do not adequately treat the problem, the next option is either surgery or other medicinal options. Covidien (NYSE:COV), Bard (NYSE:BCR) and Johnson & Johnson (NYSE:JNJ) are among the leaders in devices for surgical approaches - including laparascopes, curettes and surgical mesh. For drugs, the options include androgenic steroids (which can cause masculinization) and Abbott's Lupron - a drug that is effective but can increase the risks of cardiovascular disease and osteoporosis.
All told, at $10 a day (or about $3,600 a year), I believe elagolix has a shot at being a billion-dollar blockbuster. Through their partnership, Neurocrine is in position to reap hundreds of millions of dollars in milestone payments, as well as tiered double-digit royalties.
Elagolix is not just about endometriosis. Data (as well as the mechanism of action of the drug) have also suggested efficacy in uterine fibroids, another large treatment opportunity where current options fail to adequately address the problem. Although this program is further behind (phase 2 data should be out late this year), it could be 33% to 50% larger in terms of the addressable market. There is also evidence that drugs like elagolix can treat benign prostate hyperplasia, but I suspect that Neurocrine and Abbott would look at a different GnRH antagonist for this application.
In per-share terms, I believe that elagolix is worth $15 a share today to Neurocrine investors. I base that on a $1 billion sales estimate in 2021 and a 25% discount rate that reflects the considerable amount of Phase 2 data generated to date. That said, I think there could be upside to that number; strong phase 3 data in endometriosis alone could make it a billion-dollar drug and the uterine fibroid market should be even larger.
VMAT2 A Worthy Second Program
In addition to Abbott partnership in GnRH antagonists, Neurocrine has NBI-98854 all to itself. A highly selective VMAT2 inhibitor, '854 regulates dopamine release and appears to control/reduce involuntary movements.
Neurocrine has '854 in the clinic as a prospective therapy for tardive dyskenesia. TD has numerous presentations but usually involves repetitive involuntary movements. Not only can these movements impair mobility, they can also interfere with speech, eating and breathing. Most cases of TD can be reversible, but there may be more than 400,000 long-term TD patients.
TD is a known side-effect of certain antipsychotic medications, and the risk remains as long as the patient uses the drug. While it appears that the risk of developing TD in a given year is about 5%, antipsychotic medications are generally long-term treatments and the eventual risk of developing TD is above 50%.
An early phase 2 study showed a 41% improvement involuntary movement and additional data should be available soon, prior to the initial of larger Phase 2b studies.
There is little specific drug development that I'm aware of for tardive dyskenesia, but GlaxoSmithKline's (NYSE:GSK) Zofran has been shown to work in some cases, as well as ropinirole (marketd by Glaxo as Requip before going off-patent).
As a treatment for involuntary movement, '854 arguably merits at least small-scale Phase 2 studies in both Tourette's and Huntington's. If early efficacy in TD holds up and there are no safety issues, '854 could be worth over $400 million in revenue alone in that indication, and potentially twice as much if effective in Tourette's. Efficacy and approval in Huntington's would likely be worth at least $500 million in incremental sales, but the dismal record of successful drug development in this indication should preclude much optimism at this point.
At this point, '854 looks to be worth about $3.50 to $4 per share for Neurocrine, as the less-robust data package merits a higher discount rate (35%) and more conservative sales estimate ($500 million).
Other Programs Could Pay Down The Line
While it's possible to produce an attractive price target on the basis of its two lead drugs, Neurocrine is developing additional drug candidates as well. The company is looking at urocortin-2 as a potential treatment for heart failure; drug development efforts in CHF have found little success so far, but the potential for an effective drug is enormous. The company also has a development agreement with Boehringer Ingelheim in type 2 diabetes (covering agonists for the G protein-coupled receptor GPR119), but all of these compounds are presently pre-clinical and this area has attracted considerable attention already from other companies.
Neurocrine also has an ongoing relationship with Glaxo covering CRF antagonists. The first drug candidate from this partnership met with failure in a depression study, but Glaxo is still pursuing some long-term studies in PTSD and stress-induced cravings in women with alcoholism.
The Bottom Line
I'm always skeptical whenever an analysis suggests that a relatively well-known biotech is substantially undervalued. In the case of Neurocrine, though, I think investors may have written off this stock after the failures of indiplon and GSK's CRF-1 depression study. What's more, my own past work in healthcare suggests to me that the market seriously underestimates the potential demand of a substantially better treatment for endometriosis and uterine fibroids.
Unfortunately, Neurocrine investors are looking at a long road to an eventual payoff, as regulatory approvals in the U.S. are unlikely before 2016. That said, there is no reason that the stock cannot trade up as positive data build from elgaolix and '854 and investors become more confident of the company's prospects.
At today's levels, I would very seriously consider buying Neurocrine shares, as I see fair value of over $18 on just the basis of its two lead programs.