It's interesting to me how investors will react to news that comes from biotech companies. For those stocks where there's a strong will to believe, almost no bad news is bad enough to derail the story. But when a company has enjoyed a rebound and sits close to a 52-week high, any bad news seems easily blown out of proportion as investors look for an excuse to cash in their gains.
That's about the only explanation that makes much sense to me when seeing how shares of Neurocrine Biosciences (NBIX) are responding to news regarding results from a Phase 2 study and its upcoming pivotal Phase 3 study for lead drug elagolix
Does NBI-98854 Work Or Not?
Monday after the close, Neurocrine reported results from its Phase 2 study of VMAT2 inhibitor NBI-98854 in tardive dyskinesia. Unfortunately for shareholders, the results take some explanation and the need for after-the-fact explanations are never a good thing with biotechs.
Strictly speaking, the drug failed its trial. Neurocrine was testing two dosages of the drug (12.5mg and 50mg) against a placebo and neither showed a statistically significant reduction in Abnormal Involuntary Movement Scale (AIMS), though both showed some improvements in clinician and patient assessments of improvement. To be more clear, both dosages did do better than the placebo according to AIMS (placebo - 9.9, 12.5 mg - 9.1, 50mg - 8.8), but the p-values were large.
This isn't the final word, though. Apparently one of the trial sites did not correctly apply the assessment methodology; company management said that video tapes of the assessments showed meaningful discrepancies between what was on tape and what the clinicians recorded.
Take out that bad site and the data changes markedly. The 12.5mg dosage still fails (as the company expected it would), but there's a roughly 40% improvement relative to placebo in AIMS and very significant improvements in clinician and patient assessments of improvement. It's worth noting here too that a prior study showed about 40% improvement, so this adjusted study result is remarkably consistent in that regard.
Not A Problem... Yet
The good news for Neurocrine, and the reason I think the market's reaction is too negative, is that this is just a Phase 2 study. If this were a pivotal trial, this would be a major problem - I seriously doubt that the FDA would accept the post-hoc analysis and I'm certain a rejection and a request for a new trial would follow.
But this is just a Phase 2 study and the company can use this result to further refine its trial design (and site training) for the upcoming Phase 2b study and future pivotal study (should Phase 2b results support one). So long as the data from the Phase 2b and pivotal data are clean, this will be nothing more than an anecdote.
That said, a note on safety may be in order. Almost one-third of patients in the 50mg group experienced adverse events. One was significant enough to quit the study (akathisia - a condition basically similar to severe restlessness that is not uncommon in patients who've received anti-psychiotics). While there also seemed to be a relatively high level of adverse events in the placebo group (17%), tolerability of this drug may be an emergent issue. At this point, I would be tempted to shave about $0.50 off of the $3.50 to $4.00 in fair value I had previously estimated for NBI-98854.
"Some News" On SPA Not Necessarily Good News
Neurocrine subsequently announced Tuesday morning the FDA had responded to the SPA filed for the company's upcoming pivotal study of elagolix in endometriosis. Unfortunately, the company was very short on details, saying little more than the FDA's comments would not impact the expected start of the study in Q2 of 2012.
At this point, it's anybody's guess as to what the FDA had to say. They may have had comments pertaining to the measures of pain to be used, what sort of safety signals to monitor, or who knows what else. I do know that the company has had past discussions concerning the pain and dysmenorrhea scales to be used in studies.
As a reminder, Neurocrine is developing elagolix with Abbot Labs (ABT) under a licensing/marketing arrangement, and FDA approval (and subsequent success in the market) could be worth $1 billion in sales and somewhere near $15 per share in value to Neurocrine.
The Bottom Line
I was positive on Neurocrine just a week ago and I still am today. The lack of clean data from the Phase 2 tardive dyskinesia is annoying, as is the vagueness about the FDA's comments on the SPA, but that's also why these stocks merit such high discount rates.
While the risk has arguably gone up a bit for this stock, a 10% drop seems excessive and I believe that this remains a very interesting biotech for risk-tolerant investors to consider.