Neurocrine Still Looks Significantly Underrated

Sep.18.12 | About: Neurocrine Biosciences, (NBIX)

I've written positively on Neurocrine Biosciences (NASDAQ:NBIX) twice already this year, and I finally took the plunge and bought it for my own account. Although there's ample risk with this company's clinical programs, the pipeline addresses some major unmet clinical needs and could support a price target roughly double today's price.

Pivotal Phase 3 Under way At Last For Elagolix

The development of Elagolix, an oral gonadotropin-releasing hormone (GnRH) antagonist, has had a long and sometimes convoluted history.

There have been 18 Phase I and Phase II studies conducted to date, due in part to wrangling with the FDA over the measurement of endpoints like dysmenorrhea and non-menstrual pelvic pain. Although the drug has consistently shown a strong safety profile and good efficacy through laparoscopic follow-up, it has taken some work to get the pain assessment dialed in. The most recent studies have shown solid improvements in pain, though, and Elagolix does look like a potential winner.

Development timelines have slipped a bit with Elagolix, due in large part to the need for Neurocrine and partner Abbott Labs (NYSE:ABT) to meet with the FDA and get a special protocol assessment (SPA) hammered out for the Phase 3 pivotal study. The pivotal study is now under way, though - a study that will enroll 875 patients in the U.S., Canada, and Puerto Rico, and should deliver top-line data in early 2014. This study will measure non-menstrual pelvic pain and dysmenorrhea after three months to a baseline as the primary endpoint, but will also include secondary measures like persistence of efficacy, analgesic use and dyspareunia. Assuming that the data are good, a filing with the FDA should occur in 2016.

Abbott and Neurocrine are also developing Elagolix for uterine fibroids, with a Phase 2 study on track to deliver results later this year.

The Potential Is Well Worth It

All of the fuss and hassle for Elagolix should be well worth the trouble if the data holds up in Phase 3 studies. Although the number of women in the U.S. actively receiving treatment for endometriosis is measured in the hundreds of thousands, it is believed that 6 million women have the condition and a meaningful percentage (20%+) could be eligible patients for Elagolix, especially considering the clean side-effect profile seen to date.

Looking at it another way, of the roughly 600,000 annual hysterectomies performed in the U.S., about one-sixth have endometriosis as the stated cause. Uterine fibroids could be an even larger opportunity, as fully 40% of hysterectomies are performed due to uterine fibroids, as well as many more less-invasive ablation, embolization and fibroid removal procedures.

If Abbott and Neurocrine can charge roughly $3,500 for this drug, just the hysterectomy patients alone would be worth $1.2 billion in annual sales. Now it's all but impossible that this drug will capture 100% of surgical patients (particularly as Intuitive Surgical (NASDAQ:ISRG) offers a safer, less painful alternative approach to hysterectomy), but that figure also excludes ex-U.S. markets and less severe patients. All in all, I think Elagolix is a billion-dollar drug with some upside beyond that.

NBI-98854 - Still Unpartnered And Still Unproven

Neurocrine's unpartnered VMAT2 inhibitor NBI-98854 could possibly hold almost as much value as Elagolix, though it has a lot more left to prove to capture similar value in today's stock price.

About six months ago, Neurocrine reported what initially looked like disappointing data from a small (32-patient) Phase II crossover study. Because one of the trial sites seriously screwed up the process of evaluating the drug's efficacy, the trial looked like a failure. A company-run post-hoc analysis suggested that highest dose of the drug showed the same 40% improvement seen in earlier studies (a result that would be statistically and clinically significant).

Since then, the company had Dr. Paul Ramirez, a leader in the Abnormal Involuntary Movement Scaling (AIMS) scoring system used in these studies and a developer of AIMS training videos, conduct his own review. Encouragingly, Dr. Ramirez's analysis showed a similar result, with a p-value of 0.008.

The company has pushed on with further clinical development, with the drug going into a Phase II-B study assessing the drug in tardive dyskinesia patients with schizophrenia and bipolar disorder. This study (120 patients) should deliver results in the first quarter of 2013, and solid results would clearly support Phase III development. Importantly, Dr. Ramirez will be training each site as to how to evaluate the patients and that should reduce the risk of a repeat occurrence of the response evaluation kerfuffle.

I'm optimistic about NBI-98854, and believe tardive dyskinesia is a major under-served market. Anti-psychotic medication frequently leads to TD in long-term users, and while TD rates for more modern drugs like Bristol-Myers' (NYSE:BMY) Abilify, Lilly's (NYSE:LLY) Zyprexa, and Johnson & Johnson's (NYSE:JNJ) Risperdal are lower than in the past (where 50-60% of patients would ultimately develop TD), a long-term incidence rate of 35-40% still points to significant opportunity.

Neurocrine is careful with its cash, but I nevertheless expect further development of NBI-98854 in Tourette's, tardive dystonia, and possibly Huntington's disease if this Phase II-B TD data looks strong. The TD market is probably worth north of $1 billion, with Tourette's possibly tripling that and Huntington's supporting another $1 billion in revenue. Keep in mind that no drug gets 100% of its market and the odds of success in Huntington's are low, but there's enough potential here to follow the drug carefully.

Other Pipeline Efforts Will Take Longer

Back in May of this year, Neurocrine released encouraging Phase II data on its heart failure candidate urocortin-2. This 53-patient trial studied the use of urocortin-2 in acute decompensated heart failure, and showed an encouraging 50% improvement in cardiac output and unspecified improvements in peripheral vascular resistance and dyspenea.

While there are about 1 million hospitalizations every year in the U.S. for ADHF, Neurocrine is not likely going to advance this drug without a partner. Novartis (NYSE:NVS) did pay $120 million upfront (and up to $620 million total) for Corthera and its heart failure drug relaxin, but Corthera had more data at the time - particularly dyspnea data from a 200-patient Phase 2/3 study. Consequently, I'm not sure what sort of deal Neurocrine could get at this point without further self-funded clinical data.

Other drugs in Neurocrine's pipeline include pre-clinical compounds for schizophrenia, tremor/epilepsy, oncology (partnered with Abbott), and diabetes (partnered with Boehringer Ingelheim).

The Bottom Line

I'm moving down my price target on Neurocrine from my initial March estimates due to a longer timeline and slightly higher risk weighting on Elagolix. A sales estimate of $1.2 billion supports nearly $13 per share in value for this drug, but I could see this being a multi-billion dollar drug if the endometriosis and fibroid studies both show strong efficacy. For NBI-98854, which is still unpartnered, I use a $400 million estimate, which leads to a $3 per share value, but acknowledge the possibility of upwards of $1 billion to $1.5 billion in sales if the follow-on indications succeed.

Assigning no value to urocortin-2 and the rest of the pipeline, that suggests Neurocrine is worth about $16 per share against a current price near $8. Remember, though, that these are conservative numbers (to the extent that assuming success for any unapproved drug can be conservative), and simply the time value of money between 2021 (the year I'm using for base case revenue estimates) and 2020 is worth $3 per share for Elagolix alone. I own these shares and I believe Neurocrine remains a significantly undervalued biotech with multiple data releases coming over the next six months.

Disclosure: I am long NBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.