November Options Are Low Risk Way To Play Neurocrine Biosciences' Pending Catalysts

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About: Neurocrine Biosciences, Inc. (NBIX), Includes: ABBV
by: BioNap
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Summary

Phase 3 KINECT-3 Data is expected late October/early November 2015.

You can buy November $45 calls for $5 per contract. You can sell October $45 calls for $3.50 per contract, resulting in a net $1.50 debit.

I think NBIX's stock will go to $53-56 on positive Phase 3 data.

On August 13, 2015, Neurocrine Biosciences (NASDAQ:NBIX) announced enrollment had completed for the KINECT-3 Tardive Dyskinesia (TD) study. KINECT-3 (NCT02274558) is a randomized, parallel-group, double-blind, placebo-controlled trial examining NBI-98854 (also known as valbenazine) in approximately 240 subjects with moderate to severe tardive dyskinesia and an underlying diagnosis of mood disorder, schizophrenia or schizoaffective disorder. The primary endpoint of the study is the change from baseline in the severity of TD symptoms assessed by the Abnormal Involuntary Movements Scale (AIMS) after six weeks of active dosing.

Adding six weeks to the announcement of the final patient enrolled on August 13, 2015 puts the timeline for the completion of the study on or around September 24, 2015. The primary endpoint of the study will be assessed by blinded central readers, a step I believe likely adds a few weeks to the data analysis. For example, data from the KINECT-2 study was reported on January 6, 2014. Management reported that the trial reached full enrollment on October 25, 2013. The end of the six-week active dosing portion concluded on or around December 5, 2014. The data came approximately one month later, likely slowed somewhat by the Christmas and New Year's holiday.

Even under the same time frame, with the placebo-controlled dosing portion of KINECT-3 concluding on or around September 24, 2015, adding one month to analyze the data puts us past the October 16, 2015 options expiration data but well ahead of the November 20, 2015 data.

This would seem to present the opportunity for investors to sell the October 2015 $45 calls for ~$3.50 per contract and buy the November 2015 $45 calls for ~$5.00 per contract (note I'm taking the midpoint between the bid/ask for this analysis). The net debit is around $1.50 per contract.

Why I like The Odds

I think NBI-98854 works, as evidenced by the positive KINECT-2 Phase 2b study reported in early January 2014. The primary endpoint of the study was exactly the same as is being studied in KINECT-3, the change in baseline of severity in AIMS at week 6. Management also provided a responder analysis, which included any subject showing a 50% reduction or greater in AIMS at week 6. Secondary endpoints included a clinician's global impression of change (CGI-TD). Neurocrine analyzed the data from KINECT-2 on an Intent-to-treat (ITT) and Per Protocol (PP) basis. The ITT population includes any subject with at least one dose of blinded study drug (active or placebo) and one post-treatment AIMS assessment at week 6 (n=89). The PP population excluded any subject randomized to NBI-98854 without quantifiable level of active metabolite at the evaluation time point (n= 78). Here is the data from KINECT-2 as reported by Neurocrine Biosciences:

The results are highly statistically significant. Below I present graphical representations of the profound and consistent separation between NBI-98854 and the placebo on measures of responder analysis:

The safety and tolerability assessment showed that NBI-98854 is a clean drug. That will be very important to the marketing message for Neurocrine when positioning the drug vs. generic tetrabenazine. During the six-week treatment period, the frequency of treatment-emergent adverse events was 33% for placebo and 43% for NBI-98854. There were no drug related serious adverse events. The most common treatment emergent adverse events were fatigue in five subjects (9.8%) randomized to NBI-98854 vs. two subjects (4.1%) in the placebo group, and headache reported by four subjects (7.8%) on NBI-98854 vs. two subjects (4.1%) on placebo. Discontinuation rates were similar in both the NBI-98854 and placebo treatment groups with five per study arm (none of which were study drug related).

The FDA Likes This Drug Too...

On October 30, 2014, Neurocrine announced that the U.S. Food and Drug Administration (FDA) has granted Breakthrough Therapy Designation for NBI-98854 in tardive dyskinesia. The breakthrough therapy designation is granted for a drug that is intended to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement on clinically significant endpoints over existing available therapies.

Assuming the KINECT-3 data are positive, I believe Neurocrine will be in position to file the new drug application (NDA) in 2016. I remind investors there is an open-label safety and tolerability extension study dubbed KINECT-4 (NCT02405091) that will follow approximately 150 patients for another 42 weeks after the randomized, placebo-controlled portion of the study. This will also offer-up date in late 2016.

Auspex Tripled On Positive Phase 3 Data, Then Got Bought By Teva for $3.2 Billion

Auspex Pharma (NASDAQ:ASPX) presents the best potential roadmap for what investors can expect if Neurocrine does report positive Phase 3 data in TD. Back in June 2014, I wrote an article for investors on Seeking Alpha comparing Auspex's SD-809, a proprietary deuterium-modified version of tetrabenazine to Neurocrine's valbenazine, a prodrug of the (+)-alpha isomer of tetrabenazine. I highly encourage investors to read this article!

I concluded that these are very similar drugs designed to do the same thing - improve upon the tetrabenazine pharmacokinetics resulting in better tolerability and reduced side effects. As a reminder, Lundbeck (OTC:HLUKF) currently sells Xenazine in the U.S. for around $80,000 per year for the treatment of chorea associated with Huntington's disease. Annualized sales are in excess of $400 million, and that is with very limited off-label use (due to the REMS) in TD or Tourette Syndrome.

Auspex went public in late January 2014 with a market capitalization of only $350 million. At the time the company went public, a Phase 3 trial called FIRST-HD was being conducted comparing SD-809 to placebo in 90 patients with chorea associated with Huntington's disease. Another study, named ARC-HD, aimed to examine the effects of switching Huntington's disease patients stable on tetrabenazine to SD-809.

Shares of Auspex doubled from the initial IPO to command a market capitalization of approximately $700 million one week ahead of the Phase 3 data. The data was reported in December 2014, and it was an absolute "Home Run" in my opinion. This doubled the stock again to a market capitalization of around $1.5 billion. In January 2015, the company was awarded Orphan Drug designation for SD-809, and a week later raised $203 million in cash. The market capitalization was now north of $2.0 billion. This was all for one clinical-stage candidate with positive Phase 3 data in chorea associated with Huntington's disease and in Phase 2 for Tourette Syndrome and Tardive Dyskinesia. In March 2015, Teva Pharmaceuticals (NYSE:TEVA) announced the acquisition of Auspex for $3.2 billion.

Teva Pharma believes that SD-809, with positive data in chorea associated with HD, and two potential follow-on indications in TD and Tourette Syndrome is worth $3.2 billion in value. SD-809 and NBI-98854 are darn-near similar drugs in their efficacy, safety, and market opportunity. Neurocrine is not pursuing the chorea associated with HD indication - at least not yet. Instead, management is focusing on TD first, and it is currently conducting a Phase 1 study in Tourette Syndrome called T-FORCE. Data from T-FORCE is expected in the fourth quarter 2015.

Neurocrine's Shares Will Soar On Positive Phase 3 Data With NBI-98854

Neurocrine's market capitalization is currently $3.5 billion. I believe at least potentially up to half that value is Phase 3 elagolix at AbbVie (NYSE:ABBV). As a reminder, AbbVie reported positive Phase 3 data with elagolix in endometriosis back in January 2015. A second Phase 3 trial is currently ongoing, with data expected in early 2016. All signs point to that trial being a success as well.

UF Data Adds Additional Upside...

AbbVie has announced the Phase 2b uterine fibroids (UF) trial completed enrollment in January 2015. On Neurocrine's second-quarter conference call, Chief Medical Officer Chris O'Brien noted that he expects the data in the third quarter 2015. This suggests, at the very least, the results will be disclosed by AbbVie likely in September 2015. I do not expect AbbVie to go into too much detail on the results of the Phase 2b program. I expect it to simply report that it was either a success or failure, with success likely meaning the initiation of a Phase 3 trial to begin in 2016.

The original partnership with AbbVie dates back to June 2010. AbbVie made an upfront payment of $75 million to Neurocrine, but also committed to an additional $480 million in development and regulatory-based milestone payments. To date, Neurocrine has $450 million of those $480 million milestone payments still on the table! There is also another $50 million in sales-related milestones the company can earn. I think as the market gets more comfortable with the fact that elagolix will get approved, based on the success of the Phase 3 endometriosis and Phase 2b uterine fibroids trial, those $450 million in milestones will start to be reflected in Neurocrine's stock price.

Conclusion

It seems clear to me that elagolix is worth at least $1.5 billion in value to Neurocrine's shareholders, and with $450 million in potential development and regulatory milestones coming in the next 18-24 months, that $1.5 billion number could be conservative. That tells me the market is assigning a value to NBI-98854 of around $2.0 billion. If the Teva-Auspex deal proved anything, it's that big pharma is willing to pay up for positive Phase 3 assets. Would AbbVie be interested in NBI-98854? Perhaps! The company does have some other CNS assets in the product suite/pipeline. These include Depakote and Depakote ER for epilepsy/bipolar disorder, although we would not consider this a core area of focus for the company, it might make sense for it to scoop-up all of Neurocrine and acquire NBI-98854 along with the remaining rights to elagolix.

That being said, I think with positive Phase 3 data in TD, NBI-98854 should be valued at roughly $2.9 billion, slightly lower than Auspex because Auspex was pursuing, at least publicly, another indication for SD-809 and did offer a proprietary deuterium-modification platform, although nothing else was in the clinic at the time of the deal. This suggests upside to the current Neurocrine valuation by approximately $900 million on positive Phase 3 data.

Neurocrine reported a basic share count of 85.9 million as of late July 2015. As such, positive Phase 3 data should add roughly $11 per share to the current stock price of $42. The recent high in the shares as of late July 2015 was $56 per share. I think testing that high seems logical on the day of the announcement, although a breakout seems unlikely unless we also get positive T-FORCE data with NBI-98854 ahead of time. Nevertheless, if the stock does pop to ~$55 per share on the positive Phase 3 data, buying the November $45's for $5 doubles your money. Selling the October $45's for $3.50, resulting in a net debt position of $1.50 per contract, potentially creates the opportunity to 6X your net investment. I do not see the Phase 2b UF data pushing the stock price much past $45 per share, even if AbbVie did report the data ahead of the October 2015 options expiration date, so putting the calendar spread into place seems like a relatively low risk/high reward venture.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.