Neurocrine's Ingrezza Launch Continues To Exceed Expectations

Summary

• Neurocrine delivered a fantastic first full quarter of Ingrezza sales, more than quadrupling the average sales estimate.
• Teva's launch of Austedo will create some turbulence, but Ingrezza still looks like the better drug, and initial acceptance has been very encouraging.
• Neurocrine's other pipeline projects continue to advance, with AbbVie getting a priority review on elagolix in endometriosis.
• Investors should be careful about getting too far ahead of Ingrezza's launch, but these shares look undervalued below the mid-to-high $70s.

To quote from the A-Team, "I love it when a plan comes together." Although it is still very early, Neurocrine Biosciences (NASDAQ:NBIX) is executing well on the launch of its wholly-owned drug Ingrezza, and its partner AbbVie (ABBV) continues to move elagolix closer to the finish line for both endometriosis and uterine fibroids - indications that could both support more than $1 billion in royalty-generating sales. Additionally, Neurocrine continues to develop its clinical pipeline, with the company having started a new Phase IIb study for Ingrezza in pediatric Tourette's and planning to move its drug for congenital adrenal hyperplasia (or CAH) into a Phase II proof-of-concept study.

The market is reacting quite positively to the much better than expected revenue for Ingrezza, and the strong initial launch is encouraging, but the next few quarters could be a little more volatile as Neurocrine will have to contend with a competitive launch from Teva (TEVA), sampling, and shifts between the 40mg and 80mg doses. Even so, I believe the shares are undervalued now, with multiple clinical events on the horizon.

Ingrezza's First Full Quarter Was A Beauty

I've said it before, and I'm saying it again - the first couple of quarters of a drug's launch can be deceptive, both good and bad. So, I'm not going to go crazy over the very strong numbers that Neurocrine posted for the third quarter, but I will say (at the risk of stating the obvious) that a huge beat is quite a bit better than a miss!

Neurocrine reported $46 million in sales for Ingrezza's first full quarter of availability. The sell-side was looking for around $11 million in sales, with the highest estimate I could find closer to $17 million. Clearly, Neurocrine's efforts to work with prescribing physicians ahead of the launch are paying off with strong initial interest and uptake, and the company saw more than 5,000 prescriptions written for the drug. While Neurocrine uses a sell-in methodology for revenue recognition, management reported that there's less than one week's worth of inventory in the channel - investors can only hope that management continues to be so forthcoming about channel inventory levels in the future.

Looking ahead, I'm quite bullish on the prospects for Ingrezza in tardive dyskinesia. The company announced FDA approval for the 80mg dose back in October, as well as a surprisingly high double-digit premium for the dose relative to the already-approved 40mg dose (around 18%). Time will tell what the real effective price per patient is (there are discounts to PBMs, sampling/access programs, and dosage mixes to consider), but all in all, Neurocrine is pricing Ingrezza more aggressively than I'd expected - albeit still below the competing drug from Teva.

Speaking of Teva, that company received approval for its TD drug Austedo at the end of August. Comparing the labels, I think Neurocrine's Ingrezza is positioned to be a winner. Cross-study comparisons are tricky at best (and sometimes outright misleading or wrong), but Ingrezza's on-label efficacy is stronger (a 3.1 point improvement in AIMS versus 1.9), and there's a safety edge as well (Austedo's label includes warnings regarding agitation and neuroleptic malignant syndrome). Ingrezza's dosing schedule is also more convenient with the 80mg dose now available - one pill versus two to four pills a day with Austedo. Last and not least, even with the higher-than-expected price for the 80mg Ingrezza dose, Neurocrine's drug is over $10,000/year cheaper.

All of that said, I hope investors don't start counting on a flawless upward curve for the Ingrezza launch, with management offering some words of warning to this effect. Teva's Austedo will get some share of the market, and Ingrezza revenue will be impacted by sampling, 40mg/80mg transitions, and other factors. I'm still solidly bullish on the drug, but I don't think investors should count on similar blow-out results.

The Rest Of The Pipeline Is Coming Along

As expected, AbbVie filed for approval of elagolix in the third quarter, and the company is getting a priority review with a PDUFA date in the second quarter of 2018 for the endometriosis. The other indication (for uterine fibroids) likewise seems on track, although the timeline for pivotal data seems to have slipped a bit. Instead of "before year-end", it now sounds like the data may be announced in January - AbbVie held onto the endometriosis data a bit to announce it at a conference, and that may be what's happening here. Interestingly, management did say that the program had generated "some remarkable data"; it wasn't clear to me from context whether management was speaking more generally about this indication or specifically to this pivotal program.

Neurocrine also recently started its Phase IIb study of Ingrezza in pediatric Tourette's (the T-Force GOLD study). This study will be using higher doses than the earlier study (which failed to reach the primary endpoint), and data should be available by the end of 2018. As a reminder, this could be a $1 billion opportunity for Neurocrine, with the doses (and thus the revenue per patient) likely to be higher than for TD.

NBI-74788, the company's drug for congenital adrenal hyperplasia, will be moving into a Phase II proof-of-concept study soon. Management also announced that it has a meeting with the FDA on opicapone scheduled for January 2018. Assuming this meeting goes to form, management likely won't get much concrete feedback until February, at which point investors will get a clearer picture of the regulatory process. I continue to expect that the company will have to run a U.S. study, and this process has dragged on more than I'd have expected (Neurocrine licensed in the drug back in early 2017).

I thought management made some interesting comments in regards to a question about its plans for its cash. Specifically, management seems to be actively looking at (or at least considering) additional licensing and/or product acquisitions. Neurocrine has plenty of cash, could be profitable before the end of 2019, and has a specialty neuro sales force in place. I've criticized the company in the past for a rather lackluster R&D effort (in terms of generating new pipeline compounds), but acquiring assets (early-stage and/or ready for commercialization) could be a good way to create value in the coming years.

The Opportunity

Given the pricing on the new 80mg dose and the Austedo label, I am adjusting my expectations on the peak revenue potential for Ingrezza and making minor adjustments to other pipeline assets (largely having to do with the passage of time). These changes take my fair value up to $77.50, with about three-quarters of that tied to Ingrezza; success in the pediatric Tourette's program could add over $10/share more in value. Likewise, I assign minimal value at present to opicapone and the CAH and essential tremor programs.

I would note that Neurocrine saw its President and COO (Dr. DA Gros) resign back in October after only nine months on the job. "Reading the tea leaves" as it were, it sounds like this was a bad cultural/philosophical fit, and I don't think it speaks to any issues at Neurocrine. To that end, I'd note that the company's former CFO (who resigned around the time that Dr. Gros came onboard) is still working with the company, so I don't think Neurocrine is an awful place to work.

The Bottom Line

I continue to believe Neurocrine is a very good biotech company, and the shares still offer some upside. With one valuable wholly-owned asset and multiple wholly-owned potential value-creating assets in the pipeline (not to mention future milestones and royalties from elagolix), Neurocrine has a lot of potential stock-moving events on the horizon and could have appeal as an M&A target as well. While there are still plenty of risks, this remains a name to consider.

Analyst’s Disclosure: I am/we are 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.