Supernus Is Once Again A Super Value

Summary

• Since my last recommendation of Supernus, the stock rose from ~39 to 60 before recently falling back to 30.
• Meanwhile, the pipeline has progressed close to expectations although growth of current products has slowed somewhat.
• Supernus is in a strong financial position and seems to be a value based on earnings.
• Supernus remains attractive for future growth and is perhaps more derisked now than it ever has been.

Review of Price Since Last Article

I last wrote about Supernus (NASDAQ:SUPN) on March 1st, 2018, when it was trading just below 39. At that time I stated that Supernus was worth a "Super-Sized" portfolio position based off of its growth and pipeline. By the end of June, Supernus briefly broke $60 and seemed on its way to meeting my $75 1-year price target. Had an investor taken idealized profits, they would have been up over 50% at that time. However, since late June, Supernus has fallen and closed at $29.96 on 6/3/19 due to a combination of market weakness, concerns about slower growth, and negative market reaction to SPN-812 Phase III Studies. This could have resulted in a 50% loss for a poorly-timed investment.

This leads to the question - is Supernus an even better value than it was in March 2018 or have the concerns lowered the potential for the stock?

Current Status of the Pipeline

SPN-812 (Viloxazine)

Since my last article, Supernus has published results of four Phase 3 studies for SPN-812 (viloxazine). Viloxazine is a serotonin-norepinephrine modulating agent that has previously been used in Europe as an antidepressant, but has never been approved or marketed in the US. Supernus has been investigating its formulation of viloxazine for ADHD.

There is only one similar approved drug on the market and it is now generic (Strattera/atomoxetine). Strattera sales peaked at $854 million in 2016 before going generic. There was one other potential competitor in the form of dasotraline by Sunovion (OTCPK:DNPUF), but Sunovion received a CRL in August 2018 in response to its NDA. The primary concern was the FDA wanting additional evidence on efficacy and particularly tolerability. Sunovion has continued to pursue dasotraline and a study of dasotraline was published in March that showed a p value of <0.001 and effect size of 0.48 at the 4mg dose, but non-significant results for the 2mg dose. Of note, the 4mg dose had a 12% discontinuation rate compared to 2% on placebo.

Results for viloxazine appear to be slightly superior and more consistent than dasotraline without the significant discontinuation rate (averaged only 3.5% across the four Phase 3 studies). The effect size for viloxazine is similar to the pooled average of atomoxetine, but significantly less variable. Effect size in Strattera studies ranged from 0.4-0.8 and generally improved with longer periods of time on the medication. Effect size for viloxazine has ranged from 0.46-0.63 across its studies. Of note, the viloxazine studies published thus far have focused on 6 week data - while the atomoxetine studies continued to show improvement in effect size through 6 months. It is quite possible that viloxazine will demonstrate improved effect size with additional time. Both medications seemed to have a dose-response improvement to a point, but then lost this at the highest dose tested. Atomoxetine effect size dropped significantly from 80mg to 100mg in the above linked study and viloxazine also had a drop-off from 400mg to 600mg.

To look at the data more closely, here are some select slides from the Supernus Investor Presentation. First, the table below shows an overview of the four studies in terms of what age ranges and doses were included. The four studies combined to include 1397 patients.

Source: Investor Presentation, Slide 17

The next table is a look at the primary endpoints of the four studies and associated p values. Of note, the only p value that was not significant was the 600mg dose in the P-304 adolescent study. It should be noted that the placebo group in that study improved more than any of the other 3 studies, which could have contributed to the p value falling just shy of significance (p=0.0712). Similar to Strattera, the improvement in younger children was more notable than adolescents.

Source: Investor Presentation, Slide 19

The data was consistent on both inattention and hyperactivity/impulsivity subscales as shown:

Source: Investor Presentation, Slide 20

Pooled data from the studies showed that improvement in combined scores as well as both inattentive and hyperactive/impulsive subtypes began at 1 week and continued through the end of the study period for all doses except 600mg. This can be seen on Slides 21-23 of the Investor Presentation. This is notable as viloxazine shows much stronger p values in weeks 1-2 than atomoxetine (atomoxetine catches up at week 4). One of the downsides of Strattera compared to stimulant medicine has always been the 4-6 weeks often needed to get to positive effect (compared to the first day for stimulants). Viloxazine offers significant differentiation from atomoxetine on that point and (assuming this is seen outside of the lab) will be a much more competitive option to stimulants for those needing quicker onset. I cannot stress the clinical importance of this enough - as a Child Psychiatrist who often prescribes Strattera, I often hold off on starting it until breaks from school because parents do not want to wait 4+ weeks for positive effects at school. If I see one week onset clinically for viloxazine, then this is a much easier alternative to present to parents (especially those who are nervous about stimulants).

Viloxazine has been relatively well tolerated in studies, with only a 3.5% discontinuation rate. The most common side effect has been somnolence, which occurred about as often as atomoxetine. Other side effects were generally less common than atomoxetine. Comparison of the side effects are shown below (pulled from Supernus Investor Presentation and Strattera package insert):

Side Effect	Viloxazine Rate (%)	Atomoxetine Rate (%)
Somnolence	12.4	11
Decreased Appetite	6.6	16
Headache	6.2	19
Fatigue	6.1	8
Abdominal Pain	<5	18
Vomiting	<5	11
Nausea	<5	10
Irritability	<5	6
Dizziness	<5	5

Click to enlarge

Overall, viloxazine seems to offer similar (although possibly more consistent) efficacy compared to atomoxetine. It appears to offer quicker onset with less GI and headache side effects. I feel that the data supporting approval of SPN-812 is substantial and I expect it to be approved early to mid 2020 (NDA to be filed late this year). I estimate the approval chances at 85%. I expect that most insurances will require failed trials of atomoxetine and at least one stimulant, but Strattera had similar requirements and still made it to $854 million in peak sales. I would estimate viloxazine peak sales potential to be similar to Strattera (would be higher if it did not require Strattera/atomoxetine failure first). I believe that a lower target of $400-600 million in peak sales is very achievable. Of note, Supernus had TOTAL sales of $400 million in 2018.

SPN-810

SPN-810 is a reformulation of molindone, an older antipsychotic medication. Supernus applied its technology to the compound to make a slower-release formulation that is longer-lasting. Supernus is investigating molindone for impulsive aggression in children with ADHD. This is a well-known symptom that does not have a currently approved treatment. It is currently most-often treated with alpha agonists (guanfacine, clonidine) or atypical antipsychotics (risperidone, aripiprazole, ziprasidone, quetiapine). The new DSM-V diagnosis of "Disruptive Mood Dysregulation Disorder" is often applied to the children that have impulsive aggression, ADHD, and mood dysregulation. Supernus chose to pursue the "impulsive aggression" route because that concept exists in several diagnoses including ADHD, DMDD, Autism, PTSD, and Bipolar Disorder. As I have mentioned in previous articles, approval for impulsive aggression in ADHD (the largest market of these) would likely be followed by studies in Autism and PTSD in particular.

The Phase 3 studies of SPN-810 are nearing completion and the first two are expected to have results in the second half of 2019. Positive results in these studies are not at all priced in to the stock and could result in significant upside. The market has low expectations for SPN-810 due to Phase 2 results showing an inverted dose response curve (lowest dose had the best p values, highest dose did not show significance) combined with the lowest dose (18mg) being dropped at an interim analysis of the Phase 3 study. Of note, the company chose to initiate a 3rd Phase 3 study (in adolescents) AFTER dropping the lowest dose in the other two studies. While results are still uncertain, I believe that this shows some confidence that the 36mg dose may succeed in those two trials. The other extremely encouraging note is that patients from the first two studies have stayed on SPN-810 for an average of 10 months in an open label extension study. It would be unusual for parents to keep their child on molindone for that long if they were not seeing some consistent benefit.

Overall, I think SPN-810 offers significant upside to Supernus shareholders without much downside left. The market has basically written off SPN-810 and an argument for a lower market cap due to SPN-810 failure is hard to make. However, positive results for the studies would open up the possibility of another significant revenue source for Supernus by late 2021. I personally believe that SPN-810 could be over a billion dollar drug if these studies were positive and side effects were less than atypical antipsychotics. I believe that it would receive significant off-label scripts for impulsive aggression in Autism, PTSD, and DMDD in addition to many on-label scripts for ADHD. It could also be first line therapy (for insurance purposes) for impulsive aggression in ADHD as the currently used drugs are not approved for this purpose. Even if guanfacine ER failure was required first, there is still a significant market available. I currently estimate the likelihood of positive studies and approval at 30-40%, which is higher than the market sentiment seems to be.

SPN-604

SPN-604 is similar to Oxtellar XR, which is currently marketed by Supernus for seizure disorders. It contains the same base compound (oxcarbazepine) as Oxtellar XR, but Supernus has made a subtle distinction between it and SPN-804 which is Oxtellar XR. I have not been able to locate any comments on what the difference between the two compounds is (if any), but I suspect that there is a slight variation in delivery system in order to ensure that the patents for SPN-604 last a bit longer than Oxtellar XR.

Supernus plans to initiate a Phase 3 trial of SPN-604 in Bipolar Disorder in the second half of 2019. Oxcarbazepine in the current generic form (of Trileptal) is frequently used in Bipolar Disorder despite never having an indication for it. This is due to evidence in a variety of trials including a quality trial in combination with lithium and several smaller studies. There is some precedent for a long acting formulation of a drug being successful in psychiatry when the short acting version is commonly used, but was never approved for the given purpose. The best example of this is Intuniv (guanfacine ER), which had significant success as a long acting formulation of Tenex (guanfacine). Tenex was used, but never approved, for hyperactivity/impulsivity in children with ADHD. Shire (now Takeda) capitalized on this with Intuniv and it led to $330 million in peak sales.

Supernus has a reasonable likelihood of success for the Phase 3 SPN-604 study. I would currently estimate this chance at 50-60%. If successful, SPN-604 would likely add at least $100-200 million of revenue per year. Supernus currently estimates the potential peak sales at ">$300 million" (see slide 14 of Investor Presentation).

SPN-809 and SPN-817

Supernus has two earlier-stage compounds in SPN-809 and SPN-817. SPN-809 is the same primary compound as SPN-812, but may have slight variations. It is in Phase 1 studies for the treatment of depression. Of note, viloxazine (the active compound) is approved in Europe for depression. SPN-817 is the primary drug acquired with the acquisition of Biscayne Neurotherapeutics. It is in Phase 1 studies for the treatment of certain forms of epilepsy including Dravet Syndrome. At this point these early-stage drugs are non-factors to the market cap of Supernus, but it is encouraging to see that Supernus continues to develop their pipeline both internally and through acquisitions.

Supernus is in a Strong Financial Position

Unlike many biotech companies, Supernus is profitable and has been for 4 years. Supernus made $144 million on sales of $400 million in 2018. A review of sales and earnings growth shows a strong positive trend for both in the last 6 years:

Source: Investor Presentation, Slide 5

Supernus is projecting slowed growth for 2019, but is still projecting growth to $435-$455 million in revenues and $160-180 million in earnings. Furthermore, the company has an excellent balance sheet. It currently shows assets of just over $1 billion vs. liabilities of $545 million. This results in current stockholders equity of $480 million. The market cap of Supernus is currently $1.6 billion. Using the midpoint of projected 2019 earnings ($170 million) and assuming Supernus could maintain this, the current market cap is only 6 1/2 years of earnings on top of the current stockholders equity. From a bullish perspective, Supernus is likely to have continued growth in earnings and getting either SPN-812 or SPN-810 to market would more than replace the revenues of Trokendi and Oxtellar. If they can manage to get both to market, then the market cap should be several times what it is. Even SPN-604 could potentially replace most of Trokendi's revenues by the time Trokendi faces generic competition in 2023.

A bearish perspective at this market cap would require most, if not all, of the following to occur:

• Very limited to no additional growth in revenue/earnings from 2019-2023
• Failure of SPN-812 to gain FDA approval or sales being less than 25% of reasonable expectations if approved
• Failure of SPN-810 Phase 3 studies and discontinuation of further research for that compound
• Failure of SPN-604 Phase 3 studies or very limited sales
• Significant drop off of revenue when Trokendi faces generic competition in 2023 combined with most of the above - resulting in no additional earnings (or a loss) beyond 2023

The only given of the above is that there will be a drop off in revenue from generic competition for Trokendi in 2023. I expect that growth in revenue/earnings from 2019-2023 may be only 5-10% annually, but will still continue. I find it highly unlikely that none of the three drugs (812/810/604) will be able to replace the lost revenue from Trokendi. In fact, I suspect that either 812 or 810 will generate revenues in excess of the current revenues of Trokendi and Oxtellar combined. I think it is quite possible that Supernus could hit the trifecta with 812/810/604 and generate 4-5 times its current revenues (which could result in 6-8x its current earnings). While hitting all 3 is not a likely scenario, I do believe it to be significantly more likely than missing on all 3. I'd estimate the former at about at 16% likelihood and the latter at about a 4-5% likelihood. Put another way - I think there is close to a 95% likelihood that Supernus is successful with at least one of the 3 late-stage compounds. I also believe that it only takes one of the 3 to replace the lost Trokendi revenue in 2023. This leads me to the conclusion that the market is pricing in most, if not all, of the potential bearish factors listed above.

Given all of the this, I am extremely bullish on Supernus stock and have made it the largest position in my portfolio by a large margin. A portion of my current position is swing-based and would be sold if SUPN recovers to levels from earlier this year ($38-40). The remainder of my position I plan to hold as long as I can given my personal policy regarding holding stock of companies which market to me regularly. My current price target remains $75. Given the current share price this target may seem unreasonable to some, but positive SPN-810 studies or SPN-812 approval in the next 12-18 months could both be catalysts to help it reach this target.

Author's Note: Thank you for reading my article. Please follow me for additional articles covering the biotech space with an emphasis on neuroscience. My articles include my personal opinions and are neither financial nor medical advice. They are solely intended to show my perspective and due diligence on a given subject. Please consult with the proper professional if you are looking for specific advice for your situation.

I am a child psychiatrist and thus almost all of the mentioned companies currently market their products to me, including providing lunches for my staff and myself on as frequent as a monthly basis. The primary subject of this article (Supernus) has never marketed to me directly. In the event that Supernus begins regularly marketing to me (either through approval of their own products or acquisition/merger), I plan to sell my Supernus shares. This is due to my personal policy of not holding the stock of any company which regularly markets directly to me as a physician.

Disclosure: I am/we are long SUPN. 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.