Intra-Cellular: The Other Side Of The Rainbow

Dec. 04, 2019 11:05 PM ETIntra-Cellular Therapies, Inc. (ITCI)57 Comments11 Likes
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Out of Ignorance
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Summary

  • Quant Rating Data for development-stage pharma companies such as Intra-Cellular Therapies tells but a partial story.
  • Sell Side Ratings on Seeking Alpha are broadly positive for a variety of early-stage biotechs of varying degrees of merit.
  • Lumateperone (ITI-007) is a pipeline in a molecule that is undergoing a rough startup which will shortly face a huge PDUFA test.
  • Assuming good lumateperone news, expect a daunting trek through the danger zone as Intra-Cellular works to build its newly approved schizophrenia therapy to the other side of the rainbow.

Recently, I was checking out a Seeking Alpha feature that was new to me under the "My Portfolio" tab. It is the nifty feature that sets out a multicolumn view of each stock in a particular listed portfolio, as illustrated below for stocks in my "pharmawatch" portfolio:

Focusing on the final three columns, the one row for this portfolio that was all green was Bristol-Myers Squibb (BMY). I disregarded it because I was looking for interesting development-stage pharma. The other row that caught my interest was the Intra-Cellular (NASDAQ:ITCI) row, showing "not covered" for Seeking Alpha, "bullish" for Quant Rating and "very bullish" for Sell Side Rating.

I decided to investigate to see if I agreed with the favorable view of the analysts and the data-driven Quant Rating. This article sets out my "Author Rating" to rectify the "not covered" entry.

As an ironical aside, I note that Intra-Cellular licenses (p. 16-17) its lead therapy discussed below from Bristol-Myers.

Quant Rating Data for development-stage pharma such as Intra-Cellular Therapies tells but a partial story.

The meaning for "Quant Rating" is not immediately intuitive, so I checked with Google under the search term "Seeking Alpha Quant Rating". This directed me to the following helpful Seeking Alpha Product Team article, "Quant Ratings, Factor Grades And Comparison Data For Stocks" providing detailed description of the Quant Rating.

The article helped me more fully check out Intra-Cellular's Quant Rating. I went to its Quant Ratings tab; I set out a portion of the result taken on 11/29/19 below:

For most companies, a rich dataset underlies these grades, however not so much in the case of early-stage biotechs like Intra-Cellular. Of the ~25 metrics used to assess its value grade of "B-", only four have actual entries; the remainder are shown either as not meaningful or unavailable.

The growth metric is similarly light on data. There is a greater percentage of entries for profitability, but they are not any more revealing of Intra-Cellular's real-world prospects insofar as the company is profoundly unprofitable and likely to remain so for years to come.

The momentum and revisions grade, relating to timeliness of investing, have full complements of data. Accordingly, these components of the Quant Rating have greater potential for providing meaningful comparisons to their sector than do the others.

For Intra-Cellular, the "C-" grade for momentum is uninspiring. The "A+" for revisions suggests some cause for optimism, but only if these revisions are truly substantive and meaningful. A search through the data beneath the revision tab offers no cause for encouragement here.

Sell Side Ratings on Seeking Alpha are broadly positive for a variety of early-stage biotechs of varying degrees of merit.

I next moved to the "very bullish" Sell Side Rating to see how I ought best to evaluate it. Moving to the Sell Side Rating tab for Intra-Cellular, I found that it was based on a significant group size of 9 analysts. Their price target was $25.22, foretelling a modest multibagger (~160%) potential from the 11/29/19 closing price of $9.71.

Then, I looked further and saw that the target price was down from ~$75 several years ago. When I checked its actual price metrics, I found the droopy chart below:

ChartData by YCharts

When you compare the chart to analysts' target prices, it makes you wonder if they are not hopelessly backward-looking.

I decided to run a little check to see if analysts' price targets for clinical-stage biotechs were not generally optimistic. Toward that end, I developed a new test portfolio made up of 27 biotechs without an FDA approved therapy taken from various positions of the holdings of the Virtus LifeSci Biotech Clinical Trials ETF (BBC).

For these 27 stocks, the Sell Side Ratings were 2 Neutral, 14 Very Bullish and 11 Bullish; none were bearish or very bearish. Intrigued, I checked two other portfolios of biotechs I follow; I found a very similar spread of Sell Side ratings, most bullish or very bullish, a very few neutral or not covered, none bearish or very bearish.

I'm afraid one has to get more into the nitty-gritties on development-stage biotech; this article is my first run at Intra-Cellular.

Lumateperone (ITI-007) is a pipeline in a molecule that is undergoing a rough startup which will shortly face a huge PDUFA test.

Intra-Cellular's pipeline is heavily tilted towards development of its lumateperone (ITI-007) as shown by its website pipeline graphic below:

Intracellular pipeline

Note the fecundity of potential applications for this molecule, from schizophrenia to bipolar depression to dementia and beyond. Its schizophrenia application is the one which is currently energizing investors.

Lumateperone makes life easy for those who come under its therapy. It is an oral drug, taken once a day with no titration requirement. Lumateperone's favorable tolerability has been attributed to its:

... mechanism of action, which involves simultaneous modulation of three different neurotransmitter pathways: serotonin, dopamine, and glutamate. The drug is a potent serotonin 5-HT2a antagonist and serotonin reuptake inhibitor, a dopamine D2 presynaptic partial agonist and postsynaptic antagonist, and it also modulates glutamate via activation of the D1 receptor.

The following slide highlights lumateperone's highly significant attraction in treatment of schizophrenia:

Unmet needs in treatment of schizophrenia

Anyone who has dealt with schizophrenia patients has likely experienced the frustration of how difficult it is to keep patients on therapy. Lumateperone's favorable side-effect profile offers a potent differentiator which bulls will tout to show its blockbuster potential.

For the time being, lumateperone's fate rests entirely with the FDA. The drug must pass its upcoming FDA approval test, a sine qua non that is hardly a given. Lumateperone has had a colorful history to this date. Back in September 2016, its phase 3 in treatment of schizophrenia failed to separate itself from placebo and was terminated, although the company continued to develop lumateperone in treatment of schizophrenia and other CNS disorders.

In the intervening time, the company has had two favorable pivotal trials that support its NDA which it filed (p. 6) as a rolling submission, completed in Q3, 2018. The FDA accepted it for review in Q4, 2018, assigning an initial PDUFA date of September 27, 2019. This initial date was extended by three months to allow time for the FDA to review toxicology reports from animal studies.

Handicapping approval at this stage is difficult, although I am personally quite optimistic given the significant advantage provided by its favorable safety and tolerability along with efficacy data when considering the three outstanding lumateperone phase 3 studies completed to date.

The company is measured, per CEO Mates during the Q3, 2019 earnings CC, as follows:

We believe that our lumateperone schizophrenia program provides evidence in support of the efficacy and safety for the treatment of schizophrenia and, if approved, may represent an important new treatment option for health care providers and their patients.

Assuming good lumateperone news, expect a daunting trek through the danger zone as Intra-Cellular works to build its newly approved schizophrenia therapy to the other side of the rainbow.

While recognizing that approval is uncertain, at this point let me assume a happier outcome, approval with a palatable label. Under that scenario, the question arises as to lumateperone's launch dynamics. They are easy for investors to brush over during the prelude to approval; nonetheless, they are critical.

Encouragingly, Intra-Cellular recognizes the significance of this hurdle to its future prosperity. During its Q3, 2019 earnings call, EVP and CCO Mark Neumann addressed the company's launch preparedness operations at considerable length.

The following graphic effectively summarizes his report:

Intra-Cellular

It is a big deal when a clinical-stage pharma tries its hand at launching a new therapy. A good list is an excellent first step. Execution against the list and beyond will determine whether lumateperone ultimately succeeds or fails.

A key point in the success or failure of lumateperone, particularly from a shareholder value point of view, is how it is priced in the market. Particularly in this day and age, when price increases can be so politically volatile, one hopes that lumateperone's introductory price point adequately rewards Intra-Cellular and its shareholders for their inherent risks.

The process of price discovery is ongoing. Insofar as it is too early for there to be any convenient list price, much less any sales data, for lumateperone, Cantor Fitzgerald's Charles Duncan broached the pricing issue by asking about pharmacoeconomic value.

CCO Neumann didn't skip a beat. He gave a detailed answer that is far too lengthy and steeped in jargon to be worth repeating. I will try to fairly summarize his reply as assuring, "we recognize the need and the opportunity to educate payers and medical directors around the peculiar values of lumateperone in treating schizophrenia; our medical affairs team is working on it."

A second equal, or actually greater, point is reports that early lumateperone adopters give their doctors, their families and their friends. If that community values lumateperone, the drug will find commercial success; if not, it will surely fail. The good, albeit sad, news is that schizophrenia is an absolutely horrific condition for everyone that it touches; any therapy that improves the situation, as for example by increasing compliance, is certain to find an enthusiastic audience.

It will take time and money and careful execution to make lumateperone a commercial success. According to its Q3, 2019 earnings call, Intra-Cellular boasted liquid resources of $255.4 million as of 9/30/19. According to the company's Q3, 2019 cash flow table below, it runs through ~$10 million a month.

cash flows

During Q3, 2019, research & development costs for trials and manufacturing dropped, while launch preparedness costs increased. In its Q3, 2019 10-Q, (p. 22) Intra-Cellular sets out $45 million as its target cash requirement for the balance of 2019 and its existing cash as sufficient to carry it to mid-4th quarter 2020.

The company expects its cash needs to increase substantially as it (assuming FDA approval) builds a national sales force to market lumateperone in schizophrenia. Unless it works some type of deal to access non-dilutive financing, it will most certainly have to tap its $350 million shelf (p. 23) offering from time to time during 2020.

Conclusion

Intra-Cellular bulls can congratulate themselves; if things go well, first in terms of FDA approval and then in terms of sales, the company is well-positioned to take advantage.

Likewise, bears can growl. What if lumateperone nets a dreaded CRL? What if sales take longer to develop than expected/hoped? Lumateperone's base patent (p. 22-23) extends to June 2025, with supplemental and dosage patents extending to 2029. Patents for additional indications extend to a more comfortable 2033-34.

There are all kinds of risks. Nonetheless, with eyes wide open, I recently acquired a starter position in Intra-Cellular. It plays in the same schoolyard as Acadia (ACAD), which has performed quite well and which has encouraging forward potential. In time, they may trip clumsily over one another; however, for now I am comfortable with both Acadia and my starter position in Intra-Cellular.

I also have watched with amazement as Karuna Therapeutics (KRTX) recently shot to a market cap >$2 billion after announcing positive results in a phase 2 study of Kar-XT for schizophrenia patients with severe psychosis. Karuna has backed off quite a bit since, and I expect it to continue to do so.

It is wisely planning a significant secondary, although the price at which the secondary issues will likely be a bare fraction of its hysteria-driven move above $125 on 11/29/19. Surely, if Karuna generates extreme enthusiasm for its blockbuster phase 2 results, Intra-Cellular will receive some love should the company score its hoped-for FDA approval.

On a good day there is a pot of gold at the end of the rainbow. If the FDA cooperates and gives Intra-Cellular lumateperone approval, patient shareholders should enjoy some such good days.

This article was written by

Out of Ignorance profile picture
6.54K Followers
Writing under the pseudonym "out of ignorance", I very much regard investing as a learning process. Investing failures are tuition paid. Investing successes enter the trove of lessons learned. In my Seeking Alpha articles I share my experience from decades of investing and from ~5 years of focused research on a variety of stocks, in recent years with a primary emphasis on healthcare stocks. I greatly appreciate those who take the time to share their reactions to articles, particularly those who share relevant anecdotes and experiences.
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Disclosure: I am/we are long ITCI, ACAD. 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.

Additional disclosure: I may buy or sell shares in ITCI, ACAD or BMY over the next 72 hours

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