Sage Therapeutics (NASDAQ:SAGE) is a relatively young pharmaceutical company that is working to discover, develop and deliver novel medications for treatment of central nervous system disorders (CNS). The company's focus is on medications specifically in the field of depression, neurology and neuropsychiatry. In the 8 years since its inception, Sage has achieved one FDA approval for the treatment of postpartum depression (PPD).(Source SAGE 10-k)
Zulresso (brexanolone) is the first medication approved by the FDA with specific indication for postpartum depression. Zulresso can only be acquired through the restricted Zulresso REMS program, which requires the intravenous infusion to be given in a certified facility. The cause of Zulresso's inclusion in a risk evaluation mitigation strategy (REMS) program is due to the potential for excessive sedation or loss of consciousness during administration. Additional revenue limiting aspects to Zulresso include:
So it appears evident that the company's current prospects for revenue are dismal. I won't expand much more on Zulresso. The company will continue to expand certified facilities, but an oral formulation with no REMS limitations will be needed to garner any significant revenue in this space.
This leads us to Zuranolone or SAGE-217, an improved form of the brexanolone molecule with high oral bioavailability and a half life long enough to be dosed once daily. SAGE-217 is a positive allosteric modulator on the GABA-A receptor site. Amplifying GABA-ergic signaling is widely considered to be effective in treating a variety of mood related disorders. (Source HERE)
The above image leads to the conclusion that any substantial near-term revenue will come from sales of SAGE-217. As a result, I will not cover the neurology or neuropsych franchises.
1. ROBIN (PPD201)- Phase II efficacy and safety study met primary endpoint in reduction of HAM-D score. A statistically significant reduction in HAM-D was seen at days 3,8,15,21 and 45 vs. placebo. Dosing for SAGE-217 was 30mg daily.
2. MOUNTAIN (MDD301) - Primary endpoint of HAM-D reduction after 15 days not met with statistical significance. Post-hoc analysis of the data led to the conclusion that 9% of the subjects in the treatment arm were non-compliant with medication. This study will receive its own analysis below.
3. REDWOOD (MDD302) - A long term monotherapy safety/efficacy of SAGE-217 that will likely contain information that determines the future of the depression line and potentially the company. Redwood is a long-term study where only patients that responded well in the initial 14 day open label segment will proceed vs. placebo. With the study lasting 331 days, it is likely REDWOOD will have a significant impact on R&D expenses in late 2019 and 2020. The company claims in its last 10-q that dosing commenced in Q3 2019.
4. SHORELINE (MDD303) - This study is similar in design to REDWOOD. The difference is after the initial 14 day open label portion used to remove non-responders, there will be no placebo group like in REDWOOD. The goal is to assess safety of initial treatment and re-treatment of patients. Top line results are expected in 2020. (Source 10-q)
5. RAINFOREST - This study is a placebo controlled trial testing the efficacy of SAGE-217 in patients with MDD who also have comorbid insomnia. Top line readouts will be released in 2020. (10-q)
Possibility for revenue from sales in the next 2 years looks bleak. Sage has started booking revenue from Zulresso since its release date of June 2019. Sales for the 3 months leading into September 30, 2019 came in at $1.478m. Gross margins do look good with COGS costing only $0.1m. Revenue listed is net of rebates, discounts and patient financial assistance. As stated in the introduction I do not see a real world application for Zulresso. Sales may grow, but without any change in oversight limitation I can't imagine any significant revenue will materialize. The company is expecting growth to ramp up 2H 2020. (10-q)(Source- Sage investor slides Q3)
Another $2.1m in collaborative revenue was received from Shionogi limited per their agreement in which Sage would supply SAGE-217 to Shionogi for clinical development. Shionogi will eventually have licensing rights to SAGE-217 in Taiwan, South Korea and Japan. An initial $90m payment was made to Sage and booked as collaborative revenue in June 2018. Current revenue from this collaborative agreement is strictly from supplying Shionogi with SAGE-217 product. (Source 10-q)
SAGE-217 looks to enter into a few flooded markets, simply by offering a unique mechanism of action. Cost will likely be prohibitive for a new medication like this. Surely investors will be looking to the large market for major depressive disorder (MDD) as rationale for such a high market cap being placed on this company. I would like to put potential for SAGE-217 into perspective. Allergan's Viibryd and Fetzima are two relatively unique takes on an SSRI and SNRI respectively. Combined Q-3 sales for Viibryd and Fetzima totaled $105m*. Both of these items are FDA approved for MDD and have been on the market since 2011(Viibryd) and 2013(Fetzima), so sales have had plenty of time to mature. It's my opinion that for SAGE-217 to ever create sales such as a Viibryd or Fetzima, SAGE-217 would need to acquire FDA approval and not receive DEA controlled substance classification. In order to ever exceed these sales levels, additional indications or trials showing superiority to current first line MDD medications would be needed.
*(Allergan does not list individual sales for Viibryd/Fetzima)
The topline results from the Phase III MOUNTAIN trial were released on December 5th.
(Photo courtesy of Sage Q3 investor slides)
The only primary endpoint for this study was HAM-D reduction at day 15. This primary endpoint was not met. The company has tried to save the study by releasing a series of post hoc results. The key finding was that 9% of patients in the 30mg daily control group had no measurable drug concentration. Removal of these patients from the control group lead to a statistically significant reduction in HAM-D scores at day 15. However, the reason for 9% of patients in the control group not having any measurable drug concentration was not mentioned. In addition, based on the data provided by Sage Therapeutics, there were 3 arms to this study. The third group was SAGE-217 20mg daily at bedtime. This control group showed no therapeutic difference from the control group. (Source MOUNTAIN)
Fortunately for Sage, the company's high valuation has led to an ease of accessibility to capital. However, it is my opinion that the company has been too lavish with spending that capital. The Company's net loss for the first 9 months of 2019 was ~$511m. R&D expenses were ~$277m and SG&A costs totalled ~$264m. Diving deeper into the 10-q there were some outstanding compensation expenses.
"We do not allocate employee-related costs and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs under research and development and, as such, are separately classified as unallocated or stock-based compensation in research and development expenses"
These unallocated or stock based compensation expenses totaled $34.4m in Q3 alone. This amounted to over 30% of the R&D budget. An additional $26.5m in stock based compensation was booked in Q3 SG&A. Professional fees totaled another $16.8m of Q3 SG&A. These are absurdly high numbers for a company with very little revenue and a net annual loss in the $600m range. (10-q)
Thanks to two very successful capital raises in February 2018 and 2019, the company had $1.1B in cash, cash equivalents and marketable securities as of September 30, 2019. Sage Therapeutics should be able to fund operations through 2020.
I decided to review Sage Therapeutics at the request of a follower after the drop in share price on December 5th. Even considering the recently halved market cap, I was expecting this company to either have a novel therapy with a really high upside or a few concrete products likely to show promise in Phase III trials. I didn't find either of those asset scenarios in Sage Therapeutics. I'm left wondering how investors valued this company at $7.1b at any point in time. As a result, I sense there is a cult following behind this stock and am hard pressed to be very bearish despite my findings.
I'm bearish on the share price until we get more MDD readouts for Sage-217. Investors need to be cautious of the recent bounce in share price continuing in the short term. In the long term, I don't think investors will make money at today's share prices.
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