- Sage's zuranolone has failed to be tremendously impressive in clinical trials.
- However, Sage is backed by Biogen, a company with a magician's regulatory prowess.
- So that makes zuranolone's regulatory chances stronger, even if commercial success is less certain.
- Looking for more investing ideas like this one? Get them exclusively at The Total Pharma Tracker. Learn More »
Since I covered Sage Therapeutics (NASDAQ:SAGE) in February, the stock is down 50% - another sad reminder of how bad 2021 has been for the entire biopharma sector. In my previous article, I noted how SAGE recovered from the unfortunately-unsuccessful MOUNTAIN trial by posting successful data from the SHORELINE trial in Major Depressive Disorder or MDD. I noted how the Shionogi deal, and especially the enormous Biogen (BIIB) deal, helped spruce up the stock. Despite all of that, the stock is today down 50% today, so we need to figure out why.
I find Seeking Alpha’s news section very helpful in understanding the lifecycle of a company. True, sometimes they will inexplicably miss a critical press release, but in general, this is a very good resource. On looking at the news since I last posted on SAGE, and tallying it with the stock price movement graph, I find the following:
- The stock went steadily but slowly downhill from February until about early June.
- There was a brief spike in the middle of June, then a sudden, drastic fall.
- The stock has continued to trade downwards and sideways since.
The spike-fall routine in June was an anomaly. Even if you take that out of the equation, the rate at which the stock was falling from February onwards would have led us to at about the same price where we are today. This tells me two things. One, whatever is causing the steady fall is not a one-off event like a data readout. Two, whatever caused the June movement was a one-off event (this is obvious).
Now, if you will quickly recall the history of Sage, in mid-2020, the company was in the news for a major restructuring plan in order to survive. The situation was that dire. Zulressa was not selling, having been launched just before the pandemic, and zuranolone was too far away for comfort. Then, Biogen came down with a huge deal for this stock from the left field. So, as a result, we have the following anomaly in February earnings:
Sage recorded $1.1 billion in net revenue in the fourth quarter of 2020, comprised of $1.1 billion of collaboration revenue from Biogen and $1.7 million from sales of ZULRESSO, compared to $2.0 million for the same period in 2019, which consisted of revenue from sales of ZULRESSO.
In 4Q2019, their net revenue was $2mn, while in 4Q2020, it was $1.1bn. That looks like a big deal until you realize that ZULRESSA revenue has been steadily falling. It was $2mn in 4Q2019, by 4Q 2020, it was $1.7mn, and then, in the November quarter, it was down to $1.44mn, missing analyst expectations by a large margin. Clearly, ZULRESSO was a deadbeat asset, and all hope centered around zuranolone.
Unluckily for Sage, even zuranolone failed to impress with some of its trial data. We saw before how MOUNTAIN failed because, as the company claimed, 9 patients did not comply with the dosing regimen and that created a p-value of 0.115, which was obviously not statistically significant. Take out those 9 patients, and the trial yields a p-value of 0.048, where 0.05 is the usual threshold for statistical significance. So, fair, but not good enough. However, interim data from the SHORELINE study, announced in October, was much better, and helped bolster the stock. Topline SHORELINE data was to be announced in late 2021. Topline WATERFALL trial data in MDD was also set to be announced in mid-2021. The following milestone list will help explain the situation:
So, after the Biogen deal and the poor show with ZULRESSO, the next major catalyst was WATERFALL data. A number of analysts, including Stifel’s Paul Matteis and analysts at Citi, set up high expectations surrounding this readout. The readout offered an ‘upside-biased risk-reward,' said Paul Matteis, and opined that the drug was an ‘efficacious antidepressant.’ Citi raised its price target. This caused the initial spike in June.
This data, announced in June, was a disappointment. On the surface, the drug achieved the primary endpoint of the trial, which was “Change From Baseline in the 17-item Hamilton Rating Scale for Depression (HAM-D) Total Score at Day 15.” The change from baseline in HAMD-17 total score at Day 15 for patients who received zuranolone 50 mg was -14.1 (0.51) compared with -12.3 (0.50) for patients who received placebo (LS mean difference -1.7 points; p=0.0141). However, studies have shown, cited below, that even if statistically significant, a change from baseline of less than 3 points is clinically irrelevant:
per convention a difference < 3 points or an effect size d < 0.5 (corresponding to < 4 HAMD-17 points) are considered clinically irrelevant
Another study says:
None of the trials used ‘active’ placebo or no intervention as control intervention. All trials had high risk of bias. SSRIs significantly reduced the Hamilton Depression Rating Scale (HDRS) at end of treatment (mean difference −1.94 HDRS points; 95% CI −2.50 to −1.37; P < 0.00001; 49 trials; Trial Sequential Analysis-adjusted CI −2.70 to −1.18); Bayes factor below predefined threshold (2.01*10−23). The effect estimate, however, was below our predefined threshold for clinical significance of 3 HDRS points.
These citations relate to SSRIs or Selective serotonin reuptake inhibitors, while zuranolone has a different mechanism of action. However, the key point is that stat sig in the HAMD-17 (also known as HDRS) score does not automatically translate to clinical relevance. Sage has noted, “that the placebo-adjusted reductions in Ham-D-17 seen with standard of care in major depression were 1.3-1.5 points.” However, lacking a direct comparison with standard of care, this assessment did not convince investors.
Moreover, in a key secondary endpoint, the trial failed to show stat sig - change from baseline in CGI-S score at Day 15 was not significant at Day 15: LS mean difference: -0.2 points; p=0.1193. This is interesting because studies have shown that correlation between HAMD-17, the gold standard, and CGIS-S is significant, and increases over time, so a hit on one and a miss on the other is confusing until you consider that the absolute HAMD-17 change was small.
A second “successful” trial for another asset also failed to impress investors. From Seeking Alpha:
The narrow margin of success, adverse events, and lack of clarity over the candidate’s future development for ET are among the concerns highlighted by Jacob Plieth and Madeleine Armstrong in an article posted on Evaluate.
In November, the company announced NDA plans for 2H 2022, and in December they published more data from SHORELINE - this was mostly safety and tolerability data. None of these things helped shore up the company’s prospects, though. The stock still continues to stagnate because there has been no data strong enough to balance the negative data we saw before.
Analysts from Bernstein provide some counterpoints to the depressing thesis developing here. According to FierceBiotech:
Bernstein analysts believe the Waterfall results balance out the earlier failure: "First in class drugs are tough to get right."
Zuranolone is likely to be approved by the FDA on the strength of the Waterfall data, even though Bernstein described the effect as "moderate." Sales of $2 billion to $3 billion are expected, with zuranolone likely being used in combination with existing therapies to boost an early response.
"We believe the drug provides rapid onset of efficacy, which is an important benefit for severe depression patients," Bernstein analysts said in a note. "This will create a new franchise for Biogen in depression. While we would argue the benefits are moderate, the [mechanism of action] is differentiated enough, the market is large enough and zuranolone would benefit from protected class status."
Admittedly, not a lot of things have happened in recent years in the depression market, barring the approval of Johnson & Johnson’s (JNJ) Spravato, and patients still have to take “daily monoamine-based oral therapies” long term, with many side effects. MDD is an episodic disease, so zuranolone’s episodic efficacy, despite the shorter duration of treatment effect, have interested some KOLs. However, the market still seems disinterested. Data from the CORAL study, expected to be read out next year, may become a major binary event. There’s some recent development re CORAL which says Sage and Biogen tweaked the primary endpoint of CORAL “to avoid a miss on the original goal and one that could complicate the drug's real-world use.”
The original endpoint was to measure the drug’s effect at day 15, but in the new model, this has become day 3. This may help the drug meet the endpoint more easily, however prescribers may worry about the durability of treatment effect.
SAGE has a market cap of $2.51bn and a cash balance of $1.8bn, which gives them an enterprise value of roughly $700mn, which I think is just about correct. The company spent around $130mn in the last reported quarter, which gives them a huge runway; indeed, a long runway is the least of their worries. What should worry the company is approval, and even more, commercial success. With Biogen on board, they may be expecting another aduhelm, but they should not forget that aduhelm isn’t having a great day at the market.
The company largely institution and fund owned:
The CEO recently purchased a bunch of shares in the open market:
With Biogen behind it, and a technically successful trial, Sage may expect an approval for zuranolone in at least one depression indication in 2023. However, I believe it needs to position itself more consciously in the acute treatment scenario in order to convince prescribers. I will continue watching the stock.
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This article was written by
Avisol Capital Partners is made up of a team of medical experts, finance professionals and techies, all of whom invest their own money in the picks they share. They aim to help readers find the middle ground between value and growth investing, as they demystify the biopharma industry.They lead the investing group Total Pharma Tracker where they offer a monthly updated catalyst database, an investability scoring system for quick reference ideas, and direct access in chat for dialogue and questions. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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