CERE - Cerevel Stock Soars Ahead Of Parkinson's Drug Update - I'm On Sidelines

2023-12-06 14:05:40 ET

Summary

• Cerevel Therapeutics Holdings, a neuroscience company, has seen its stock rise over 250% since its listing on the Nasdaq via a SPAC merger.
• The company recently conducted a $450 million at-the-market fundraising and its stock has risen over 45% this week.
• Cerevel is set to host an investor webcast on December 11th to discuss its Parkinson's disease drug candidate, Tavapadon, which has the potential for blockbuster sales.
• In this post, I review Cerevel's recent progress, expectations for PD drug Tavapadon, competitive threats, and whether I'd buy ahead of this much-anticipated investor call.

Cerevel Therapeutics Overview

I last covered Cerevel Therapeutics Holdings, Inc. ( CERE ) in a note for Seeking Alpha in July last year, giving the company's stock a "sell" recommendation.

Cerevel was formed via a spinout of beleaguered Pharma giant Pfizer's ( PFE ) neuroscience assets, achieving its listing on the Nasdaq via a merger with a Arya Sciences Acquisition Corp II - a Special Purpose Acquisition Company ("SPAC"). As I wrote last July:

Arya Sciences acquired Cerevel Therapeutics and changed its name to Cerevel Therapeutics Holdings, allowing Cerevel management to access the public markets without the onerous listing requirements usually associated with an Initial Public Offering.

Arya was able to equip Cerevel's experienced management team with $320m of funding raised from the likes of Bain Capital, Perceptive Advisors, Fidelity and RA Capital, whilst Cerevel itself raised $150m in a private round.

SPAC listed companies have generally performed poorly post-listing - research from evaluate vantage suggests that "half of the 43 drug developers that floated via these vehicles since 2019 have enterprise values of less than $30m," but Cerevel has bucked the trend and shares currently trade at $37 per share, up >250% since listing.

In August this year, my bearish call looked fully justified, however, as Cerevel - a central nervous system disease specialist - pushed back timelines for key data readouts related to its Schizophrenia drug candidate emraclidine into the second half of 2024, disappointing the market, and leading to a downgrade from analysts at the Bank of America ( BAC ). Shares sank from $30 per share, to $20 per share overnight - a 33% drop.

Undeterred, Cerevel completed a $450m at the market fundraising in October, via the issuance of ~19.7m shares priced at $22.81 per share. According to the company's Q3 quarterly report / 10Q submission :

We are advancing our extensive and diverse pipeline with numerous clinical trials underway or planned, including three ongoing Phase 3 trials and an open-label extension trial for tavapadon in Parkinson’s, two ongoing Phase 2 trials and an open-label extension trial for emraclidine in schizophrenia, an ongoing Phase 2 proof-of-concept trial and an open-label extension trial for darigabat in focal epilepsy and an ongoing Phase 2 proof-of-concept trial for darigabat in panic disorder.

Despite the heavy shareholder dilution, Cerevel stock had risen to $26 per share by the beginning of this week, before taking flight this week, reaching a value of $37 per share at the time of writing, up >45% since the markets opened Monday.

There has not been much in the way of news-flow, however in a press release issued on November 29th, the company announced it "will host a Tavapadon investor webcast on Monday, December 11, from 10:00 to 11:30 a.m. ET." The release continues as follows:

Cerevel will lead an in-depth discussion of tavapadon, its D1/D5 partial agonist currently in Phase 3 development for the treatment of Parkinson’s disease. The event will include remarks and insights from Hubert Fernandez, M.D., Director, Center for Neurological Restoration at Cleveland Clinic and recognized key opinion leader in Parkinson’s disease.

“I am excited about the potential of tavapadon, the first and only selective D1/D5 partial agonist being studied for Parkinson’s disease,” said Dr. Raymond Sanchez, Cerevel’s chief medical officer. “We know there is a significant need for a novel treatment option that provides sustained motor control without non-motor side effect tradeoffs and look forward to discussing our hope for delivering tavapadon to people living with Parkinson’s."

This investor event will provide a detailed look at tavapadon’s differentiating features, previously published clinical data, the design of the TEMPO program, and the potential opportunity of tavapadon to meet unmet patient needs within the Parkinson’s disease treatment paradigm.

Tavadapon - A Parkinson's Drug With Blockbuster Potential?

Tavadapon is a selective dopamine D1/D5 receptor partial agonist and it is being developed by Cerevel with "the goal of enhancing motor control and improving tolerability compared to standard of care," according to Cerevel's latest investor presentation . The drug is being looked at as both a monotherapy for early stage Parkinson's Disease, and as an adjunctive therapy for late-stage Parkinson's.

According to Cerevel's 2022 annual report / 10K submission :

tavapadon has been evaluated in 294 subjects across 11 prior clinical trials, including five Phase 1 trials in healthy volunteers, three Phase 1/1b trials in patients with Parkinson's and three Phase 2 trials.

In a Phase 2 trial in early-stage Parkinson’s, tavapadon demonstrated a statistically significant and clinically meaningful difference from placebo of -4.8 points on the MDS-UPDRS Part III motor score at week 15 of the treatment period. Separation from placebo was observed as early as week three while still in the titration phase.

In a Phase 2 trial in late-stage Parkinson’s, tavapadon showed a 1.0-hour improvement versus placebo in “on” time without troublesome dyskinesias at week 10 with a sustained effect observed through week 15, which we and our clinical advisors believe is clinically meaningful.

Based on positive data collected from these studies, Management elected to initiate a:

registration-directed Phase 3 program for tavapadon beginning in January 2020, which includes two trials as monotherapy in early-stage Parkinson’s, known as TEMPO-1 and TEMPO-2, one trial as adjunctive therapy in late-stage Parkinson’s, known as TEMPO-3, and an open-label extension trial, known as TEMPO-4.

Management says that "Data are expected from the TEMPO-3 trial in the first half of 2024, and the TEMPO-1 and TEMPO-2 trials in the second half of 2024," which is later than originally expected - when I covered Cerevel last year, management was promising data in early 2023.

Management was, however, discussing the planned December 11th updates as early as the Q3 earnings call, on November 1st, with Cerevel's President and Chief Executive Officer ("CEO") Ron Renaud stating:

we will host a tavapadon investor webcast on December 11th, during which we will explore this novel mechanism and its potential to address patient needs in greater depth. We believe there is a significant opportunity in Parkinson's disease to deliver sustained motor control with a favorable side effect profile.

Chief Medical Officer ("CMO") Ray Sanchez also brought up the meeting commenting:

We look forward to walking you through the scientific rationale and prior data for tavapadon, as well as its clinical potential during our investor event in December.

Later in the call CMO Sanchez candidly discussed the company's planned filing of a New Drug Application ("NDA") for Tavapadon as follows:

So when we file the tavapadon NDA, we will file all three trials and the open label extensions. So, we will get a label like others have received for the treatment of Parkinson's disease. So, the NDA will consist of the TEMPO-3 trial, which we'll read out in the first half of next year, which is the adjunctive to levodopa trial, the two monotherapy trials that we'll read out in the second half of next year, as well as the TEMPO-3, which is actually the -- excuse me, TEMPO-4, which is actually the open label extension trial.

In summary, we might interpret management's comments as a clear indication of their confidence in the efficacy and safety profile of tavadapon, and the upcoming investor event as a precursor to positive data to be shared early in the New Year, in the adjunctive setting at least, followed by positive monotherapy data, followed by the NDA submission.

If that is the case, does it make the recent share price run-up justified, and will further upside be explored post-meeting?

Tavapadon Market Opportunity

According to Global Data , the market for Parkinson's Disease is expected to grow from $3.5bn in 2019, to $11.5bn in 2029, although personally I would take such forecasts with a pinch of salt. The market will grow, but perhaps by half as much based on patient prevalence at least.

According to the Parkinson's Foundation , 90k people are diagnosed with the devastating disease every year in the US, a figure that has increased from 60k per annum in 2018, and by 2030, there will likely be 1.2m people suffering from Parkinson's in the US.

At present, the market consists "mainly of L-dopa, D2/D3-preferring agonists and MAO-B inhibitors," according to Cerevel, with the most popular product likely being AbbVie's Duodopa, which earned revenues of $458m in 2022, down from $511m in 2021.

Competition in the space is fierce, however. AbbVie's candidate ABBV-951, for example - a combination of foscarbidopa and foslevodopa, the prodrugs for carbidopa and levodopa, used in Duodopa, was rejected for approval by the FDA in March this year, owing to issues with its subcutaneous pump device, but is likely to gain approval at the second time of asking, putting it well ahead of tavadapon in the race for commercialisation. The drug has been forecast to achieve blockbuster (>$1bn per annum) sales by some analysts.

Then there is Swiss Pharma giant Roche (OTCQX: RHHBY ) and partner Prothena’s ( PRTA ) PRX-002 (prasinezumab), which is in Phase 2 studies, and Amneal’s IPX203 (levodopa/carbidopa) extended release prospect, with peak sales expectations of $300 - $500m although this too has been rejected by the FDA .

In my view, there are two ways of interpreting the current state of the Parkinson's Disease markets, which ought to inform the investment case for Cerevel. One interpretation is that it is crowded, that Tavapadon is towards the back of the queue for an FDA approval, that gaining approval is by no means guaranteed, and that blockbuster revenues would be extremely hard won.

The other interpretation is that the quality of drugs being pushed for approval is low, and that any drug that can show a genuine edge on efficacy and safety - as Cerevel management believes Tavapadon does - may gain a swift approval, and given its likely broad label, easily achieve "blockbuster" revenues.

Concluding Thoughts: A Must-Not Miss December Date For Prospective CERE Investors - A Chance For Management To Make Up For Lost Time

Ultimately I find myself torn in relation to the investment opportunity in relation to Cerevel. On the one hand, the company has made slow progress amid a number of frustrating delays, and the company's greatest strength appears to lie more in its ability to keep raising cash than to successfully develop central nervous system disease drugs.

The company reported a cash position of $758m as of Q3, although it also made a large net loss of >$300m in the first nine months of 2023, meaning its funding runway will just about last through to the end of 2025, by which time the company is only likely to have a single commercial product, if, all being well, the NDA for Tavapadon has been submitted, accepted, and approved.

On the other hand, it is not a good idea to rush drug development - as evidenced by the recent failure of AbbVie and Amneal's Parkinson's candidates, small development mistakes can cost a company a year's worth of commercial sales. The signs point to a positive investor call on December 11th, and the unveiling of a large market opportunity, but smooth progress is rarely guaranteed with Cerevel.

Cerevel's current $6.5bn valuation is arguably high even for a company with a potential blockbuster product in Phase 3 studies, with final data due next year - I tend to work on a rule of thumb of a valuation of 3-5x sales when looking at Pharmas, especially when they are as heavily loss making as Cerevel, and even if Tavapadon is a commercial success, cerevel will not achieve that metric at current valuation.

Arguably, however, the validation of Cerevel's approach will be worth billions in market cap valuation to the company, and with two other major drugs in development, looking as if they may make a meaningful contribution in the schizophrenia and epilepsy fields of commercial drugs, you could certainly make the case that Cerevel has the potential to morph into a double-digit billion market cap company.

Ultimately, however, I choose to give Cerevel a "hold" recommendation and pass on the opportunity to buy into a potential share price spike when the investor day arrives next week.

The biggest factor in my decision is the uncertainty of the market opportunity in CNS disease indications, and the difficulty of developing effective drugs for patients - what works in a clinical setting may not ultimately be received well by patients - more than any other field, CNS disease treatment is subjective, and down to patient preference. Tavapadon is unproven in that respect.

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