CERE - Cerevel Therapeutics: CNS Specialist's Delayed Readouts A Potential Red Flag

2023-03-10 17:11:22 ET

Summary

• Cerevel promised multiple data readouts in 2022 and 2023 but the major ones are now delayed until 2024.
• The company was spun out of Pfizer's CNS division and wants to become a major player in CNS.
• Its major targets are epilepsy, Parkinson's, and Schizophrenia - markets where its differentiated MoA may make a difference.
• The frustrating delays have allowed others to move far ahead in the development race however.
• Cerevel is majority owned by Pfizer and investor Bain - that may be the only reason why its valuation hasn't dropped more sharply. That and the fact a >$500m fundraising last year gives the company >$900m of cash to deploy.

Investment Thesis

I last covered Cerevel Therapeutics ( CERE ) for Seeking Alpha back in July last year, when I gave the company a "Sell" rating, arguing that its market cap valuation of ~$4.4bn was too high for a company whose three main drug candidates - Emraclidine indicated for Schizophrenia and Alzheimer's Disease Psychosis ("ADP"), Tavapadon for Parkinson's Disease, and Darigabat for Epilepsy and Panic Disorder - were still a long way from commercial approval, and would be unlikely to generate the forecast blockbuster (>$1bn per annum sales).

Nine months later and Cerevel's valuation has fallen by ~$350m, to $4.05bn at the time of writing, and its share price by 14%, to $25 at the time of writing.

The losses can be attributed largely to Cerevel's failure to meet a number of promised data deadlines - Wells Fargo downgraded the stock in late February owing to the pushing back of Phase 2 epilepsy data from Darigabat until 2024, removing a key catalyst for shareholders to look forward to this year.

Today Cerevel had the opportunity to answer its critics when presenting at the 43rd Annual Cowen Healthcare Conference. In this post I will guide readers through the main elements of the presentation, run the rule over the pipeline, and advise if my "Sell" recommendation has changed.

Cerevel Overview

As discussed in my last note on the company:

Cerevel is a drug developer focused on diseases of the Central Nervous System ("CNS"), which was spun out of the Pharma giant Pfizer's ( PFE ) neuroscience division.

The lead assets handed over to Cerevel by Pfizer include Emraclidine - an M4-selective positive allosteric modulator ("PAM") in development for schizophrenia as a once-daily medication without the need for titration, Darigabat - an ?2/3/5-selective GABA _A receptor PAM currently under development for anxiety and epilepsy - and Tavapadon - a D1/D5 partial agonist currently in Phase 3 trials for the treatment of Parkinson's disease.

According to Cerevel's 10K submission (annual report) for 2022, Pfizer and Bain Investor - a global private investment firm - owned >56% of Cerevel's common stock, meaning they control more than a majority of total voting stock.

Cerevel was able to list on the Nasdaq thanks to a merger with Arya Sciences Acquisition Corp II - a Special Purpose Acquisition Company ("SPAC"). As I wrote back in July:

SPAC's are essentially shell, or "blank check" companies "formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses", according to Cerevel's 2021 annual report .

There is a fair amount of skepticism around the role that SPAC's play within the stock market - often they are seen as enabling companies to list that would have struggled to make it on their own, due to an inadequate business model, or suspect management, and post merger / acquisition SPAC's have generally performed poorly.

According to a Bloomberg post from March, "the De-SPAC Index, which tracks 25 such companies, is down more than 60% in the past 12 months"

Cerevel has in fact bucked that trend - its shares have climbed from their listing price of $10, by almost exactly 150%, and back in November 2021, traded at ~$45 per share.

In August 2022, Cerevel's share price briefly spiked from ~$26, to >$41, which apparently coincided with the company's completing an underwritten public offering of 7.25m shares priced at $35 per share, raising ~$250m, and offering of ~$300m worth of 2.5% coupon convertible notes due in 2027. As of FY22, Cerevel has reported a cash position of ~$950m.

Markets, Pipeline and Catalysts - Emraclidine

Cerevel's stated ambition is to become " the premier neuroscience company" although the competition in the fields Cerevel is focused on is fierce. In Schizophrenia, for example, Cerevel states in its 10K:

We may face competition from second-generation atypical antipsychotic treatments that work primarily by inhibiting D2 receptors as their primary mechanism of action.

These drugs include: Abilify and Abilify Maintena, marketed by Otsuka Holdings; Invega Trinza and Invega Sustenna, marketed by Johnson & Johnson ( JNJ ); Aristada, marketed by Alkermes ( ALKS ); Zyprexa, marketed by Eli Lilly ( LLY ); Vraylar, marketed by AbbVie ( ABBV ); Caplyta, marketed by Intra-Cellular Therapies ( ITCI ); and Latuda, marketed by Sumitomo Dainippon Pharma.

Between them, Abilify earned ~$425m of revenues in 2022 for Otsuka's partner Lundbeck, Invega Sustenna / Trinza ~$4.1bn, Aristada ~$300m, Zyprexa ~$360m, Vraylar ~$2bn, and Caplyta ~$250m, and Latuda ~$2bn.

Bearing in mind that the Schizophrenia market is estimated to be worth ~$7bn today, growing to $12.5bn by 2031, Cerevel is going to have to deliver on its promise to deliver a best in class drug in Emraclidine if it wants to snatch market share away from so many entrenched rivals.

Emraclidine may have a differentiated mechanism of action to its rivals - Cerevel targets the M4 Muscarinic receptor - but presently the only completed study the drug has undergone is a Phase 1 study in which it "demonstrated a clinically meaningful and statistically significant improvement in the Positive and Negative Syndrome Scale, or PANSS, total score at six weeks."

Unfortunately for Cerevel, however, there's another drug close to winning a full commercial approval that also targets the M4 receptor in the shape of Karuna Therapeutics' KARXT.

Karuna's drug has already met endpoints in a Phase 2 study with a clean safety profile - producing a statistically significant 9.6 reduction on the Positive and Negative Syndrome Scale ("PANSS"), and is likely to be approved this year. By comparison, Emracidine is barely out of the starting blocks, and won't be reporting its Phase 2 data now until 1H24.

In fairness, KARXT has been pegged by analysts for peak sales of nearly $7bn per annum, and there is chance that Emraclidine could prove to be the more selective drug (since it targets only M4, and not M1, M2 and M3 as KARXT does) and therefore end up claiming a larger market share than KARXT.

With that said, I suspect Karuna's management team would not wish to swap places with Cerevel's given the relative stages of development, and data collected to date.

Markets, Pipeline and Catalysts - Darigabat

There are just as many products approved to treat Epilepsy - if not more - than are approved to treat Schizophrenia, according to Cureepilepsy.org , which lists no fewer than 36 FDA approved therapies.

Cerevel notes in its 10K submission however that:

Despite the existence of over 30 approved Anti Seizure Medications ("ASMs"), approximately 30% of epilepsy patients fail to achieve seizure control even with the use of two or more ASMs (whether as monotherapy or in combination), which the International League Against Epilepsy defines as being drug resistant.

Darigabat has a differentiated mechanism of action to currently available ASMs - it is designed to "selectively enhance GABA’s inhibitory effect at the alpha-2/3/5 subunit-containing GABAA receptors, which is expected to suppress aberrant overexcitation that underlies epileptic activity."

Before passing Darigabat to Cerevel, Pfizer evaluated the drug in several Phase 1 and 2 studies involving >300 patients. Cerevel itself has completed a Phase 1 study of the drug in acute anxiety, which was broadly successful, with results recorded as follows:

After eight days of treatment, the darigabat 7.5 mg and 25 mg twice-daily doses demonstrated a 3.9 point (p=0.036) and 4.5 point (p=0.008) placebo-adjusted improvement, respectively, on the primary endpoint of the Panic Symptoms List (PSL-IV) total score.

A Phase 2 Panic Disorder trial will commence next quarter, management has promised, but epilepsy is the more attractive goal for management, which it estimates is a 65m patient market, worth as much as >$6bn per annum.

Its REALIZE study is a Phase 2 proof-of-concept trial in focal epilepsy and management has blamed pandemic headwinds for a failure to enroll more patients in the study thus far, but remains positive - company CEO Tony Coles told analysts on the Q422 earnings call in late February that:

We have tremendous confidence in the potential of Darigabat to address important unmet medical needs not only for epilepsy but in the potential treatment of anxiety related disorders, given its selectivity and it's avoidance of the Alpha-1 receptor subunit which we believe is the main driver of the occurrence of side effects that plagues the diazepines.

One or two analysts on the call questioned why Cerevel has experienced such long delays when other companies had apparently not experienced the same issue, whilst management warns about "next generation therapies" in its annual report, commenting:

Additionally, there are next-generation therapies in development, such as XEN1101 being developed by Xenon Pharmaceuticals and NBI-921352 (formerly known as XEN901) being developed by Neurocrine Biosciences.

Management further mentions fenfluramine from UCB (formerly Zogenix), ganaxalone from Marinus Pharmaceuticals ( MRNS ) and cannabinoid-based therapies from Jazz Pharmaceuticals ( JAZZ ) as potential competitors.

I also would question why Pfizer had discarded the drug after conducting so many studies if it was convinced it had a future - although in fairness, Pfizer owns a large share of Cerevel and will earn royalties on any net sales of the drug, if approved.

Markets, Pipeline and Catalysts - Tavapadon

Tavapadon is - according to Cerevel - the only D1/D2 selective partial agonist in development for Parkinson's Disease - although whether that is a positive or a negative is open to debate.

There's no shortage of competition in the field of Parkinson's Disease drugs. Cerevel lists its competitors as:

Denali Therapeutics ( DNLI ), Prothena ( PRTA ), Roche (OTCQX: OTCQX:RHHBY ), Voyager Therapeutics ( VYGR ), Prevail Therapeutics, Sage Therapeutics ( SAGE ), Neurocrine Biosciences ( NBIX ), Eli Lilly ( LLY ) and AstraZeneca ( AZN ).

It's a formidable list of competitors, although Cerevel says it rates its market opportunity as ~705k patients on treatment, and notes that "only 30% of healthcare practitioners ("HCPs") are satisfied with current treatment options."

Tavapadon has at least produced some promising Phase 2 data - as I covered in my last note:

The drug met its primary endpoint in an early stage trial, achieving a 4.8 point difference vs placebo by Movement Disorder Society-Sponsored Revision of the Unified Parkinson's Disease Rating Scale ("MDS-UPDRS") scoring, with only 14% of patients experiencing somnolence, albeit a higher 31% experienced some form of nausea.

I also noted however that "there are three global, registrational studies ongoing - TEMPO 1,2 and 3, with data from 1 and 2 due early in 2023", yet we now know that there will no data until mid and 2H 2024, according to Cerevel's Cowen presentation.

Once again, on the Q422 earnings call, management blamed "the challenges in the clinical trial environment across the industry", although my coverage of the sector over the past 6 months has seen hundreds of companies complete clinical studies, including plenty of CNS specialists - Karuna Therapeutics being a good example.

Chief Medical Officer Raymond Sanchez told analysts that "we're adding additional sites in the Asia Pacific region and those will be up and running later this year," but at the very least it is a frustrating delay, and at worst, something more problematic than a post COVID lull in available patients may be at play.

Conclusion - The Frustrating Wait For Data Does Cerevel No Favours - Its Valuation Is Likely Supported by the Pfizer Stake

I have bought shares in a few pharma / biotech spin outs in the past - Organon ( OGN ), and Viatris ( VTRS ) - and some - although not all - of these companies seem to have issues in common.

First of all, there's the question around why a pharma would want to spin out a successful product rather than keep it in house? The most famous example of a successful spin out is probably AbbVie ( ABBV ), spun out of Abbott in 2012. AbbVie was gifted Humira by Abbott, which went on to become the world's best-selling drug.

That may be the exception that proves the rule however. Although Cerevel wants to establish itself as a major CNS player and claims to be in possession of three best-in-class drugs, the reality may be that Emraclidine is a long way behind Karuna's KARXT in Schizophrenia - an already congested market - and does not have mature enough data in relation to Tavapadon or Darigabat to justify claims to be best in class.

The right drug product released at the right time in the right CNS field can yield a blockbuster sales opportunity - this has been proven in the past - although smaller players such as Intracellular, Supernus ( SUPN ), Vanda Pharmaceuticals can struggle to compete against Big Pharma.

All three of these companies have secured approvals for important CNS drugs, although none has a market cap larger than Cerevel's, which by management's own admission has little prospect of commercializing anything for at least two more years.

My feeling is that Cerevel's valuation is being artificially swollen by Pfizer's large holding in the company, although COVID products aside, Pfizer itself has been struggling badly, its share price down >20% this year.

Although it would be foolish to dismiss Cerevel's promise - its pipeline could still yield three blockbuster drugs, and there are earlier stage programs in play also, as shown below - I think the company has been getting away with it valuation wise - a biotech that was not majority owned by a major pharma and a venture capital firm would have experienced a far worse selloff in the face of long clinical data delays, in my opinion.

As such, if I were a Cerevel investor who had been holding and waiting for all-important Schizophrenia, Parkinson's or Epilepsy data, I'd be very tempted to cut my losses at this stage.

Long study delays rarely translate to successful products in my view, and when the disease indications are within CNS - an incredibly tough patient population to treat successfully, despite the plethora of approved therapies, I'm remaining a little bearish on the investment case for Cerevel at this time.

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