CRNX - Crinetics: FY23 Could Be Turning Point With Two Phase 3 Acromegaly Readouts

Summary

• Acromegaly pipeline continues to advance with two Phase 3 readouts scheduled for 2023.
• FDA's red-light of the CRN04777 Phase 2 study received muted price response.
• Technicals unsupportive of re-rating for now, hence 2023 will be key year for CRNX.
• Net-net, we rate CRNX a hold, but are constructive on its prospects in the coming year.

Investment summary

As the market continues to reprice risk assets at the back end of FY22, we are looking for beaten down opportunities within the med-tech and biotech spheres. Added to that, we continue to unearth selective names that are working to provide substantial breakthroughs in rare, complex disease segments, where the current standard of care has failed to create a statistically meaningful change of outcome. One such name we've been observing across the bulk of FY21-22' is Crinetics Pharmaceuticals, Inc (CRNX). The company is advancing its pipeline that spans across the segments of acromegaly, congenital hyperinsulinism, and Cushing's syndrome.

In our opinion the alpha opportunity in CRNX lies in its two phase 3 readouts for its acromegaly pipeline in mid-to-late FY23. However, these are still a while away, and there's plenty that can happen in markets between that time. Moreover, it expects further readouts from its broad pipeline in FY23. These could absolutely prove to be key inflection points for the stock, should it convert on its Phase 2 and 3 trials in question.

However, until then, several data points suggest that right now might not be the right time for entry in CNRX. Until then, we are trigger shy on this name, but are constructive on the company nonetheless, in view of the points raised above. Here I'll provide a deep dive into the company's underlying treatment segments, to give insight into the investment opportunity. Net-net, we rate CRNX a hold.

Potential overhang: FDA red-light for CRN04777

In late November the FDA informed CRNX that it would not greenlight the company's investigational new drug ("IND") to progress to Phase 2 studies of CRN04777.

The compound is being investigated as an oral administration for the treatment of congenital hyperinsulinism ("CHI"). The FDA was due to release its reasoning within 30 days of its decision [starting from November 28th]. Hence, we'd be expecting the FDA announcement any day soon.

As a reminder, CRN04777 had been examined in a cohort of 78 healthy adults during a Phase 1 trial, demonstrating it was well tolerated in dosages of 30mg-120mg, with no serious adverse events.

Provided the FDA greenlights the next phase of clinical trials for CRNX, this could be a positive outcome. However, should it continue to deny permission for the company to advance its pipeline here, this could equally prove to be a meaningful overhang looking ahead. Investors should factor this into the investment debate here.

Key mid-term growth lever: Acromegaly pipeline

The key medium-term growth driver for CRNX is its Paltusotine pipeline by estimation. Here, it is searching to provide a medical breakthrough in a complex condition known as acromegaly. As a reminder, CRNX has two phase 3 readouts scheduled for its acromegaly interventions in 2023. Hence, in order to understand the investment opportunity in CRNX downstream, it's essential to have a firm grasp of this condition.

Acromegaly is a rare endocrine disorder characterized by excessive secretion of growth hormone ("GH"). It is typically caused by a benign tumor of the somatotroph cells within the anterior pituitary gland, leading to overproduction of GH. The pathogenesis of acromegaly is complex, involving multiple signaling pathways and transcription factors that regulate GH synthesis and secretion.

With that, it should be noted that GH is a single-chain polypeptide hormone produced and secreted by the somatotroph cells in the pituitary gland. This occurs in response to growth hormone-releasing hormone ("GHRH"), produced by the hypothalamus [I'll also talk more on the hormone somatostatin a bit later, as it is also key to understand here].

In consequence, GH stimulates the liver to produce and release insulin-like growth factor-1 ("IGF-1"), which in turn stimulates growth and development of various tissues in the body. In individuals with acromegaly, the GH-secreting tumor leads to excessive production of GH, which results in increased levels of IGF-1, leading to abnormal, excessive tissue growth. Hence, a positive feedback loop is formed, resulting in an uncontrolled/unregulated advancement of the condition.

The clinical presentation of acromegaly is varied and often insidious, with symptoms often appearing gradually over time. Classical signs and symptoms include enlarged hands and feet, thickened facial features, headaches, fatigue, and impaired glucose tolerance. Acromegaly can also lead to more serious complications, including hypertension, diabetes mellitus, sleep apnoea, and cardiovascular diseases. Diagnosis of acromegaly is therefore typically made based on clinical presentation and laboratory testing.

As it currently stands, treatment of acromegaly typically involves a multidisciplinary approach, with the goal of normalizing GH and IGF-1 levels. Most commonly, medical intervention may involve use of GH receptor antagonists such as somatostatin analogues, which inhibit GH secretion. Otherwise, surgical removal of the pituitary adenoma is preferred in a number of candidates.

With respect to somatostatin analogs, two common labels exist, octreotide and lanreotide. Both are comprised of an injection, and, per Katznelson (2016) , have shown effectiveness at reducing IGF-1 levels in 25-50% of patients with acromegaly, also reducing tumor size in roughly 1 quarter of patients. However, this therapy is associated with an extensive list of severe adverse side effects, reducing compliance and also efficacy.

In addition, the GH receptor antagonist, pegvisomant, has proven it can reduce IGF-1 levels in up to 95% of patients with acromegaly. However, it does nothing to impact tumor control.

Hence, CRNX's Paltusotine has scope to provide a medical breakthrough in this segment. Currently, the acromegaly treatment market is valued at $767.5mm in 2022, with an projected CAGR of 5.1% into 2030. With respect to somatostatin analogues, the market was valued at $8.64Bn last year, with projected growth of 6.8% into 2030.

This is important, because the company's Paltusotine hypothesis is building on the previous evidence surrounding the benefits of modulating the hormone somatostatin.

Somatostatin is also a hypothalamic hormone that plays a crucial role in the regulation of GH secretion by the pituitary gland. It acts as an inhibitor of GH release through its action on somatostatin receptors, which are also expressed on the surface of GH-secreting cells in the anterior pituitary gland. Upon binding to these receptors, somatostatin activates intracellular signaling pathways that lead to the inhibition of cAMP production, and the subsequent suppression of GH secretion. In normal circumstances, the balance between GHRH and somatostatin ensures that GH levels are tightly regulated. However, in individuals with acromegaly, the presence of a GH-secreting pituitary adenoma leads to a disruption of this balance.

Exhibit 1. Mechanism of action for Paltusotine

Therefore, somatostatin exerts a negative feedback loop on the hypothalamic-pituitary-GH axis by inhibiting the secretion of GHRH from the hypothalamus, further contributing to the inhibition of GH release. In addition to its inhibitory effects on GH secretion, somatostatin has been shown to have a direct effect on the growth of GH-dependent tissues, such as the liver and bones.

Here's where CRNX's Paltusotine steps in. In effect, Paltusotine could establish a standalone therapy, by creating a class of selective non-peptide somatostatin receptor type-2 ("SST2") agonists. By binding to and activating these receptors, SST2 agonists can mimic the inhibitory effects of somatostatin on growth hormone release, and other hormonal pathways.

And this forms the basis of CRNX's compound, that is now being investigated in the Phase 3 PATHFINDER-1 study. It is investigating the safety and efficacy of Paltusotine once-daily via oral administration for 9 months, in patients diagnosed with acromegaly. Meanwhile, the company is also accepting enrolments for its Phase 3 PATHFINDER-2 study . The key difference is that the PATHFINDER-2 trial will investigate a patient population that hasn't received pharmacological intervention for acromegaly, whereas the PATHFINDER-1 regime is examining Paltusotine in patients treated with long-acting somatostatin receptor ligands. Investors can expect top-line data from both PATHFINDER-1 and PATHFINDER-2 in Q3 FY23' and Q4 FY23' respectively. CRNX's Paltusotine pipeline is also seen in the Exhibit below.

Exhibit 2. Paltusotine pipeline

CRNX: The technical picture

As you can see in Exhibit 3, FY22' has been a fairly unflattering year for the CRNX share price. It's traded in a fairly tight range of c.$15-$22, backing and filling along the way. After a dip below the support level, shares have recovered this week and trade back in range.

Tracing the fibs down from the April FY22' high to the low of last week suggests the next upside target is $19, then $20.70, which would correspond to a 38% and 50% recovery of the downside, respectively.

Meanwhile, weekly volume trends have remained fairly consistent for CRNX over the course of this year, with plenty of buying thrusts in the latter two months. Despite this, the stock trades below its 50DMA and 250DMA, and has rode the 50DMA to the downside since early November.

Exhibit 3. CRNX price action over the past 2-years, demonstrating heavy consolidation in early 2022, before backing and filling the rest of the period.

With this sideways price activity, the stock is now testing cloud support, but the lag line hasn't managed to enter the cloud. On balance volume and momentum are equally as weak in this regard. Further price upside is required in order to justify a bullish outlook from technicals in the medium term. Hence, the FDA's announcement for CRN04777 and the additional readouts for Paltusotine are critical inflection points into the new year.

Exhibit 4. Testing cloud support, without the backing of on balance volume or momentum.

Valuation

It's difficult to prescribe a valuation for CRNX based on the trajectory of its future cash flows at this stage. A surging cost of capital, corresponding to higher discount rates, ultimately compresses the value of any cash flows priced out into the future. Moreover, there's additional risk in the fact CRNX is a clinical-stage biotech, printing little revenue to flow to funding its growth initiatives.

It does, however, trade at a price/book ratio of 2.8x, with $6.53 in book value per share. It has grown its book value per share 30% YoY from Q3 FY21, well ahead of the S&P 500's total return in the same time.

At this point in time, the bulk of its asset base is made up from $337.45mm in investment securities, and $30.9mm in cash, resulting in shareholder equity of $351.4mm. Hence, assigning the 2.8x multiple to CRNX's $6.53 in book value per equity derives a valuation of $18.30, suggesting the stock could be fairly valued at its current market price.

The same point is supported by Seeking Alpha's quantitative factor grading , that rates CRNX lowly in terms of valuation. This is further supportive of a neutral view at this point.

Exhibit 5. CRNX quantitative factor grades, implying risks associated with valuation.

In short

There are several inflection points on the horizon for CRNX into the new year that could also prove to be turning points for the stock. In particular, the company's acromegaly pipeline could serve to be an interesting compounder, should the economics also stack up. However, this is contingent on the completion of its Phase 3 trials of its Paltusotine label.

Despite this, the question of opportunity cost arises, and where to most efficiently allocate capital. As the macro-landscape tightens up, and discount rates begin to lift, long-duration stocks are less appealing. Hence, whilst we are constructive on CRNX, until we have further clarifications, we are happy watching this name on the sidelines for now. We encourage investors to be active on the name and be ready for the FDA's decision regarding CRN04777 due within the coming weeks.

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