ITCI - Intra-Cellular Therapies: Depression Data Boosts Investment Prospects (Rating Upgrade)

2023-05-25 19:51:46 ET

Summary

• Intra-Cellular's drug Caplyta (lumateperone) is advancing through trials for major depressive disorder (MDD), expanding its approved uses beyond schizophrenia and bipolar depression.
• Caplyta faces exclusivity expiration in December 2024, compelling Intra-Cellular to rely on Orange Book patents and promising pipeline candidates.
• Lumateperone 403 Study presents significant symptom relief for patients with MDD and bipolar depression, showcasing its potential as a leading therapeutic choice.
• Leveraging existing physician relationships, Intra-Cellular plans to widen its outreach upon MDD approval, enhancing its growth prospects.
• Despite exclusivity concerns, Intra-Cellular's strong clinical results and pipeline propose an upgrade to a "Buy" recommendation, while closely observing the company's patents and financials.

Introduction

Intra-Cellular Therapies ( ITCI ), a pioneering biotech firm, is dedicated to the creation and market introduction of novel small molecule therapies, which are primarily targeted at fulfilling unfulfilled healthcare needs. Their primary focus lies in neuropsychiatric and neurological conditions, by manipulating the intracellular signaling pathways in the central nervous system.

Their foremost drug, Caplyta (lumateperone), gained US FDA approval in December 2019 as a therapeutic option for schizophrenia in adult patients. By December 2021, Caplyta received another approval from the FDA, this time for treating bipolar depression in adults. Currently, Lumateperone is in the stage of phase 3 clinical trials, aiming for the treatment of major depressive disorder.

In the past, I've viewed Caplyta as an effective and well-received solution for bipolar depression, causing fewer side effects compared to other antipsychotics. This led to quick revenue growth, suggesting Caplyta's blockbuster potential. However, their upcoming challenge is the expiration of Caplyta's New Chemical Entity [NCE] exclusivity in December 2024.

With no substantial value generators beyond Caplyta, Intra-Cellular may need to depend on Orange Book patents for exclusivity. Hence, while I considered Intra-Cellular's stock, valued around $4 billion, fairly priced, I gave a "Hold" recommendation while also noting some potential for upside. Since the recommendation, shares of Intra-Cellular are 32% higher.

Recent Developments: Findings from Study 403 indicate that daily administration of lumateperone substantially mitigated depressive symptoms, as gauged by the MADRS, and also lessened the severity of the disease, as measured by the CGI-S, in a cohort of 192 patients. Lumateperone showcased a stable side effect profile, affirming its safety and tolerability.

Q1 2023 Financials

In Q1 2023, Intra-Cellular reported total revenues of $95.3 million, a substantial increase from $35.0 million in Q1 2022. The net sales of Caplyta surged to $94.7 million, up by 173% YoY. Caplyta prescriptions also rose by 16% sequentially. However, the net loss was $44.1 million, less than the $72.1 million loss in Q1 2022. Costs of product sales and SG&A expenses were $6.8 million and $98.9 million respectively. R&D expenses rose to $38.0 million due to increased project costs. Cash and equivalents were $540.5 million. The company reaffirmed its FY 2023 financial outlook, predicting Caplyta sales between $430 and $455 million.

Q1 2023 Earnings Call Review

In the recent earnings call , Intra-Cellular management reported positive feedback from both prescribers and patients about Caplyta, the drug developed to treat bipolar depression and schizophrenia. This affirmation reinforces the belief that Caplyta is transformative for patients. They announced robust results from Study 403, where lumateperone significantly reduced symptoms of major depressive disorder and bipolar depression.

Management also discussed expanding lumateperone's program across major neuropsychiatric conditions, investing in long-acting injectable lumateperone, and advancing other pipeline programs like ITI-1284 and ITI-333. They plan to file a Supplemental New Drug Application [sNDA] in 2024 based on ongoing studies' results.

Lumateperone 403 Study: Promising Results for MDD and Bipolar Depression

The lumateperone 403 study yielded impressive results, as it demonstrated statistically significant and clinically meaningful reductions in symptoms for patients with both major depressive disorder [MDD] and bipolar depression with mixed features. The substantial effect sizes, reaching 0.64 and 0.67 across different patient populations, imply a medium-to-large impact , signifying a notable clinical influence.

Lumateperone's efficacy is particularly noteworthy in addressing mixed features, representing a severe manifestation of these disorders associated with higher recurrence rates, comorbidities, and poor responsiveness to antidepressants. Given these challenges, lumateperone's notable effect sizes and statistical significance underscore its promising potential as an effective therapeutic option.

When compared to currently available treatments, many antidepressants and antipsychotics often report lower effect sizes , typically ranging from 0.3 to 0.5 in clinical trials, and are also hampered by significant side effects. Lumateperone, however, offers a compelling advantage with its well-tolerated safety profile consistent with prior studies. Moreover, it also demonstrated a medium-range effect size on the Global Impression of Severity Scale (CGI-S), indicating clinicians noted a significant improvement in overall disease severity.

Looking at the bigger picture, these robust results herald lumateperone's potential to reshape the treatment landscape for both MDD and bipolar depression with mixed features. This potential is amplified by Intra-Cellular's well-established prescriber relationships, setting a solid foundation for a successful market entry, pending MDD approval.

As discussed in their most recent earnings call, Intra-Cellular maintains connections with approximately 43,000 physicians, primarily psychiatrists, nurse practitioners, and a segment of primary care providers. These healthcare professionals account for about 90-95% of all branded antipsychotic prescriptions for schizophrenia and bipolar depression, marking a significant market share that would be pivotal for the potential roll-out of lumateperone for MDD.

Significantly, a large majority of these 43,000 practitioners also manage a substantial number of MDD cases. This existing network provides Intra-Cellular with a unique advantage, allowing them to leverage built-up awareness about Caplyta when transitioning to MDD messaging, pending approval.

My Analysis & Recommendation

Investing in the biotech sector is inherently associated with the roller-coaster ride of clinical trials, patent cliffs, and drug approvals, making it a highly speculative arena. Yet, the recent performance of Intra-Cellular Therapies illuminates the potential for significant rewards amidst these risks. The impressive clinical results from Study 403, indicating the efficacy of lumateperone in MDD and bipolar depression cases, and the consistent growth trajectory of Caplyta, point to an attractive investment proposition.

The broader implications of lumateperone's success in addressing mixed features, an area of significant unmet need, are noteworthy. It stands as an exemplar of Intra-Cellular's innovative approach to drug development, potentially paving the way for the company to capture a significant share of the neuropsychiatric treatment market. The anticipated MDD approval of lumateperone presents an exciting growth prospect for Intra-Cellular, especially given its pre-existing prescriber network.

However, the reliance on Caplyta for revenue generation is a double-edged sword. While it has proven lucrative so far, it also raises concerns about the company's ability to maintain momentum in the face of exclusivity expiration and ensuing competition. Nevertheless, the diversification of their pipeline with promising candidates like ITI-1284 and ITI-333, along with the potential development of a long-acting injectable lumateperone, provide a buffer against patent cliff and sustain the growth narrative for the company.

While the cash position of Intra-Cellular is robust, rising R&D expenses underline the high stakes nature of its ongoing and future trials. Despite this, the positive outlook for Caplyta sales in 2023 and the potential market penetration in the MDD segment present significant revenue growth prospects to offset this.

On balance, Intra-Cellular's recent successes and promising prospects outweigh the looming exclusivity expiration concerns. The company’s strong position in the neuropsychiatric space, bolstered by positive clinical trial results, makes it an attractive proposition for investors with a long-term horizon and an appetite for risk. Hence, based on the aforementioned factors and the anticipation of continuous growth driven by expanding therapeutic indications, an upgrade from a "Hold" to a "Buy" recommendation is warranted for Intra-Cellular Therapies stock, albeit with a vigilant eye on the company's patent portfolio, pipeline progression, and financial management.

Risks to Thesis

When the facts change, I change my mind.

Several key risks could challenge my optimism:

1. Exclusivity Expiration: The biggest risk is the imminent expiration of Caplyta's NCE exclusivity in December 2024. Upon expiration, competition from generics could significantly decrease Caplyta's market share, affecting ITCI's revenue streams.

2. Regulatory Approval: Lumateperone is in phase 3 trials for treating MDD. However, the FDA may not grant approval, which would delay or halt its market launch.

3. Commercial Success of Lumateperone for MDD: Even if Lumateperone gets regulatory approval for MDD, its commercial success isn't guaranteed. The market is crowded with antidepressants, and many of these have established prescriber networks. ITCI's ability to market and gain adoption of Lumateperone for MDD is a significant risk.

4. Reliance on a Single Drug: ITCI relies heavily on Caplyta for revenue generation. If Caplyta's sales falter due to competition, market dynamics, or other factors, ITCI's financial health may suffer.

5. Pipeline Development: The future growth of ITCI depends on successful development and commercialization of pipeline candidates like ITI-1284 and ITI-333. Delays or failures in clinical trials for these drugs pose significant risks.

6. Financial Health: ITCI reported a net loss in Q1 2023, despite a surge in Caplyta sales. If the company cannot transition to profitability, its financial stability may be in jeopardy.

7. Sales Force Expansion: ITCI's plan to expand its sales force to cover more providers, pending MDD approval, could strain resources and increase costs. The success of this expansion isn't guaranteed and might not lead to anticipated revenue increases.

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