NBIX - Neurocrine Biosciences: Fear Not The IRA

2023-11-30 12:16:34 ET

Summary

• Neurocrine Biosciences' stock has been stagnant due to a lack of appreciation for positive updates and the modest mid-stage pipeline setbacks.
• The company recently settled with generic filers, ensuring no generic launch of Ingrezza until 2038 and highlighting the strength of its intellectual property.
• The concerns over the impact of the Inflation Reduction Act on Ingrezza seem overblown.

Shares of Neurocrine Biosciences ( NBIX ) have been stuck in a range recently due to a combination of a lack of appreciation for good news on the clinical side with two phase 3 trial wins for crinecerfont and the continued strong growth of Ingrezza, and some market “appreciation” on the downside due to the two recent phase 2 trial failures of NBI-352 in focal onset seizures and of NBI-846 in anhedonia in major depressive disorder.

The recent positive legal update went nearly unnoticed as well – that Neurocrine settled with remaining generic filers which means there will be no generic Ingrezza launch until 2038. Of course, these settlements do not mean other generic filers cannot challenge Ingrezza patents, but any such challenge will take years to resolve. The settlements also show the strength of Ingrezza’s IP position.

This leaves the Inflation Reduction Act, or the IRA, as the only viable threat to Ingrezza in the long term. Investors fear the unknown and I often hear and read that being hit by the IRA is like a drug going generic. That is not the intention of the law, nor will this happen.

There are also benefits of the IRA that should boost the prescription growth of certain medicines, particularly those that are also going to be negatively affected by the IRA, and the $2,000 cap on out-of-pocket costs for Medicare beneficiaries beginning in 2025 should make drugs like Ingrezza more affordable.

CEO Gorman talked about the expected impact of the IRA on Ingrezza at the Jefferies conference two weeks ago and tried to address some of the unfounded concerns:

Let’s just take it as it sits today. What IRA looks like. Neurocrine, best guess that we have looking how they are rolling it out, Neurocrine would be listed for negotiation in 2027. We’d be negotiated between 2027 to 2029. And in 2029, the negotiated price would be set and would roll incrementally in between 2029 and 2031. That’s how the price part works.

The key feature here is the least amount that they can reduce, how far they can take the price down from whatever it is in 2027, that’s going to be the reference price for when the negotiation starts, is 25%. So, legislation says that they can take you down 25% from that price, they can’t take you down by more than 34%, so you have a maximum. I’m talking about for those companies with small biotech exemption.

So, no, Ingrezza is not going “almost” generic anytime soon, and its price will not be cut by 90% nor will it have any remotely similar discount. The worst-case scenario is an incremental rollout of a 34% lower price between 2029 and 2031. That would be the price for Medicare, and from a 2027 reference price that will likely be 15-20% higher than today’s price, but the price in 2027 would ultimately depend on inflation levels as Neurocrine will not raise the price more than the inflation rate, nor will it keep the price stable if there is inflation.

There is also an offset for that discount because the so-called donut hole coverage for Ingrezza would be eliminated as it would no longer apply to negotiated drugs. Gorman said the following:

There is the second part, and that is the redesign for part D. I know for a lot of the European colleagues this is gibberish so I apologize. And that is one where we believe we qualify for small manufacturers exemption. So that will be staged in for us from 2025 to 2031 also, and that’s where no longer do we fill up the donut hole but we have, we will then be picking up in the catastrophic phase of Medicare coverage up to 20% of that, many years. It starts out low, 1% for the first year, 2% for the second, grows like that. That, in the first couple of years that is actually a tailwind, we will be paying less to Medicare Part D than we currently pay for today. Once you are negotiated, wherever you are in that going up to 20%, that goes away, you no longer pay into part D because you’re a negotiated price at that point in time.

So, when you start looking at that and seeing how all that works out, there are people who immediately came to the conclusion, oh my God, when you are negotiated, they’ll negotiate you like you are a generic you’re just going to be a generic drug? Not even close. We are going to have a much greater number of patients between now and 2029, when the negotiated price goes into place. We take cautious no more than inflation price increases when we take them and so we will have a higher price negotiated off of in 2027. And so, it is not good for our industry or the patients in the United States, most of the things are not going to be good in the long-term from IRA but it is not as draconian or devastating as I think many people have thought of in the past.

It is not yet clear whether commercial payers can get up to a 34% discount, but let’s assume that they do. At worst, the IRA would more or less set Ingrezza back by what I estimate is approximately two years as I believe it will remain in modest growth mode at the time and that the list and net price will go up over that time and make up for some of the “negotiated” discount. In other words, net sales in 2032 would drop back to 2030 levels, or a net price cut between 15% and 20% including the mentioned benefits and offsets. Negotiated is in quotation marks because there is no negotiation here. The government sets the price or the manufacturer pays egregious fines that essentially put it out of business.

Based on what Neurocrine has in its pipeline today and what I assume will be additional few products on the market by 2031, I expect Neurocrine to remain in growth mode even during the price reduction period that will be phased. Even Ingrezza could remain a growth product during this period, but for that to happen, it will probably need to add another indication such as adjunctive treatment of schizophrenia or dyskinetic cerebral palsy (although I assume the latter trial will fail based on Austedo failing in the same indication recently).

During that time, I would expect to see continued growth from crinecerfont in classic CAH, and potentially blockbuster launches of one or more muscarinic products (NBI-568, NBI-570, and/or others), pending positive and competitive data.

And the beneficial part of the IRA will come sooner – the cap on out-of-pocket costs that will likely provide a boost to Ingrezza’s prescription growth.

In any case, I see a clear line of sight for Neurocrine to remain a strong growth biopharma company in the next 10+ years and a company that will either be acquired for a good premium from current levels or a company that will have $4-$5 billion in annual profits by the early 2030s, driven by the continued growth of Ingrezza in tardive dyskinesia and Huntington’s disease chorea, by the launch of crinecerfont in classic CAH, and potential contribution from other existing, in-licensed, or acquired product candidates, and products, as well as the potential contribution from additional indications for Ingrezza, such as adjunctive treatment of schizophrenia or dyskinetic cerebral palsy.

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