NBIX - Neurocrine Biosciences Goes Dumpster-Diving To Accelerate Its International Business Development

Summary

• Neurocrine is acquiring beaten-down Diurnal Group for $57M, primarily to accelerate its ex-U.S. business development.
• Diurnal has a pipeline of hormone-based therapeutics, including Efmody (commercialized in Europe), but the pipeline is likely secondary to the clinical/commercial infrastructure Diurnal offers.
• Efmody is in a Phase III study for U.S. and Japanese markets, but a prior pivotal study failed to achieve its primary efficacy endpoint and the commercial outlook is uncertain.
• Even with minimal contribution from the pipeline, acquiring clinical and commercial infrastructure in the UK makes sense in the context of Neurocrine's long-term growth plan.

Biotech stocks have bounced back a bit since the early summer, but it has been a tough stretch for riskier clinical-stage companies, and the opportunity to raise funds without crushing dilution has all but vanished for many smaller companies. With that has come the expectation of increased M&A activity in the sector, and investors have seen numerous deals in recent weeks and months, ranging from larger deals like GlaxoSmithKline ( GSK ) and Sierra, Pfizer ( PFE ) and Biohaven ( BHVN ) and Global Blood Therapeutics ( GBT ) to smaller deals for companies like F-star ( FSTX ).

Neurocrine Biosciences ( NBIX ) has gotten into the game on the smaller end of the spectrum, announcing on Tuesday that it would acquire the UK’s Diurnal Group (DNL.L). This deal does bring in some pipeline assets that could prove worthwhile to Neurocrine, but the deal also advances the company’s clinical and commercial capabilities in Europe, and does so at a reasonable price. This deal does not substantially change my fair value for Neurocrine at this time, but it does represent some modestly positive incremental business development progress.

A Small Deal Into Endocrinology

Neurocrine announced on Tuesday August 30 that it had reached an agreement to acquire UK-based biotech Diurnal Group for $57M in cash. This deal represents a 144% premium to the pre-deal share price, but the GBP 0.275 deal price is less than half of what the company’s shares traded for a year ago and far below the prevailing prices back in 2016 and 2017.

Diurnal Group is a small biotech focused on hormone therapeutics for a range of diseases, and the company does have two commercialized products – Alkindi and Efmody – that address adrenal insufficiency and congenital adrenal hyperplasia (or CAH).

It has taken a backseat to the company’s work in CNS diseases in recent years, but Neurocrine does have history in endocrinology, including its not-at-all-commercially-successful elagolix program that has AbbVie ( ABBV ) as its commercial partner, and its pivotal-stage crinecerfont program (a CRF-1 receptor agonist for classic CAH).

Diurnal’s Efmody is approved in the EU and UK for adrenal insufficiency and CAH, and generated about GBP 1M in revenue in the first six months of 2022, while Alkindi generated GBP 3.7M in sales. Efmody was approved by European regulators despite equivocal efficacy (a 0.403 reduction in 17-OHP versus a 0.172 reduction in the control group), and the company has been looking to a continuation study and a Phase III pivotal study for the U.S. and Japanese markets (“CONnECT”) to further bolster the clinical profile of the drug.

Beyond this, Diurnal has clinical programs in classical hypogonadism (DNL-0300, an oral native testosterone), hypothyroidism (DNL-0400, a modified-release T3), and Cushing’s disease (DNL-0500). While there are legitimate commercial opportunities across all of these programs, the latter two are still pre-clinical and DNL-0300 has not yet started Phase II studies.

How Will Neurocrine Leverage Diurnal?

Diurnal has definitely had to deal with some challenges in 2022. In March of this year, the Scottish Medicines Consortium declined to recommend Efmody for automatic reimbursement through NHS Scotland for patients 12 or older with CAH on the basis of insufficient differentiation from standard of care in terms of efficacy – while the drug showed some improvement in morning and afternoon biochemical control, the Phase III study missed its primary efficacy endpoint. About a month later, the CEO stepped down after 14 years on the job, and the company reported only about $19M in cash at the most recent financial report (the end of June 2022).

This is not an especially material deal for Neurocrine, and the company has made only limited disclosures about it so far. In the 8-K filing with the SEC, Neurocrine talked primarily of an “opportunity to accelerate the establishment of clinical development and commercial capabilities in the UK” as the motivation for the deal. With Neurocrine looking to build itself into a more international CNS player and maximize the long-term value of its pipeline, this makes sense.

With that, then, I’d consider any future contributions from Diurnal’s pipeline as primarily a “bonus”, with the main attraction being the clinical and commercial infrastructure that the company is acquiring. I’d expect Neurocrine to reconsider whether the potential of the CONnECT study is sufficient to merit ongoing spending, and I’d likewise expect a similar evaluation as to whether the rest of Diurnal’s pipeline merits further investment.

The Outlook

I was already expecting Neurocrine to build up its international development and marketing capabilities over time, so while this deal accelerates that process (at least somewhat), I wouldn’t call it a material change to the model or fundamental outlook. Diurnal’s pipeline could deliver some value for the company over time, but this strikes me now as more of a “blocking and tackling” deal aimed at building up the company’s long-term operational capabilities.

The Bottom Line

I liked Neurocrine before , and this deal does not change that. I expect some investors to question whether this was the most cost-effective way to build up the company’s ex-U.S. presence, but I don’t think the price was unreasonable, and again there is some potential longer-term upside from the pipeline. All told, I think there’s no reason for this deal to meaningfully change an investor’s view of Neurocrine’s long-term prospects, and the shares do remain a bit below my 12-month fair value estimate, with multiple potential value-creating milestones on the way over the next year.

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