CERE - Neurocrine Biosciences Hands Out Treats For This Halloween Season

Summary

• Neurocrine announced another better-than-expected quarter for Ingrezza, as enhanced sales efforts are driving reacceleration in sales.
• The company will be announcing Phase II results from multiple programs over the next year, and while these are high-risk programs, successful results could drive sentiment.
• Phase III results from crinecerfont will be a significant driver for Neurocrine in 2023.
• Improved momentum in Ingrezza is a definite positive and the early-stage pipeline holds promise, but the share price today doesn't leave a lot of obvious near-term upside.

It may have not been on par with a full-size Snickers, but Neurocrine Biosciences ( NBIX ) delivered investors a slightly late Halloween treat, as third quarter results confirmed reacceleration in the core Ingrezza tardive dyskinesia franchise. Healthier trends here remove the main source of anxiety around the stock and give the company a somewhat cleaner runway heading into some significant clinical updates over the next year.

I've boosted my fair value in response to stronger Ingrezza trends, but the increase in the share price since my last updates ( here and here ) doesn't leave a tremendous amount of easy upside right now. Should upcoming trials go Neurocrine's way, though, there is meaningful upside potential to be unlocked from de-risking the pipeline. I'm still positive about the long-term potential of Neurocrine shares, but with the catch-up in the share price, it's not as compelling of an idea as before.

Not A Huge Beat, But A Beat When It Was Needed

Neurocrine had been under pressure for some time due to disappointing momentum in the Ingrezza business and concerns that the company had already picked all of the low-hanging fruit in the tardive dyskinesia market. Those concerns aren't completely put to rest, but third quarter results do support the idea that an intensified sales effort is paying dividends, and there are other drivers in play that should continue to drive healthy growth.

Revenue rose 31% year over year for the quarter, beating expectations by about 3%. Product revenue rose 31% yoy and 8% quarter over quarter. Ingrezza accounts for the vast majority of product revenue and grew 31% yoy and a little under 8% qoq this quarter (with prescriptions up 32%), beating expectations by 4% and also beating the high-end of the Street range.

There were some signs of life in the Ongentys business, with revenue up 38% yoy and 38% qoq, and with the world of sales calls and patient visits continuing to normalize after the pandemic, maybe this treatment can finally start growing toward its potential (which I believe is over $250M in annual sales versus the $13M annualized sales in this quarter). Neurocrine also reported 3% growth in the royalties it receives from AbbVie ( ABBV ) for elagolix, but this drug looks basically dead in the water unless the label extension study in polycystic ovary syndrome delivers something exciting.

Operating income was about 4% below expectations, due largely to higher SG&A and R&D spending tied to the increased marketing efforts for Ingrezza and clinical trial costs.

Ingrezza Still Has Growth Legs

Neurocrine decided to expand its sales efforts for Ingrezza earlier this year, and given that sales force expansions using take around nine months to really mature, I would expect some further upside from this driver in the fourth quarter of 2022 and into 2023. Better compliance was also named as a driver of a better performance this quarter, but I wouldn't expect this to be as much of a positive driver in the coming quarters.

Management has also opted to get more aggressive on pricing with Ingrezza. Neurocrine is raising the price by 9% effective at the start of November, and this is stronger pricing than I'd expected. I don't expect much share loss to Teva's ( TEVA ) Austedo from this move, as Austedo has a higher list price and a black box warning.

Beyond these shorter-term drivers, there is still ample debate as to how much of the tardive dyskinesia market is truly accessible to drugs like Ingrezza and Austedo. I've discussed these issues in the past, but I'll repeat a few points here. One of the main issues or concerns here is that physicians are often reluctant to diagnose and treat tardive dyskinesia despite demonstrated negative impacts on quality of life for patients. Second, while tardive dyskinesia may well be more common than physicians acknowledge, it seems less likely that severe and moderate-to-severe cases go unrecognized. The concern, then, is that a large percentage of obtainable patients are already being treated.

Management increased its estimate of diagnosed patients to about 30% of the estimated tardive dyskinesia patient population but believes that only about half of those (or 15% of the total) are being treated. I do believe awareness of the condition is increasing through the marketing efforts of Neurocrine and Teva (to both patients and physicians), and over time, I think this untreated gap will close.

Neurocrine management increased its guidance for Ingrezza revenue in FY'22 from $1.35-1.4B (and a sell-side average of $1.39B) to $1.4-1.425B. That's around one-third of my long-term peak sales estimate or about half of my long-term Ingrezza tardive dyskinesia peak sales estimate. In the years to come, I expect the company to benefit from increased diagnosis and treatment of the disease, further price increases, and contributions from other indications like Huntington's (which should be approved in the first half of 2023) and dyskinesia in cerebral palsy.

Pipeline Updates Can Add Additional Value Over Time

The next meaningful clinical update from Neurocrine will be the Phase II results of NBI-827104 (or '104) in CWS, a rare form of pediatric epilepsy. While this drug did fail in essential tremor, success here could not only make CWS a viable opportunity but also drive testing in a broader range of epilepsies. The contribution of '104 to my fair value is minimal today, so any meaningful derisking or evidence of broader utility would be additive.

The bigger upcoming update is in the crinecerfont program for congenital adrenal hyperplasia in adults and children. These Phase III trials will read out in 2023, and I believe it could drive meaningful upside ($15+/share) as investors become more aware of the size of the market and the potential of the drug; management has already started discussions with payors and taken some initial launch preparations and expects to leverage its acquisition of Diurnal to market the drug in Europe without a partner.

Beyond this are higher-risk programs in focal onset seizures (NBI-921352) and anhedonia (NBI-1065846), both of which should see Phase II read-outs in 2023. Neither contributes much to my fair value model now given the long odds against success (a statement more on the indications than the drugs), but compelling early evidence of efficacy could add value and boost sentiment as both are meaningfully under-treated indications.

Management announced that the read-outs for valbenazine (the chemical name of Ingrezza) in schizophrenia and NBI-1065845 in treatment-resistant major depressive disorder have been pushed from 2023 to 2024 due to slower enrollment (due at least in part to disruptions in Russia and Ukraine).

Neurocrine has also recently begun dosing patients in its Phase II trial of NBI-1117568 compound (an M4 agonist) in schizophrenia. This is a promising new category of drugs, and while Neurocrine is behind Karuna ( KRTX ) and Cerevel ( CERE ), '568 was created with an attempt to design out off-target binding and could produce a more compelling combination of efficacy and tolerability. Time will tell, but schizophrenia remains a large market opportunity due to the inadequacy and side effects of current treatments.

The Outlook

Ingrezza is still far and away the biggest driver of value for Neurocrine, contributing about two-thirds of my upgraded fair value estimate of $129. Within that, about 80% (or $70/share) is tied to further growth in the diagnosis and treatment of tardive dyskinesia, as well as further pricing actions. Crinecerfont contributes around $20/share to my fair value today but could become a bigger component of valuation on successful Phase III studies. Nothing else contributes to fair value by more than a few dollars, but these are high-risk early-stage compounds generally targeting sizable undertreated markets, and if Phase II and Phase III studies go well, they could contribute more meaningfully over the next five years.

The Bottom Line

The main drivers I see for Neurocrine now are even better performance in getting new TD patients onto Ingrezza and seeing some positive results out of the clinic. While I can see a path for Ingrezza continuing to outperform, I think the share price today is pretty close to fair value. I'm not looking to sell out now, as I do see some upside from clinical trials over the next year, but I can't really recommend these shares with the same vigor after this rebound in the share price.

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