NBIX - Neurocrine Biosciences: In Limbo Until The Arrival Of The 'Next Big Thing' Beyond Ingrezza

2023-05-24 04:31:45 ET

Summary

• Neurocrine Biosciences shows promising growth, boosted by Ingrezza sales, but struggles with high operational costs.
• Despite significant revenue growth, the company's reliance on a single product for revenue and inconsistent EPS growth raises investor caution.
• Valuation concerns emerge due to high ratios, hinting at possible overvaluation despite impressive growth and profitability ratings.
• The "Hold" investment recommendation continues due to uncertainties around pipeline drugs, revenue diversification, and cost control.

Introduction

Neurocrine Biosciences ( NBIX ), a neuroscience-focused biopharmaceutical company, is committed to relieving suffering for individuals with limited treatment options. They aim to provide transformative treatments for neglected neurological, neuroendocrine, and neuropsychiatric disorders. With a diverse portfolio, the company offers FDA-approved therapies for conditions such as tardive dyskinesia, Parkinson's disease, endometriosis, and uterine fibroids, and continues to expand its advanced clinical-stage programs. In May 2017, Neurocrine launched Ingrezza, the first FDA-approved drug for tardive dyskinesia, in the US. Additionally, through partnerships, Dysval was launched in Japan in 2022 for tardive dyskinesia, and AbbVie launched Orilissa and Oriahnn in the US for endometriosis and uterine fibroids, respectively. Neurocrine receives royalty payments on the net sales of these partnered products.

In my previous analysis of Neurocrine, I expressed admiration for the strategic utilization of Ingrezza to target the Huntington's disease market, which has the potential to yield an extra $300 million in annual revenue. The company's market capitalization, at that time, exceeding $10 billion, its strong financial track record, promising pipeline, and the expanding market all pointed to a robust groundwork for future expansion. Nevertheless, I recommended that investors adopt a "hold" strategy for Neurocrine shares until more conclusive indications of consistent profitability emerge. Since my "Hold" recommendation, shares of Neurocrine have slid 10% despite recent strength in the biotechnology sector ( XBI ).

Q1 2023 Financials

Neurocrine Biosciences' first quarter 2023 report revealed total revenues of $420.4 million, a significant increase from $310.6 million in the same period of 2022. The main contributor was net product sales, which jumped to $415.3 million from $305 million. However, collaboration revenue dipped slightly from $5.6 million to $5.1 million. The company's expenses in Research and Development (R&D) escalated from $102.2 million to $139.5 million, while Selling, General and Administrative (SG&A) costs rose from $200.7 million to $242.7 million. The company reported a net loss of $76.6 million or $0.79 per share, contrasting with the previous year's net income of $13.9 million or $0.14 per share. As of March 31, 2023, Neurocrine held $1,139.2 million in total cash, cash equivalents, and marketable securities, a decrease from $1,288.7 million at the end of 2022.

Neurocrine has reaffirmed its 2023 guidance, projecting Ingrezza net product sales to fall between $1.67 billion and $1.77 billion. Additionally, the company anticipates its R&D expenses to range from $550 million to $580 million. Incurring in-process research and development (IPR&D) costs are expected to be $144 million. SG&A expenses are forecasted to be within the range of $850 million to $870 million.

Examining Neurocrine Biosciences' Financial Landscape: Growth, Profitability, and Valuation

In the realm of valuation (per Seeking Alpha ), Neurocrine Biosciences presents a mix of indicators. The GAAP P/E ratio raises concerns with a high value of 144.51, contrasting the more modest forward Non-GAAP P/E ratio of 25.93. Additionally, the Price/Book ratio indicates that market valuation exceeds book value at 5.41. Elevated ratios such as EV/Sales (5.32) and EV/EBITDA (29.04) further suggest possible overvaluation.

Regarding growth, Neurocrine performs well, earning an A+ rating from Seeking Alpha. Noteworthy figures include a remarkable 32.38% year-over-year revenue growth and a solid three-year compound annual growth rate [CAGR] of 21.70%. Levered free cash flow demonstrates an impressive surge of 83.94% from the previous year. However, EPS diluted figures show a decline of 11.33% compared to the previous year, with a three-year CAGR drop of -29.20%, indicating challenges in translating revenues into net earnings.

On the profitability front, Neurocrine excels, earning an A rating from Seeking Alpha. The company exhibits a robust gross profit margin of 66.96%, a decent EBIT margin of 17.24%, and a net income margin of 4.00%. These figures highlight the company's ability to effectively convert sales into profit. Return figures, including return on equity (4.16%) and return on assets (7.65%), fall within moderate levels.

In conclusion, Neurocrine Biosciences showcases impressive growth and solid profitability, yet faces challenges concerning valuation and EPS growth. Addressing these issues will be crucial for the company's financial stability and to attract investors going forward.

Q1 2023 Earnings Call Review

Neurocrine Biosciences' management expressed pleasure with the consistent progress of the clinical portfolio during Q1 2023. They remain on track to announce the top-line results for adult and pediatric crinecerfont trials for congenital adrenal hyperplasia, and the Phase II trials of NBI-352 for adult focal onset epilepsy and NBI-846 for major depressive disorder-related anhedonia by Q4 2023. They also anticipate a PDUFA date on August 20 for valbenazine as a potential treatment for chorea associated with Huntington's disease. There's also substantial progress with their muscarinic agonist portfolio, including NBI-568, which is in a Phase II study for schizophrenia, and NBI-570, a dual M1/M4 agonist expected to enter Phase I clinical development this year. The management is confident in their team's performance and eagerly awaits to share more updates in the coming year.

My Analysis & Recommendation

In conclusion, Neurocrine Biosciences has made commendable progress, particularly with its tardive dyskinesia drug, Ingrezza. The company's commitment to addressing neglected neurological, neuroendocrine, and neuropsychiatric disorders is laudable. However, its financial performance is less inspiring. Despite impressive growth, Neurocrine has faced significant operational expenses, primarily in R&D and SG&A costs, which have eroded profitability. Combined with a slight decline in collaboration revenue, this has prevented the company from generating substantial profits despite increased revenue.

The contrast between growth and profitability may explain the stagnation in Neurocrine's market capitalization over the past five years, despite significant revenue growth and strong performance. It suggests that investors are cautious, recognizing the revenue growth but concerned about high operational costs and their impact on the bottom line. This situation also highlights the company's reliance on Ingrezza for revenue, underscoring the need for a diversified product portfolio.

However, Neurocrine's extensive pipeline offers promising prospects for the future. The company has successfully launched new therapies for tardive dyskinesia, Parkinson's disease, endometriosis, and uterine fibroids through strategic partnerships. While these partnerships are advantageous, it is crucial for Neurocrine to develop another successful revenue-generating drug to reduce dependence on a single product and enhance the resilience of its business model.

Although Neurocrine continues to strengthen its advanced clinical-stage programs and is expected to announce top-line results for multiple trials in the coming year, it is important to acknowledge the challenges and uncertainties involved in translating trials into commercially successful products. Therefore, until Neurocrine successfully brings another drug from its pipeline to the market, its stock is likely to continue underperforming the market.

Considering these factors, as well as indications of overvaluation and inconsistent EPS growth, my investment recommendation for Neurocrine Biosciences remains "Hold." It is advisable for investors to monitor how the company manages its operational expenses and the progress and commercialization of its pipeline drugs before making significant investment decisions.

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