NBIX - Neurocrine Biosciences: Ingrezza Impresses Amid Costly Pipeline Expansion Efforts

2023-08-04 03:08:41 ET

Summary

• Neurocrine Biosciences' Q2 2023 performance showed 26% growth in Ingrezza sales, improvement in net income, and a stable financial position.
• Despite growth, challenges persist with high operational costs, overvaluation concerns, and uncertainty in diversified product portfolio advancement.
• Investment recommendation remains a "Hold" on Neurocrine, reflecting promising growth but underlying challenges that prevent a more bullish stance.

Introduction

Neurocrine Biosciences ( NBIX ) focuses on relieving suffering through transformative treatments for neglected neurological disorders. They offer FDA-approved therapies for conditions like Parkinson's disease and have launched drugs like Ingrezza for tardive dyskinesia. The company also receives royalties from partnered products.

In my previous analysis of Neurocrine, I concluded that the company's progress in developing drugs like Ingrezza for neurological disorders is impressive, but financial performance is lackluster due to high operational costs. While revenue has grown, profits remain minimal, affecting market capitalization and investor confidence. The company's reliance on Ingrezza underscores the need for diversification. Despite a promising pipeline and successful launches of new therapies, challenges in commercialization and overvaluation led me to recommend a "Hold" on investing in Neurocrine until it shows more resilience in its business model.

Recent developments: Neurocrine Q2 beats expectations with $1.25 EPS, $452.7M revenue; Ingrezza sales grow 26%; 2023 guidance raised.

Q2 Earnings & Balance Sheet

In Q2 2023 , Neurocrine's Ingrezza sales were $440 million, a 26% growth from Q2 2022, with a record number of new patients receiving therapy. The financial highlights showed GAAP net income of $96 million and non-GAAP net income of $126 million, a substantial improvement from losses in Q2 2022, driven partly by a $70 million loss reduction in debt extinguishment. Increased expenses were noted in R&D ($145.8 million) and SG&A ($221.8 million), supporting clinical portfolio advancement and commercial initiatives. The company had $1.3 billion in cash, cash equivalents and marketable securities.

Now, let's take a look at the balance sheet . Neurocrine's financial footing appears stable as of June 30, 2023. The current assets have slightly increased to $1,496.6 million from $1,453.5 million at the end of 2022, while total assets grew to $2,613.1 million. The cash and cash equivalents declined to $160.2 million from $262.9 million, suggesting increased cash burn in operating activities. However, the net income of $18.9 million for the first six months of 2023 shows positive profitability, and the overall cash flows from operating activities amount to $54.4 million. The decrease in cash might be partially offset by sales and maturities of debt securities available-for-sale, providing liquidity. While the company's financial position seems healthy, the decline in cash may signal a potential need for additional financing if this trend continues and significant investments or expansion plans are on the horizon.

Valuation, Growth, & Stock Momentum

According to Seeking Alpha data, Neurocrine Biosciences shows promising growth in EPS and sales for the years 2023-2025, with especially notable growth expected in 2024. However, the company's earning revisions are a concern, with more down revisions than up. The valuation metrics indicate the stock might be overvalued, but growth prospects are excellent, with impressive revenue and free cash flow growth. Profitability is strong with good margins and returns, but recent stock momentum has been somewhat negative, with declines over the short term.

Neurocrine's Q2 Earnings Call: Growth Initiatives and Clinical Progress

During the Q2 earnings call , Neurocrine Biosciences' management detailed several growth initiatives focusing on advancing their clinical programs. They highlighted key milestones for the remainder of the year, including a significant PDUFA date on August 20 for valbenazine for Chorea treatment in Huntington's disease, expressing confidence in the drug's efficacy and safety. Additionally, they are on track to report top-line results from four studies in Q4, covering treatments for Congenital Adrenal Hyperplasia, focal onset seizure, and major depressive disorder. Management also emphasized progress in their muscarinic portfolio, with ongoing studies for schizophrenia and advancing compounds for neuropsychiatric conditions. They expressed satisfaction with the progress of their diverse pipeline, reflecting a robust commitment to growth in the sector.

My Analysis & Recommendation

In conclusion, Neurocrine Biosciences' Q2 2023 performance brings a mixed bag of insights. On the positive side, the impressive 26% growth in Ingrezza sales and the substantial improvement in net income are notable achievements. The company's commitment to advancing clinical programs, demonstrated by expected milestones and data readouts, adds to the optimism. The management's proactiveness in expanding their pipeline and entering new treatment avenues showcases the growth potential.

Nonetheless, it is crucial not to ignore the drawbacks. The company's ongoing elevated operational expenses, particularly in Research & Development (R&D) and Selling, General & Administrative (SG&A) costs, may raise alarms. These expenses illustrate some of the foundational problems I've mentioned earlier in my analysis. Although these substantial investments are made with the expectation that they will yield returns beyond Ingrezza, this outcome is still uncertain. The valuation metrics, which suggest an overvaluation, along with the recent downturn in momentum, further contribute to these apprehensions.

Despite these mixed indicators, Q2 earnings do not fundamentally change my previous "Hold" recommendation for Neurocrine. The company is showing signs of robust growth, but the persistence of the identified challenges, such as dependence on Ingrezza and high operational costs, prevents a more bullish stance at this time.

Investors should look forward to the company's impending milestones, such as the PDUFA date for valbenazine, and keep a close eye on their clinical trial readouts in Q4. Monitoring how Neurocrine manages its operational expenses and advances its diversified product portfolio will be crucial in the coming weeks and months. These factors could well determine whether the company can transition from a promising player in the neurological treatment space to a resilient and profitable entity, and thus warrant a reevaluation of investment recommendations in the future. For now, Neurocrine appears fairly valued at current prices.

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