NBIX - Neurocrine's Crinecerfont Delivered But The Street Has Been Slow To Reward The Success

2023-10-11 03:44:41 ET

Summary

• Neurocrine Biosciences has reported very positive Phase III results for crinecerfont in adult and pediatric congenital adrenal hyperplasia.
• The adult study showed that 63% of patients on crinecerfont were able to reduce their steroid usage to physiological replacement levels, and 30% of children reached this threshold.
• The market has reacted with muted enthusiasm, possibly due to the limited data provided and a potentially challenging commercial launch.
• Neurocrine will have two more clinical updates before year-end (focal onset seizures and anhedonia), both of which could drive further upside for the company.
• Shares look around 20% undervalued, with upside tied to further clinical read-outs and healthy ongoing sales momentum for Ingrezza.

Neurocrine Biosciences (NBIX) has done its part - this is a stock where the narrative has focused a lot on how the company needs another growth driver to complement Ingrezza , and the Phase III read-outs for crinecerfont in both adult and pediatric congenital adrenal hyperplasia (or CAH) were both quite positive. Still, the Street reaction has been muted, with the shares up about 6% in absolute terms since my last update and about 10% versus the sector.

I believe some of the reaction may be due to the paucity of data that management provided, with more to come at the company's December analyst day and through medical journal publications, as well as ongoing concerns about whether the data are actually compelling enough to convince physicians and payers to support the drug. These concerns are understandable, and at times Ingrezza has been frustrating (where there's a similar reticence to prescribe and reimburse), but I believe the market continues to underestimate the potential impact of this drug on CAH patients and on Neurocrine's future revenue.

It will take time for crinecerfont to develop, and in the meantime the company will have two more clinical updates before year-end to evaluate - NBI-921352 ('352) in focal onset seizures and NBI-1065846 ('846) in anhedonia-associated with major depressive disorder. Meaningful success in either read-out could perhaps drive 10% upside (more likely from '352, in my opinion), while failure likely won't have much more than a 5% negative impact. I continue to believe that Neurocrine shares are undervalued today and offer close to 20% upside.

A Muted Reaction To A Strong CAHtalyst

While Neurocrine reported successful CAHtalyst pivotal Phase III trial results for both the adult and pediatric studies of crinecerfont in CAH, neither result really drove the sort of share price reaction you might hope for in a successful Phase III study with a $1B-plus addressable opportunity. Part of the issue may be how little data the company actually provided. For both studies, Neurocrine announced that all primary endpoints were hit, including change in serum androstenedione and change in daily glucocorticoid, and with attractively low p-values. Unfortunately, the company didn't offer the easy-to-interpret net reductions in androstenedione that analysts and investors could easily compare to opinion leader targets (a 55% or greater reduction in A4 in the pediatric study would widely be considered a "win").

Still, the company did provide an important piece of information - in the adult study, 63% of patients achieved reductions in glucocorticoid doses to physiological replacement levels (45% placebo-adjusted), while 30% of patients achieved that in the pediatric study (with 0% of the placebo group achieving that milestone).

Just doing some simple math, 63% of adults achieving physiological doses would mean a roughly 25% reduction in glucocorticoid doses (with a physiological dose at 15mg and the median for trial participants at 25mg) across the study even if the other 37% saw no benefit. Management did say that patients who didn't achieve reductions to physiological doses still saw reductions, so the minimum of a 30% reduction (that opinion leaders set out) seems to be in-hand, and management noted that the adult study exceeded management's highest expectations.

I can't do a similar calculation with the pediatric study as there's more variance in physiological dose and starting median doses, but I would expect significant reductions here as well. All told, I think both studies read out as positively as could be reasonably expected.

Now the debates shift to FDA approval and the commercialization of the drug. I can't really see why the FDA wouldn't approve this drug unless there's something awful lurking in the unreleased details (very unlikely, in my view), so that's not much of a risk.

With commercialization, though, there are definite risks - many physicians argue that current steroid regimens are "good enough" and given that steroids are cheap, insurers may well be inclined to agree. I think this seriously overlooks the quality of life aspects of the disease and of long-term steroid usage, and this is not an uncommon physician-patient divide (many physicians have tried to downplay the frequency, severity, and significance of the movement disorder that patients with tardive dyskinesia experience). Neurocrine has years of experience marketing against this challenge with Ingrezza , and I do think crinecerfont will become a $1B-plus drug, but I freely acknowledge it could take time and meaningful marketing spend to get there.

The Next Candidates In The Queue

At some point before the end of the year, Neurocrine should report Phase II data on '352 in focal onset seizures and '846 in MDD-associated anhedonia. Both are high-risk programs where I believe expectations of success are fairly low today. Thus, compelling positive data should have a disproportionately positive response (versus clinical failures) if the data comes through.

With '352, this drug is a highly selective sodium channel inhibitor that targets the Nav1.6 sodium channel (of nine sodium channels). Other drugs for focal onset seizures end up hitting multiple sodium channels and this is what drives sometimes-meaningful side-effects. The idea here, then, is that Nav1.6 is the sodium channel you want to block to stop (or reduce seizures) and that doing so will produce meaningful seizure reduction and a better tolerability and safety profile. A 15% placebo-adjusted improvement (30% versus 15%) in seizure reduction and better safety/tolerability data would likely be enough, but a bigger seizure benefit would certainly be welcome.

Around a third of patients diagnosed with focal onset seizures still have uncontrolled or breakthrough seizures despite being on medication. That is clearly an addressable market for '352, but a comparable or better seizure reduction effect with better tolerability could drive some switchover of patients who are otherwise considered well-controlled.

The trial read-out for '846 is likely to be even more challenging. While anhedonia is a recognized problem (roughly a third or more of patients with MDD experience it) and often a significant driver of street drug abuse, it's tough to measure. This study uses two endpoints, the Dimensional Anhedonia Rating Scale (or DARS) and the Montgomery Åsberg Depression Rating Scale (or MADRS), and while DARS is arguably better at measuring anhedonia it is not a clinically-validated endpoint, so I'd argue that the drug needs to score compellingly well on both endpoints to really drive investor enthusiasm. More likely, the trial will produce equivocal results and the company will either need a second Phase II to clarify the dosing and endpoints or will have to decide whether to push into a more expensive Phase III data with lingering concerns around efficacy.

The Outlook

Recent IQVIA data for Ingrezza has been positive, suggesting better than 20% year-over-year growth in the trailing quarter. That should reduce some of the risk going into Q3'23 earnings, though I would expect management may not want to initiate estimates for chorea-related Ingrezza sales until reporting Q4 earnings. Management has already said they plan a significant marketing push for Ingrezza in chorea, and given the cleaner safety profile and dosing, I think there's upside here.

As far as core Ingrezza sales in tardive dyskinesia go, I think that 20%-plus sales momentum is fairly positive. I also note that the company is starting to ramp up its efforts to market the drug to long-term care facilities. The company recently applied for approval for a new oral granule sprinkle formulation that could be useful in this setting, but I wouldn't get my expectations too high at this point, as the LTC market is a tough market to crack, and particularly given that tardive dyskinesia symptoms aren't typically all that disruptive to their operations (with LTCs, you need to make a compelling case that you're making the staff/admin's life easier and/or saving them money).

Relative to my last update, nothing really changes except improved odds of approval and commercialization for crinecerfont - from 60% to 90%. That remaining 10% is mostly tied to "you never know" issues with the FDA and the challenges of ramping up a drug that many physicians will argue they don't need. Those higher odds of success move my fair value for crinecerfont to almost $28 (from $21.50). I still estimate about $95 in value from Ingrezza , and a little more than $10 from the pipeline. My total fair value estimate moves up to $134, with potential for positive read-outs on '352 and '842 to move those contributors higher.

The Bottom Line

Given I see more benefit than risk to the upcoming Phase II read-outs and still believe there is underappreciated upside in Ingrezza and crinecerfont, I'm still bullish on Neurocrine shares. Admittedly, 20% or so upside is not great near-term upside in the high-risk/high-reward world of biotech, but Neurocrine is in that awkward transition phase from biotech to pharma (its profitable and generating free cash flow), so maybe different rules should apply. In any case, I still think it's a name worth owning.

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