SAGE - Sage Therapeutics Looking To FDA Approval Of Zuranolone

Summary

• Sage’s first approved drug, Zulresso, did not sell well.
• Zuranolone offers significant improvements for depression over current therapies.
• While some success is built into the stock price, an FDA approval should lead to both short and long-term gains, given the size of the depression therapy market.

Sage Therapeutics ( SAGE ) specializes in psychiatric drug therapies. Its stock price has fluctuated greatly over the years, with a peak back in 2019. I believe the FDA is likely to approve Sage's candidate zuranolone for both MDD (major depressive disorder) and PPD (post-partum depression). Sage is partnered with Biogen ( BIIB ) in the endeavor. If the FDA does approve zuranolone the stock price should see a bump, in part because doubts have been raised in investment circles about the approval. The decision would happen in August, unless there is a delay at the FDA. If approved zuranolone has the potential to become a blockbuster, which should greatly boost Sage's stock price in the long run.

This article will focus on the potential approval of zuranolone and on its commercial potential. I will cover the caveats as well. First, I will briefly review the recent Q4 2022 results, mainly to be able to examine if the current cash balance is sufficient to reach cash-flow break even without raising more cash through stock dilution.

Sage Therapeutics Q4 2022 Results

Sage Therapeutics Q4 2023 results and analyst conference were on February 16, 2023. The key news was that in December the rolling submission of zuranolone for MDD and PPD was completed. The FDA accepted the filing on February 6 and set a PDUFA (decision deadline) date of August 5, 2023.

Revenue in Q4 was just $2.9 million from Zulresso for PPD, up sequentially from $1.7 million and up from $1.6 million year-earlier. No one expects Zulresso to produce significant income in the future. On a GAAP basis Sage lost $154 million, resulting in an EPS loss of $2.47. However, Sage is cash rich, with $1.27 billion available at the end of the quarter. In addition, if the FDA approves zuranolone, Sage expects to receive a $250 million milestone payment from Biogen. Given that, it is guiding to its cash lasting into 2025. Further down I will share my thoughts on a timeline to cash-flow break even.

Zuranolone Background

Zuranolone is a steroid that acts as a GABA receptor modulator. It was developed as an improvement on Zulresso by way of being orally available and having a longer half-life for its activity. GABA is one of the many types of neurotransmitters that work between neuron synapses in the brain to allow neurons to conduct signals, or not. GABA is an inhibitory neurotransmitter, so strengthening its receptors results in a lower rate of firing by the target neurons. Dysfunction in the systems of neurons where GABA is the neurotransmitter is known to lead to a variety of psychiatric disorders, including depression. Because the systems of positive and negative neurotransmitters and receptors are complexly related, including with feedback loops, a decrease of activity in one circuit may result in complex increases or decreases in other circuits. Sage believes [Slide 2, Q4 2022 Presentation ] that Zuranolone is differentiated from other GABA modulators by binding to both synaptic and extrasynaptic receptors.

Zuranolone Data, Caveats and FDA Timeline

Zuranolone has been intensely studied in several placebo-controlled trials. For a negative review of the results, see Sage Therapeutics Could Be In For A Depressing FDA Review at Seeking Alpha by Clinically Sound Investor. The more positive take is laid out by Sage in Slides 9 through 14 of theQ4 presentation. In a disease as complex as depression, physicians do not expect all patients to respond in a like manner. The difference in improvement in symptoms between placebo and zuranolone varied by trial, which is not surprising, especially for trials with small sample sizes. One of the larger trials, the Mountain study, showed an improvement in HAMD-17 scores that was not statistically significant. But the other five trials for which we have data did have statistically significant differences in results. The two PPD studies, Robin and Skylark, showed average score differences of 4.2 and 4.0. That is not just statistically significant, it corresponds to meaningful results for patients.

The final study, Shoreline, is studying the longer-term effectiveness of zuranolone, with a follow up at 12 months, in patients that respond well be initial treatment, at either a 30 mg or 50 mg doses. More data from the Shoreline study will be reported in mid-2023, before the final FDA decision.

In addition to the HAMD scores, Sage is emphasizing patient improvements as reported on SF-36 forms. Patients report on physical functioning, physical role function, bodily pain, general health, vitality, social functioning, emotional role functioning, and mental health. Sage broke this out on Slide 14. The argument for zuranolone fulfilling unmet medical need also includes its rapid onset compared to therapies currently in the market; durability of effect; positive patient attitudes to retreatment, when necessary; and high patient satisfaction.

Commercial Potential and Caveats

More than 19 million Americans and 260 million people globally suffer from depression. Drugs currently prescribed for Americans experiencing depression include Prozac (flouoxetine), which is available in generic form and for which 23 million prescriptions were filled in 2020. Total cost to patients was $654 million. Zoloft, also now generic, had over 38 million prescriptions, costing $522 million. Both drugs generated much higher revenues for their producers before they went generic.

How well zuranolone does in the commercial space is dependent on acceptance by physicians and patients, which in turn depends on how they see it compared to older, better established, drugs like (but not limited to) Zoloft and Prozac. On longer time frames there may be new competitors as well. I see no reason to hazard a specific guess as to revenue until Sage makes an announcement of the retail price, which would follow if there is an FDA approval. If people like the drug, the revenue potential is huge, at least until it runs into its own generic competition.

In addition to FDA approval and the usual haggling with insurers, there is one other hurdle for Zuranolone that will likely delay a significant revenue ramp into late 2023. For this class of drugs a DEA review is necessary, to get its class schedule. That review process is three months long. During that time Sage and Biogen would further prepare for commercial introduction, but will not be able to distribute samples.

Rest of Pipeline

The Sage pipeline is shown on page 4 of the presentation and also at the Sage Pipeline page . SAGE-324 for essential tremor is partnered with Biogen, but everything else is wholly owned by Sage. SAGE-718 for cognitive dysfunction, being tested in separate trials for Huntington's, Parkinson's, and Alzheimer's, could be a major revenue generator if trial results are positive. I expect Sage to continue to introduce clinical candidates given its proven expertise.

Biogen Could Also Get a Boost

As I discussed in detail in Sage Therapeutics Deal With Biogen Should Revive It [the it referring to Sage], Biogen would be a major beneficiary of a zuranolone approval. Under the terms of the 2020 agreement the companies will jointly develop and commercialize zuranolone in the U.S., while Biogen will have all rights outside the U.S. An upfront payment of $875 million was made by Biogen to Sage. Biogen invested $650 million in Sage, with 6.2 million shares purchased at $104.14. In addition, if successful, milestone payments are due to Sage. In the U.S. the companies will split profits. Outside the U.S. Biogen will pay royalties tiered between the high teens and low twenties. So revenue recorded at Biogen, if there are approvals outside the U.S., will be higher than at Sage. Getting royalties for sales outside the U.S, without having to share in the cost of commercialization, will boost Sage profits. Biogen seems excited about the potential of zuranolone, naming it as its other big near-term catalyst besides the new Alzheimer's drug Leqembi.

Analysis and Valuation

Sage Therapeutics now and Sage a year from now may have very different stock prices. The price at the close on Friday, February 17, was $45.52, giving the company a market cap of $2.72 billion. Analysts and investors will continue to argue about whether the statistics from the zuranolone trials are good enough for approval. The FDA may schedule an Independent Advisory Committee hearing, which could be a hurdle. On the other hand, a positive vote for the committee would make it almost certain the FDA will approve the drug. Another twist could be the FDA approving for just one indication, which seems unlikely.

If there is an FDA approval, we get back to the big commercialization question: will doctors and patients want a new drug, at some high price, when there are well-known generics available? Will insurance companies see the value? Will patients who have recurring depression want to try something new? I expect the ramp to go about as usual, with some early adopters and some taking a wait-and-see position. Sage does not have a good marketing record, but Biogen does, despite the failure of Aduhelm, which was largely due to a government (but not FDA) ruling. On the whole I see it highly likely that zuranolone will see significant sales, with 1H 2024 revenue figures giving us a lot of insight. I think there is a lot of upside if the quick-acting nature of zuranolone compels physicians to prescribe it instead of, or in addition to, the older standards of care. Prozac sales peaked at $2.6 billion per year, which would be a nice addition for Biogen, but a game changer for Sage.

Given that revenue should ramp in 2024 and be significant in 2025 (assuming FDA approval), there is a good chance that Sage's current cash will get it to cash-flow break even. But investors cannot count on that, or on a lack of dilutive stock sales. Sage's total operating costs in Q4 were $157 million. How quickly can zuranolone ramp to cover that is an open question. Also, when stock prices jump, biotech companies almost always raise cash. It allows them to spend more on their earlier pipeline, giving them a competitive edge. I see the most likely scenario as an FDA approval, followed by a jump in the stock price, followed by a stock issuance to insure there is cash for commercialization of zuranolone and for pipeline acceleration. My cash flow break-even horizon is 2026, but that may be optimistic as it assumes Sage's share of zuranolone revenue will have ramped to between $600 million and $800 million per year.

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