JNJ - Sage Therapeutics: Zuranolone August Approval Likely Opportunity Uncertain

2023-06-30 13:15:02 ET

Summary

• Sage Therapeutics, Inc. should find out in August whether its drug targeting major depressive disorder and postpartum depression, zuranolone, will be approved.
• Zuranolone is being co-developed with Biogen, who made an upfront payment to Sage of $1.5bn, in 2020, and could pay another $1.5bn in milestone payments.
• Sage stock traded >$150 back in 2019 before zuranolone's failure to meet endpoints in a key study dropped the share price by >50%.
• Back then, analysts felt the drug could generate >$4bn in peak sales, but doubts over durability mean management are hoping for ~$1bn.
• Even blockbuster sales may not be achievable in a crowded and fast-moving market - but the odds do at least seem to be in favor of an approval in August.

Investment Overview

I first covered Sage Therapeutics, Inc. ( SAGE ) over 3 years ago in October 2019, shortly after the launch of the company's first - and to date only - commercial product, Zulresso, indicated for postpartum depression ("PPD").

Although its stock was trading >$140, I was bullish on Sage's valuation increasing based on its ability to win approval for candidate SAGE-217, an orally administered version of Zulresso, in Major Depressive Disorder ("MDD"), a much larger indication than PPD.

Analysts had been forecasting for peak sales of SAGE-217 as high as $4bn per annum. However, in December 2019, Sage reported the drug failed to meet the primary endpoint in its key MOUNTAIN Phase 3 clinical study in MDD. According to Seeking Alpha :

Specifically, SAGE-217 did not sufficiently separate from placebo as measured by a scale called HAM-D total score at day 15. Patients receiving 30 mg once daily experienced a mean reduction of 12.6 in HAM-D total score versus 11.2 for control (p=0.115), although statistically significant reductions were observed at days 3,8 and 12 (p<0.018 at each timepoint).

Sage's stock price nose-dived, falling from $155, to $65 overnight - a 58% drop - and it has not recovered since. 3 years after the MOUNTAIN study failure, however, in December last year, Sage and Biogen filed a New Drug Application ("NDA") with the Food and Drug Administration ("FDA"), seeking approval of SAGE-217 - now referred to as zuranolone - for the treatment of MDD and PPD.

The FDA accepted the submission in February, granting it a priority review, and setting a Prescription Drug User Fee Act ("PDUFA") date of August 5th. The agency has also said it does not plan to convene an advisory committee to discuss the NDA. With zuranolone having also received Fast Track designation for PPD and Breakthrough Therapy designation for MDD, the omens for an approval look good.

In this post I will dive into the zuranolone opportunity in more detail, discussing Sage's partnership with Biogen, the data the FDA is considering ahead of the PDUFA date - when it will announce whether the drug is approved for commercial sale - the market opportunity, and the prospects for Sage's share price going forward. Let's begin with a brief overview of Sage the company.

Sage Therapeutics Overview

According to Sage's Q123 10Q submission , the company is:

targeting diseases and disorders of the brain with three key focus areas: depression, neurology and neuropsychiatry. Our focus as a company is on brain health, and we are currently targeting two critical central nervous system, or CNS, receptor systems, GABA and NMDA.

The GABA receptor family, which is recognized as the major inhibitory neurotransmitter in the CNS, mediates downstream neurologic and bodily function via activation of GABAA receptors. The NMDA-type receptors of the glutamate receptor system are a major excitatory receptor system in the CNS. Dysfunction in these systems is implicated in a broad range of CNS disorders.

Sage's pipeline currently looks as follows:

And the company's emphasis, as shown in this illustration of upcoming milestones shared in a recent investor presentation - is very clearly focused on zuranolone.

As of Q123, Sage reported a strong cash position of $1.13bn, and total liabilities of just $88m. The company's cash burn is high, however - net losses in 2022 and 2021 were $(533m), and $(458m), and in 2020, $(680m).

In 2021, however, Sage earned $606m thanks to the deal the company struck with Biogen, giving the larger Pharma a 50% stake in the development and commercialization of zuranolone. Biogen made an upfront payment to Sage of $1.5bn, whilst the deal also included $1.6bn of payments that Sage could earn if it meets certain development and commercial milestones. Costs and profits will be split 50/50 in the US, whilst Sage will earn tiered royalties ex-U.S. in the high teens to low twenties percentages, if commercialized.

The deal also includes co-development of arguably Sage's next most important asset, SAGE-324 - a novel GABAA receptor positive allosteric modulator intended for chronic oral dosing - which is in a Phase 2, multi-year study in Essential Tremor, which will eventually also include patients with epilepsy and Parkinson's Disease.

SAGE-718 - an oxysterol-based positive allosteric modulator of the NMDA receptor - is a wholly owned asset which has a Fast Track designation as a potential treatment for patients with Huntington’s disease from the FDA, and an Orphan Drug designation from the European Medicines Agency ("EMA"). This drug is being evaluated in multiple studies of patients with Huntington's disease, a fatal condition with no cure that affects movement, cognition, and mental health.

Zuranolone - The Data In Front of the FDA

In its Q123 10Q submission, Sage describes zuranolone as follows:

Zuranolone is a neuroactive steroid that, like brexanolone, is a positive allosteric modulator of GABAA receptors, targeting both synaptic and extrasynaptic GABAA receptors. We may in the future develop zuranolone for other affective disorders.

To date, we have completed six pivotal clinical trials of zuranolone, four in MDD and two in PPD. The completed pivotal trials evaluating zuranolone for the treatment of PPD and three of the four completed pivotal trials evaluating zuranolone for the treatment of MDD met their primary endpoints.

We are currently conducting an open-label Phase 3 clinical trial of zuranolone for the treatment of MDD, known as the SHORELINE Study, which is designed to evaluate the safety, tolerability, and need for repeat dosing of zuranolone in adults for up to one year. Enrollment in a 50 mg cohort of the SHORELINE Study has been completed and the study is ongoing.

Brexanolone is already approved, as Zulresso, but sales of the drug are minimal - just $3.3m in Q123. The fact that zuranolone binds to both synaptic and extrasynaptic GABAA receptors is what may give it an edge in a commercial setting, management believes. It also has a rapid onset of action, can be used as either a mono or adjunctive therapy, can work in the short term, e.g., a 2-week treatment course, and, according to Sage, has a "differentiated side effect profile with no evidence of sexual dysfunction or weight gain."

Whilst the MOUNTAIN study which missed endpoints used a 30mg dose, subsequent studies have used a higher 50mg dose and met endpoints, albeit narrowly, and with concerns over durability. The 440-patient CORAL study achieved a statistically significant two-point reduction in depressive symptoms on the 17-point Hamilton Depression Rating Scale ("HAMD-17"), but the difference between the drug and control arm narrowed by 15 days, and was almost non-existent by 42-days. The WATERFALL study did show a statistically significant difference at 15-days, but only very narrowly.

The consensus amongst analysts seems to be that the drug will be approved, but there are doubts about the market opportunity, due to the apparently short term effect. The drug could be used to treat high risk patients, but whether that will be enough to meet management's blockbuster (>$1bn per annum) sales expectations is unclear.

Sage itself is hopeful that the ongoing SHORELINE study demonstrates the durability of the drug, as shown in the slide below:

The median of 249 days between initial treatment and first repeat treatment appears to be encouraging, but conversely, does that damage the market opportunity given patients will not have to use the therapy as often?

Zuranolone - Analyzing The Market Opportunity

Sage believes that enough patients are not satisfied with the current MDD treatment they are receiving to open up a large market. There is no question that depression is a hard disease to treat, and that some medicines may work for some but not others, and that zuranolone's rapid onset of action may have a stronger chance of lifting a larger proportion of patients in the short-term.

The reality is that there are a large number - and different classes - of approved drugs that can used to treat MDD. According to the FDA's website, there are Selective Serotonin Reuptake Inhibitors ("SRRIs"), such as Zoloft, or Celexa, Serotonin and Norepinephrine Reuptake Inhibitors ("SNRIs"), such as Cymbalta or Effexor, Tricyclic and Tetracyclic Antidepressants such as Asendin or Pamelor, Atypical Antidepressants such as Serzone and Desyrel, or Wellbutrin, Monoamine Oxidase Inhibitors (MAOIs) such as Marplan and Nardil, and the N-methyl D-aspartate ((NMDA)) Antagonist Spravato. More than 30 in total are listed as approved by the FDA.

Eli Lilly's Cymbalta earned $283m of revenues in 2022, whilst Sage lists its main competitors as Axsome Therapeutics' ( AXSM ) newly approved AXS-05, and Johnson & Johnson's (JNJ) Spravato - whose sales since approval in 2019 have been underwhelming, and which has peak sales expectations of ~$400m.

Given the above, a peak sales expectation of >$1bn per annum for zuranolone feels a little optimistic - which is a worrying sign for both Sage, and partner Biogen (BIIB), which could end up investing >$3bn into the drug.

Concluding Thoughts - Once Bitten, Twice Shy - Approval Ought to Bring A Share Price Spike But Opportunity May Be Overstated

It is possible for drugs that underperform, or miss endpoints in key studies to eventually prove their worth in the marketplace, but in a marketplace as crowded as MDD, in my view Sage and Biogen have their work cut out attempting to match the hype around this supposed blockbuster opportunity.

Regarding the PPD opportunity, sales of Zulresso suggests this is not a large enough market, although an oral version of Zulresso may do better than the currently available infusion therapy.

Sage's current market cap of $2.8bn, and share price of $46.5 feels quite high to me, given there is only one near-term opportunity in play. Although the overall body of evidence likely points to an approval for zuranolone in August, marketing the drug to physicians may prove tricky given the durability issues.

If we use a rule of thumb that a commercial stage pharma ought to trade ~5x sales (unless the pipeline is late stage with massive revenue potential - which Sage's is not), then we can infer that the peak sales expectation for zuranolone is just over $1bn, remembering that Sage shares revenues 50/50 with Biogen.

That would potentially mean that zuranolone would need to become the best-selling and best-in-class MDD drug, and quickly, in order to justify the current share price, although if we take a longer term view, the potential of SAGE-324 and SAGE-718 is exciting, if speculative.

I don't think there is much chance of Sage's share price recapturing 2019 highs of ~$190 upon approval - I would be surprised if it exceeded $65, which would represent a 40% spike in value. Of course, short term investors would find such a spike in the share price highly attractive, but there is a risk that FDA declines to approve the drug, which could potentially drop the share price by 50%.

Ultimately, zuranolone's studies have probably not lived up to the hype generated in 2019, and I am not sure the market shares Sage's view that there is blockbuster revenue potential in zuranolone. As such, I am staying on the sidelines for Sage Therapeutics, Inc. stock, but those investors hoping for a short term spike on approval may not be disappointed.

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