SAGE - Sage Therapeutics: Zuranolone NDA Near-Term Tailwind

Summary

• SAGE's collaboration with BIIB looks to be finally building momentum around the zuranolone segment.
• It is set to be selling into a broad set of growing end-markets.
• The recent new drug administration is a good step forward and sets the company up for the next stages of commercialization.
• Rate hold, but ready for further announcements.

Investment summary

There could be a selective growth opportunity for Sage Therapeutics, Inc. (SAGE) should the market support its "zuranolone" deal with Biogen Inc. (BIIB).

When we last reviewed the stock in October FY20 [it is down 44% from our buy call, and did not perform], there was no clarification on the deal. A little later, by December FY20, the pair had formalized a global collaboration and license agreement to jointly develop and commercialize zuranolone. There are several advantages with that. For SAGE, it reduces the execution risk, not having to allocate capital away from R&D. For BIIB, it mitigates its pipeline risk, allowing it to invest capital into more growth initiatives to generate return on invested capital.

Fast forward 2-years later, December 6 2022, the pair finally announced the completion of the rolling submission of a New Drug Application (NDA) FDA for zuranolone in the treatment of major depressive disorder ("MDD") and postpartum depression ("PPD"). This is the natural step forward for zuranolone, and the question now turns to what the market will think of the next rung on the ladder. This is also a significant milestone in the development of the drug, and if approved, zuranolone could provide a new treatment option for patients suffering from PDD and MDD. Noteworthy, is that SAGE already has good exposure to PDD, being its Zulresso label is well supported in management of the condition. Here we will discuss our findings and help investors make an informed decision.

You can see the market's reaction to the hype surrounding the FDA's decision in the chart below. We will be closely observing price distribution from here in order to get a feel of what the market will decide good forward.

Exhibit 1. SAGE 12-month price evolution

MDD, PPD markets wide and growing

We have covered the MDD market in great detail as part of a deep dive into the segment in 2020. You can observe some of the key findings here [see sub-head: "The MDD Market is growing" ]. This has formed the bedrock of our knowledge into the sector, and guided key decision making along the way [very successfully]. In order to fully appreciate the zuranolone opportunity, and also make the most informed investment reasoning possible, we've shared our findings about the market:

1. According to market research, over 300 million people currently suffer from MDD worldwide. In the United States alone, there are nearly 20 million cases at any given time, and MDD is the leading cause of disability among individuals aged 15-50. Furthermore, the onset of MDD is occurring at younger ages, with approximately 8% of young adults experiencing some form of depression. The prevalence of MDD has continued to rise over time, with most high-income and populous nations experiencing an increase since 1990 or at least maintaining their current levels, highlighting the need for innovation and disruption in the treatment of this condition.
2. The global market for MDD treatments is expected to continue to grow in the coming years, driven by an aging population and increasing awareness of mental health disorders. According to recent market research and forecast data, the global MDD treatment market is projected to reach a value of $16.8 billion by 2032, representing a compound annual growth rate of 5.2% from 2022 to 2028. This growth is expected to be driven by factors such as the increasing prevalence of MDD, the introduction of new and innovative treatments, including zuranolone.
3. The aging population presents a significant commercial opportunity for companies operating in the MDD space . By 2030, it is estimated that approximately 21% of the US population will be older adults (defined as 65 years or older), compared to the current figure of around 17%. There is a strong correlation between the incidence of MDD and chronological age, with older individuals being the most susceptible demographic. Additionally, the increasing prevalence of MDD among younger individuals suggests that the commercial opportunity for companies operating in this space will continue to grow in the coming years.

Zuranolone (SAGE-217/BIIB125) SAGE & BIIB's new investigational drug that is being developed for the treatment of MDD and PPD. It is an oral neuroactive steroid ("NAS") that acts as a positive allosteric modulator of the GABA-A receptor, which is a key inhibitory signaling pathway in the brain. This mechanism of action makes zuranolone unique compared to existing antidepressant medications, and it has shown promise in early clinical trials.

The LANDSCAPE and NEST clinical development programs are currently evaluating zuranolone in a wide range of populations and treatment paradigms. These programs will provide valuable information on the safety and efficacy of zuranolone, and will help to further understand its potential role in the treatment of MDD and PPD.

The PPD treatment market is a segment of the overall mental health and antidepressant medication market. PPD is a common and serious condition that affects women after giving birth, and it can have a significant impact on the health and well-being of both the mother and the baby. The postpartum depression treatment market is estimated to reach a CAGR of 30.4% during the forecast period 2021 to 2030. The market was valued at $5Bn in 2021.

Currently, the PPD treatment market is dominated by pharmacotherapy, with selective serotonin reuptake inhibitors ("SSRIs") being the most commonly prescribed class of drugs for PPD. Other classes of drugs, such as tricyclic antidepressants and monoamine oxidase inhibitors, may also be used in the treatment of PPD. In addition to pharmacotherapy, psychotherapy, such as cognitive-behavioral therapy ("CBT"), may also be used to treat PPD.

As such, given the high growth percentages in both end-markets, there could be momentum building around the zuranolone segment. We encourage investors to remain diligent on the space and be ready for a potential breakout. Right now, we need more evidence from the market side.

Bottom line

Sage Therapeutics was founded in 2010 and went public in 2014, seeing its stock price reach a peak of around $190. However, investor sentiment turned negative in 2019 after the company failed to meet the primary endpoint in its SAGE-217 phase 3 study for the treatment of clinical depressive disorders. As a result, the company's stock price plummeted by over 60%.

Furthermore, the company's financial performance has been underwhelming over the last few years, with declining revenues, negative EBITDA, and negative EPS growth. Its free cash flow has also remained negative, although this is not uncommon for early-stage companies that are heavily invested in R&D.

Therefore, this could certainly be an inflection point for the company looking ahead. There is still merit in being patient with this one, and keeping trigger heavy ready for an update on further release. What's more, is we look forward to understanding the commercialization strategy in greater detail. Our findings demonstrate there is market potential in the stock and its underlying market. Hence, we rate it hold, awaiting further updates.

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