SUPN - Supernus Pharmaceuticals: Derisked CNS Drug Portfolio Offers Attractive Buying Opportunity

2023-11-10 14:22:53 ET

Summary

• Supernus Pharmaceuticals has experienced revenue growth every year since its IPO in 2021, reaching $667m in 2022.
• The company has expanded its product portfolio through acquisitions, including the purchase of Adamas for $850m.
• Q3 earnings beat expectations, with increased guidance for FY23 earnings and the resubmission of a New Drug Application for SPN-830.
• Supernus is successfully navigating through the patent expiry of its long-term bestselling drug, Trokendi, thanks to ADHD drug Qelbree - a drug with over $500m p.a. revenue potential.
• An exciting late stage pipeline and further approval shot in Parkinson's early next year makes a strong buy case for a company that has been heavily sold on unfounded  Trokendi LOE fears.

Investment Overview - Supernus, From IPO To Present Day

Supernus Pharmaceuticals, Inc. ( SUPN ) is a pharmaceutical company headquartered in Rockville, Maryland. The company - once part of Shire Pharmaceuticals - completed a cut price IPO back in 2021, raising ~$50m via the issuance of 10m shares priced at $5 per share. Jack A. Khattar has served as the company's President, Chief Executive Officer, and Director since founding the company in 2005.

Since listing, Supernus has focused on the treatment of central nervous system diseases. It has grown revenues every year, from just $12m in 2013, to $667m last year, generating a net profit every year since 2015. Although things have changed a little, since generating over $100m between 2018-2020, net income has slipped to $53.4m in 2021, and $61m in 2022.

The first two products Supernus launched were both epilepsy therapies, in the form of Oxtellar, an anticonvulsive, and Trokendi, which was also indicated for the prophylaxis of migraine headaches in 2016. Buoyed by $226m of revenues from Trokendi, and $68m from Oxtellar, Supernus achieved its peak share price value of $60 in mid-2018.

By April 2020, however, as revenue growth struggled to meet the market's expectations and the pipeline asset SPN-810 failed to make the grade in attention deficit hyperactivity disorder ("ADHD"), shares had slipped to ~$17 per share. At that time Supernus signed an agreement to acquire the CNS portfolio of US WorldMeds, a privately-held biopharmaceutical company, for $530m.

That gave Supernus access to APOKYN (apomorphine hydrochloride), MYOBLOC (rimabotulinumtoxinB), and XADAGO (safinamide), indicated for Parkinson's Disease (for reliable control of body movements), cervical dystopia, and as an adjunct to Parkinson's therapy levodopa respectively.

In late 2020, Supernus had two marketing applications rejected by the FDA, for another ADHD drug, SPN-812, and SPN-830 - a device for the continuous treatment of motor fluctuations in Parkinson's disease, acquired as part of the WorldMeds deal. In April 2021, however, at the second time of asking, SPN-812 secured an FDA approval, for the treatment of attention-deficit hyperactivity disorder ((ADHD)) in pediatric patients 6 to 17 years of age. The drug is now marketed and sold as Qelbree.

Supernus urgently needed to add to its portfolio of approved drugs as a result of the pending loss of patent protection for its main revenue driver, Trokendi, which earned $305m of revenues in 2021, or more than 50% of the company's total revenues in that year. In late 2021, the company duly paid ~$850m to acquire Adamas, which according to a press release issued at the time:

Strengthens (our) Parkinson's disease portfolio with GOCOVRI® (amantadine) extended-release capsules, the first and only FDA-approved medicine indicated for the treatment of both OFF and dyskinesia in patients with Parkinson's disease receiving levodopa-based therapy and Osmolex ER® (amantadine) extended-release tablets, approved for the treatment of Parkinson's disease and drug-induced extrapyramidal reactions in adult patients.

Management also noted that the deal "significantly reduces the reliance on net sales of Trokendi XR", and that it could generate "potential synergies of $60 million to $80 million in year one due to strong overlap with existing infrastructure."

To The Present Day - Supernus Stock Sinks From 4-Year High, To 3-Year Low

In May 2022, the FDA agreed to expand the label of QELBREE, for the treatment of adults aged 18 years and older, and although SPN-830 was rejected again, in October, after beating analysts' revenues for three consecutive quarters (although falling slightly short on GAAP EPS), Supernus stock was riding high going into 2023, trading at over $40 per share.

In April 2023, the company repaid $403m of convertible notes, but the stock price began to slide as the company announced FY22 results and provided FY23 guidance. The company earned $667m, with Trokendi revenues of $261m, down 14% year-on-year, Oxtellar revenues of $115m, GOCOVRI revenues of $104m, Qelbree revenues of $61.3m, and APOKYN revenues of $75m. Earnings per share of $1.04 was up marginally year-on-year.

Guidance for 2023 was issued for $580m-$620m, with $60-$80m of Trokendi revenues, but with combined R&D and SG&A expenses expected to reach $460-$490m, an operating loss of $(50m)-$(25m) was forecast on a GAAP basis, and a profit of $65-$95m on an adjusted basis. Fast forward to August, and a Q2 revenue miss - $135.6m of revenues falling short of analysts' estimates - sent the stock price tumbling, to $24 per share, its lowest value since late 2020.

Supernus Q3 Earnings In Review

This week, Supernus announced its Q3 earnings, which have given the stock price a lift, as shares have risen in value from ~$23, to $26, up ~13%. First of all, management was able to raise its FY23 guidance for earnings of $95-$110m.

Revenues of $154m beat market expectations, as did GAAP operating earnings of $8.1m, and non-GAAP earnings of $37.3m - up 47% year-on-year. The company also announced the resubmission of its New Drug Application ("NDA") for SPN-830, with a Prescription Drug User Fee Act ("PDUFA") date - when the FDA announces its approval decision - of April 5, 2024.

As we can see above, Qelbree's revenue growth has been impressive, bolstered by the label expansion secured last year, no doubt, and revenues rose 103% year-on-year in Q3, to $37m, and 149% over the 9-month period, to $93.8m. Over the long term, analysts at Jefferies have suggested the drug could achieve peak sales of over $400m per annum, based on a 4-5% share of the ADHD market. Importantly, that would be a higher figure than was ever achieved by Trokendi.

Growth in GOCOVRI, while not matching Qelbree, is also encouraging, with 17% year-on-year growth year-to-date, to $75m. When Supernus acquired Adamas, there were contingent value rights attached to the deal, one which pays out if GOCOVRIS revenues achieve $150m in sales prior to the end of 2024, and another if revenues exceed $225m in four consecutive quarters before 2024. At this stage, neither looks likely to pay out.

On the negative side, the 70% year-on-year decline in Trokendi revenues in Q3, to $21m, shows the negative effect that its loss of exclusivity has had. The drug may do well to post revenues of $50m in FY24. The company is still forecasting for a GAAP net loss in 2023, but is now guiding for a smaller loss of $(15m)-$(5m), while adjusted net profit is expected to be $95-$100m.

Total revenues year-to-date were reported as $500m, down 11% year-on-year, although ex-Trokendi, revenues climbed 25%, to reach $368.5m. Supernus reported total current assets of $449m as of Q3, versus total current liabilities of $288m, and total liabilities of $373m.

Looking Ahead - Pipeline Provides Reasons To Be Cheerful

Supernus' long-time CEO Khattar was in a positive mood on a short Q3 call with analysts, first of all noting that the "$70 million in net sales from Qelbree and GOCOVRI far exceeded the $49 million decline in Trokendi XR net sales in the third quarter". An undeniably positive sign. Discussing Qelbree, the CEO noted:

While the overall ADHD market had a soft back-to-school season, Qelbree delivered robust prescription growth of 16.6% in September 2023 compared to June 2023. In addition, Qelbree accelerated its quarterly sequential prescription growth in the third quarter 2023 to 12% up from the 9% sequential growth in the second quarter of this year.

During the third quarter of 2023, the average net price per prescription for Qelbree was $227, an increase of 7% compared to the second quarter of 2023. This increase was primarily due to an improvement in gross to net, which was around 58.7%, the lowest since the launch of the product, and a key step towards our year-end target of 50% to 55%.

According to Grand View Research , "USD 13.21 billion in 2022 and is expected to expand at a compound annual growth rate ((CAGR)) of 4.2% from 2023 to 2030, implying a valuation of over $18bn by the end of the decade. Although the marketplace for ADHD drugs is crowded, with Supernus name-checking Adderall XR, Intuniv, Kapvay and Strattera in its latest annual report , it has also been subject to global supply constraints , with underlying ingredients being complex to manufacture, and classified as controlled substances. As such, the outlook for Qelbree revenues appears to be substantially positive.

Supernus has no intention of resting upon its laurels and relying solely on its current product portfolio - Jack Khattar discussed the company's current drug pipeline on the Q3 call as follows:

The company has a significant number of near-term milestones.

• First, the initiation of a Phase IV study with Qelbree in ADHD patients with comorbid mood disorders, such as depression and anxiety, before year-end 2023.
• Second, the initiation of a Phase II open-label study with SPN-820 in approximately 40 subjects with major depressive disorder, also before year-end 2023.
• Third, getting top-line data in the first half of 2024 from the Phase IIa study of SPN-817 for treatment-resistant focal seizures.
• Fourth, the initiation of a Phase IIb placebo-controlled study with SPN-817 in patients with treatment-resistant focal seizures, also in the first half of 2024.
• And fifth, the potential launch in the second half of 2024 of SPN-830 for the continuous treatment of motor fluctuations in Parkinson's disease, if approved by the FDA.
• Finally, we remain active in corporate development, looking for strategic opportunities to further strengthen our future growth and leadership position in CNS.

The opportunity that jumps out, to me at least, is SPN-820, which the company describes as a "first-in-class, orally active small molecule that increases the brain mechanistic target of rapamycin complex 1 (mTORC1) mediated synaptic function intracellularly."

Major Depressive Disorder is a substantial market of over 17m adults, Supernus believes, with 30% of MDD patients treatment-resistant. There are over 60 products available to treat the condition, but many are older therapies and the demand for better alternatives is high, with its novel MoA, and early signs of efficacy in TRD patients, this is a potentially substantial revenue accretive opportunity for the company.

Meanwhile, the company will hope to increase its presence in the Parkinson's Disease market with an eventual approval for SPN-830, and in epilepsy, through SPN-817, with a critical data readout due from a Phase 2a study in 1H24.

Concluding Thoughts - Why I Believe Supernus Shareholders Can Look Forward With Confidence

Completing this review of Supernus, past, present, and future, I am impressed with most aspects of the company. From a leadership perspective, the guidance provided by the long-term CEO since the company's inception nearly 20 years ago has been very strong, in my view.

From securing FDA approval for the company's first two drugs, to growing revenues substantially in every year for a decade, to navigating its first major patent expiry - arguably the biggest challenge pharmaceutical companies face - the company's progress has been seamless,

The management of debt - paying back over $400m in convertible notes earlier this year - and the relatively strong cash position speaks to good financial stewardship, as does the profitable nature of the company, even if, from a GAAP perspective, a loss may be recorded this year.

The expected GAAP loss does not concern me, when we consider the company's opportunities for growth, led by Qelbree, which is picking up prescriptions faster than any other recently approved ADHD product, as we can see below.

Thanks to its novel mechanism of action, Qelbree is apparently finding favour with patients in a market characterised by regular product switching - 86% of patients report a positive response after two weeks of using the drug, a recent research report suggests (detail in a recent Supernus investor presentation) and this leads me to believe we could be looking at a drug with peak revenue potential of $500m-$1bn, as opposed to $400m, as some analysts have forecast.

Supernus has shown itself to be adept at guiding drugs with novel MoAs to market, and that bodes well for a current pipeline that has the potential to bolster and diversify the company's presence in the depression and Parkinson's Disease markets. Even when the FDA has rejected its marketing applications in the past, it has shown the resilience to come back and try again successfully, and that could happen again next April with SPN-830. The company has also shown itself to be capable of making good strategic M&A decisions - both the Adamas and US WorldMeds buyouts have been unqualified successes.

In summary, while many smaller commercial stage Pharmas typically struggle to grow revenues, and manage financially, Supernus seems to have gone from strength to strength, and having negotiated the tricky Trokendi LOE, the company looks to be in an excellent position to resume its path to growth both at the top and bottom line.

It is clear the market has sold Supernus stock based on doubt around the company's ability to keep growing post-Trokendi-LOE, but Q3 earnings have shown that is unlikely to be the case, creating a mini-spike in the share price, which I am hopeful will continue into 2024, and over the longer-term.

There are of course risks to consider in relation to an investment in Supernus, such as "key-man" risk in relation to a long-term, visionary CEO - their departure could create substantial instability. The ADHD market, as mentioned, is highly competitive, and with major pharmaceuticals with major marketing budgets active in the market, Supernus' own marketing activities may put a strain on finances, which are not unlimited by any means. New and better drugs could put Qelbree in the shade, and the long-term shelf lives of other assets, Oxtellar and APOKYN for example, may be limited.

Nevertheless, I am confident the company will return to growth and profitability in 2024, and as such, I'd rate Supernus as a strong buy opportunity at the current share price and valuation - a forward price-to-earnings ratio of ~14x on a non-GAAP basis is an attractive ratio, even in a difficult year for the company. I hope to see management target annual sales of $1bn by 2027, let's say, and that could see the share price doubling in value from its current low bar over a similar time period.

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