Neuren Pharmaceuticals (ASX: NEU) – In Phase 3, priced like Phase 2

Article written by Pitt Street Research. For the full report click here

The Neuren/Acadia deal has been misunderstood

When Neuren Pharmaceuticals, a drug development company focused on neurology drugs, partnered its lead molecule, called Trofinetide, to Acadia Pharmaceuticals in August 2018, the result was a sudden decline in the share price, from the $2.65 level of early August to a low of $1.04 by 28 August. To us that doesn’t make sense, given the quality of the Phase 2 data which Neuren has generated in two Orphan diseases – Rett Syndrome and Fragile X. It also doesn’t make sense in the light of Acadia’s agreeing to pay US$105m in development and regulatory milestones and US$350m in sales milestones, plus double-digit royalties on all Trofinetide sales, for North American rights only.

Investment case: A fast path to market

Acadia expects to take Trofinetide into Phase 3 next year and file for FDA approval in Rett Syndrome potentially in 2021. We believe the market has misunderstood the massive opportunity Neuren and Acadia are working on with Trofinetide, particularly with regard to its speed to market. Since Orphan drugs often sell for very high prices, we see potential for Trofinetide to become a blockbuster.

Neuren has a great partner in Acadia

Acadia Pharmaceuticals is a significant player on the US biotechnology scene, with a current market capitalisation of nearly US$3bn and membership in the elite Nasdaq Biotechnology Index. The company gained FDA approval for its first drug, Nuplazid for Parkinson’s disease psychosis (PDP), in 2016 and is now seeking to grow based on strong focus and expertise in the neurology space.

Valuation range of A$4.17 – A$6.31 per share

We value Neuren at $4.17 per share base case and $6.31 per share optimistic case using a probability-weighted DCF approach. We believe the market has chosen to price Neuren like a Phase 2 company rather than the Phase 3 company which it really is. We see Neuren being re-rated towards our valuation range as the market starts to appreciate the quality of the deal with Acadia, as Neuren negotiates a deal for the ex-North America rights for Trofinetide and as Acadia prepares for the US pivotal studies.

Introducing Neuren Pharmaceuticals, ASX: NEU

Neuren Pharmaceuticals is a Melbourne-based drug developer. This company’s lead compound is Trofinetide, for the treatment of two Autism Spectrum Disorders, Rett Syndrome and Fragile X Syndrome. The company has generated favourable Phase 2 data in both these conditions and in August 2018 was able to license the North American rights to Trofinetide to Acadia Pharmaceuticals , a US specialty pharma company based in San Diego with a market capitalisation of about US$3 billion.

Acadia deal worth US$450M

Acadia paid US$10m upfront and may pay US$105m in development and regulatory milestones and US$350m in sales milestones, plus double-digit royalties on all Trofinetide sales. Acadia will now proceed with and fully fund a Phase 3 study in Rett Syndrome and commence further clinical work on Fragile X Syndrome. The US company expects to be filing for FDA approval in Rett Syndrome potentially in 2021 ahead of a 2022 approval following a 6- month Priority Review. Significantly, Neuren retains the Rest-of-World rights to Trofinetide and is currently negotiating a potential deal on these rights with Acadia.

What is Trofinetide?

Trofinetide is a synthetic tripeptide drug that has its origins in the hormone Insulin-like Growth Factor 1 (IGF-1). This hormone, which is central to the normal growth and functioning of the central nervous system, has long been known to play a role in brain development. In the 1990s the laboratory of Sir Peter Gluckman at the University of Auckland in New Zealand did a great deal of work on the neuroprotective and neurotrophic properties of Glypromate, a tripeptide that cleaves off the N terminus of IGF-1 and is known toupregulate in the brain after hypoxic-ischemic injury.

Neuren Pharmaceuticals was founded in 2001 and did its IPO on the ASX in 2005 in order to develop Glypromate for the prevention of cognitive impairment following cardiac surgery, where the drug failed in Phase 3 in late 2008. Dist. Prof. Margaret Brimble and her group at the University of Auckland produced a synthetic analogue of Glypromate initially called NNZ2566, which is more stable, able to be administered orally and more readily crosses the blood-brain barrier.

Neuren initially worked on this compound as a potential neuroprotective in Traumatic Brain Injury, before shifting the development focus to the Orphan Drug programs Rett Syndrome and Fragile X Syndrome in late 2012. NNZ-2566 was renamed ‘Trofinetide’ in early 2015 when the World Health Organisation accepted this name for inclusion on the list of International Nonproprietary Names. The effects of Trofinetide can be summarised as reducing neuroinflammation, restoring the normal function of microglia (the brain’s immune cells) and improving connectivity between brain cells.

What is Rett Syndrome?

Rett Syndrome is a serious and debilitating neurodevelopmental condition that almost exclusively affects females. It is caused by a mutation in a gene located on the X chromosome called MeCP2. Rett Syndrome is characterised first and foremost by severe intellectual disability, but also by unsteady breathing, cardiac arrythmia and unusual hand movements. Prevalence of the condition has been estimated at 1 in 10,000 or 1 in 15,000 females and we estimate that there are ~10,000 females in the US currently living with the condition.

Females with Rett have been known to live into their 40s and beyond, however many die before this, and many suddenly die because of respiratory failure, apnoea or cardiac arrhythmia. As yet, there are no approved drug treatments. Neuren and Acadia hope to change all that with Trofinetide, which has performed well in two Phase 2 studies in Rett Syndrome patients. Because Trofinetide aims to improve the underlying brain biology rather than treating one symptom, the target market is the entire Rett population.

What is Fragile X Syndrome?

Fragile X Syndrome is, like Rett Syndrome, a monogenic disorder (i.e. caused by a single gene defect), in this case by mutations in the fmr1 gene, also on the X chromosome. It’s called ‘Fragile X’ because, when viewed under a microscope, the X chromosome at the point of the mutated fmr1 is so narrow it looks as if it would break. Fragile X Syndrome affects both sexes, but males more than females. The condition is characterised by intellectual disability, as well as by a long face and other atypical physical features, social withdrawal, hyperactivity and seizures. We estimate there are around 40,000 Fragile X patients in the United States11. Neuren has completed a successful Phase 2 in Fragile X Syndrome.

Orphan drugs can command extremely high prices

Since the 1980s many countries have had measures in place to encourage the development of so-called Orphan Drugs affecting small patient populations. In the US an Orphan Drug is defined at one affecting less than 200,000 people in that country annually. Since around 2008 there has been a strong push by US pharma and biotech companies to enter the Orphan Drug space because of the high prices that are often charged for such drugs, and the ease with which they can gain regulatory approval. We estimate that Trofinetide can become a blockbuster based on Orphan-style pricing in the order of US$200,000 per patient.

What happened to Neuren’s former lead programme in Traumatic Brain Injury?

As we noted above, Neuren initially developed Trofinetide for the treatment of Traumatic Brain Injury. This programme was able to attract US Army funding in 2009, and a Phase 2 trial in TBI patients, called INTREPID-256612, treated its first patient in 2010. This study recruited 261 patients with moderate-to-severe TBI with results reported in April 2016. It’s fair to say that, like most of the TBI studies that have been conducted with other drugs, the results of this study were lacklustre, there being no noticeable difference between Trofinetide and placebo in three core efficacy measures. That said, a fourth measure, called RBANS (Repeatable Battery for the Assessment of Neuropsychological Status) yielded a highly significant result for Trofinetide in severe TBI (p=0.008). On the basis of this, the US Army may consider funding a second study in severe TBI, however this programme is now noncore for Neuren.

If Neuren is so good, how come the share price came down markedly with the Acadia deal?

After the announcement of the Acadia deal, Neuren’s share price declined from the $2.65 level of early August to a low of $1.04 by 28 August. We believe that the market was disappointed with the Acadia partnering because the headline upfront in the deal was only US$10m. We also believe such disappointment is unwarranted. Firstly, US$455m in development and sales milestones plus double-digit royalties is a large deal in anyone’s book when it comes to Pharma partnering, and the deal also removed a heavy development funding burden from Neuren.

Secondly, Trofinetide is moving into Phase 3, in which it has to repeat the result that was obtained in Phase 2, so the risk of clinical failure is
considerably lower than was the case in Phase 2.

Thirdly, there is potential for Trofinetide to become a blockbuster once it comes on the market after 2022.

And fourthly, Neuren’s partner Acadia is a well-regarded US drug developer with a track record of success as demonstrated by Nuplazid (pimavanserin), which the FDA designated a Breakthrough Therapy for Parkinson’s Disease Psychosis in 2014 and which gained marketing approval in April 2016. Nuplazid enjoyed US$125m in net sales in 2017, its first full year of commercial release. We see strong potential for Neuren to re-rate as the market starts to appreciate the quality of its August 2018 deal.

Ten reasons to look at Neuren

1. Neuren is a Phase 3 CNS drug developer in areas of urgent unmet need, with Trofinetide having performed well in two Phase 2 studies in Rett Syndrome and one Phase 2 in Fragile X Syndrome. Following an end-of-Phase 2 meeting with the FDA for Rett syndrome in October 2017, Trofinetide only needs to repeat the result from the second Phase 2 trial in a single Phase 3 trial prior to Neuren’s partner Acadia filing for FDA approval. Given the speed with which Neuren’s previous studies have recruited, Trofinetide could potentially become an approved drug for Rett Syndrome by 2022.

2. Neuren has a lucrative partnering deal with Acadia Pharmaceuticals. Neuren’s partnering deal with Acadia, signed in August 2018, came with total milestone payments of up to US$465m plus double-digit royalties on net sales of Trofinetide in North America. It provides a clear path to market for Trofinetide in Rett Syndrome and Fragile X Syndrome.

3. Trofinetide performed particularly well in the Phase 2 for pediatric Rett Syndrome. This randomised, placebo-controlled study, which completed in 2017, generated statistically significant improvements across a range of domains and core measures and helped shape the design of the upcoming Phase 3. Two of the measures that showed statistically significant improvement are the primary endpoints for the Phase 3 trial.

4. Neuren has the support of the key physicians and advocacy groups. Neuren’s studies have been conducted with strong support and collaboration from the leading Rett Syndrome physicians and the largest patient advocacy group Rettsyndrome.org, which is critical for development and commercial success.

5. Neuren is funded for its next stage of development. With Neuren holding A$24m in cash as at September 2018, and Acadia funding further development of Trofinetide estimated at US$60m for Rett Syndrome alone, we see Neuren as being free from near-term funding pressures.

6. There is potential for Acadia to take Rest-of-World rights for Trofinetide, with a second exclusive negotiating period having commenced in October 2018. Should these discussions proceed satisfactorily, we see potential for further cash infusions, as well as the potential for a re-rating of Neuren stock given the de-risking represented by such a transaction. If the parties don’t reach agreement on a deal, Neuren will be free to negotiate with other interested parties.

7. Neuren is an Orphan Drug developer. Both Rett Syndrome and Fragile X are Orphan diseases with, at present, no approved drug treatments. There is potential for Neuren and Acadia to therefore enjoy high pricing for Trofinetide should the drug come to market.

8. NNZ-2591 has potential across a wide range of conditions. As per preclinical evidence, NNZ-2591 has demonstrated potent neuroprotective and neurotrophic properties across a range of CNS conditions. Development of NNZ-2591 offers further opportunities for Neuren to expand its drug portfolio for neurological disorders.

9. Neuren has a strong management team. The company’s management team is led by its Executive Chairman, Dr. Richard Treagus, who has >20 years of experience in the biopharmaceutical industry on aspects such as development and commercialization of new pharmaceutical products, FDA approval for novel products, and product licensing deals. Richard is part of a well-equipped board that has extensive experience in building a successful life sciences company.

10. Neuren is undervalued, on our numbers. We value Neuren at $4.17 per share base case and $6.31 per share optimistic case using a probability-weighted DCF valuation approach. We see Neuren being re-rated towards our valuation range as the market starts to appreciate the quality of the deal with ACADIA, as Neuren negotiates a deal for the ex-North America rights for Trofinetide and as Acadia prepares for the US pivotal studies.

Valuing Neuren

We value Neuren at $4.17 per share base case and $6.31 per share optimistic case using a probability-weighted DCF valuation approach.

– Our WACC was 15.3% (Speculative);
– We modelled payoffs for Trofinetide in both North America and globally;
– We model commercial exclusivity for each product until 2032, which is when the method patents for both Rett and Fragile X expire53;
– Our probability weighting for Trofinetide reaching the market for Rett syndrome and Fragile X syndrome was respectively 71% and 38%, reflecting the historical probability for large molecules in Phase 3 and Phase 254;
– We modelled a corporate overhead of A$0.6m per month.

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