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Ingrezza Remains Surprisingly Strong For Neurocrine

Neurocrine Biosciences (NBIX) is establishing at least some reputation and track record for “underpromising and overdelivering”, with yet another quarter of better-than-expected sales for lead drug Ingrezza. Whether it adds much value to the share price is another story, though, given the shares have largely just chopped around for the last couple of months, as the Street seems to feel that the Ingrezza story is well-understood and future pipeline catalysts are still a ways down the road.

I’ve been concerned all year that Neurocrine could drift a bit in 2020 given the absence of game-changing catalysts, and the shares have underperformed the sector by a noticeable amount. Still, I think the Street is undervaluing the moves the company has made to deploy capital toward building a diverse, deep early-stage pipeline, and I likewise continue to believe that the shares are undervalued below $140. Whether the 15% or so upside that implies is good enough for a profitable, cash flow-positive biotech is something investors will have to decide for themselves.

Ingrezza Comes Through Again…

Neurocrine posted a healthy beat on the top line this quarter, with 65% revenue growth and a final number that was about 16% higher than the Street.

Ingrezza was stronger than expected once again, with revenue up 48% yoy and 16% qoq on an imputed 12% qoq increase in prescriptions. Reported Ingrezza revenue was 10-12% better than expected (depending upon which source you use for the “consensus” number) and still would have beaten expectations, subtracting out the $12 million inventory build. Collaboration revenue was also stronger than expected, rising to $35 million and trouncing expectations.

R&D spending was a little higher than expected, while SG&A was a little lower, and the two items basically canceled each other out. Period-ending net cash and investments isn’t as much of a concern anymore, but nevertheless finished above $700 million, with over $150 million of free cash flow generated in the first half of the year.

… But The Second Half Could Be More Challenging

Although management couldn’t really characterize what has been happening with patient-doctor visits in the tardive dyskinesia (or TD) space, they did say that new patient starts seem to have declined far less than has been the case for the market overall, and that numbers have been relatively steady since April.

It’s well worth remembering here that psychiatry has been one of the earliest (and strongest) adopters of telemedicine, so it’s not wholly surprising that this has held up better. Still, management did indicate that new starts are going to be under more pressure as the COVID-19 lockdowns continue. Doctors really don’t like diagnosing and prescribing for TD through telemedicine.

I’d also keep an eye on the inventory levels of Ingrezza in the channel. This quarter’s build has brought inventory in the channel to over three weeks – the highest it has been so far. While building inventory may make some sense given what has been going on, management expects some inventory drawdown, and that is likely to pressure results in the third or third and fourth quarters.

Management also provided an update that, in their view, diagnosis rates for TD are at around 20% in the U.S. That fits pretty neatly with my model, as my peak revenue assumption (around $2.7 billion to $2.8 billion) was built on a 50% diagnosis/treatment rate (with Neurocrine never getting 100% of that). It’s also worth noting that, although not a near-term catalyst, Neurocrine does have a partnership in place that could ultimately bring in Ingrezza TD revenue from geographies like Japan and China.

As For The Rest…

With partner BIAL having resolved some issues on its end, Neurocrine should be clear to launch Ongentys in the third quarter. Again, the challenges created by COVID-19 will likely mean relatively limited initial sales, and this isn’t a drug from which I have large expectations anyway – while there is a market need for something to improve upon existing levodopa use, I don’t expect this drug to reach $500 million in revenue.

Neurocrine has also started its Phase III study (CATALYST) for crinecerfont in adults with congenital adrenal hyperplasia. The study is designed to enroll 165 patients in North America and Europe, with a target completion date in February 2023. The primary endpoint will be the percentage change (from baseline) in glucocorticoid administration. While this is an endpoint with some risk, I like this decision, as I believe a “real-world endpoint” (as opposed to a biomarker) will be more compelling for physicians, patients, and payors. Management has also resumed its Phase II pediatric study.

AbbVie (ABBV) received approval for elagolix in uterine fibroid-associated bleeding back in late May, and will market the drug as “Oriahnn”, as it is distinct from already-marketed Orlissa. Both contain elagolix, but Oriahnn also contains estradiol and norethindrone acetate. Elagolix sales and royalties have thus far been disappointing, but AbbVie does appear committed to the program.

The other relevant update to mention was the removal of the Phase I next-gen VMAT2 inhibitor from the pipeline. This drug had been lingering around without advancing for some time, and its removal is not wholly surprising. It would seem that Neurocrine will instead look to advance Ingrezza into other disorders instead of incurring the clinical costs to develop a new VMAT2 inhibitor (or at least that new VMAT2 inhibitor).

The Outlook

Neurocrine certainly has more going on than I’ve mentioned, though I’ve discussed developments like the Takeda (TAK) and Idorsia partnerships in prior pieces, and there’s really not much new to say about them now. As such, the company remains an interesting story with a very strong commercial asset (Ingrezza), a thus far unproven asset in Ongentys, and a thus far disappointing asset in Orlissa/Oriahnn. Behind that is a broad, deep pipeline that is addressing some major markets, but the pipeline does skew early-stage, with even crinecerfont still several years away from the market.

I continue to value Neurocrine on the basis of multiples on risk-adjusted peak sales, discounted back. Ingrezza remains the primary value driver, worth over $105/share, with crinecerfont contributing close to $20/share and elagolix over $8/share.

Bottom Line

Adding all of the pipeline projects, I believe Neurocrine is worth around $140/share today, with meaningful upside possible if and when clinical data further de-risk programs like crinecerfont, VY-AADC, XENE901, and TAK-831. While this is not a strong year of game-changing catalysts for the company, and Ingrezza’s strength could wobble some in the next quarter or two, I continue to believe this is a worthwhile Hold, and possibly a Buy relative to that $140 fair value.

Disclosure: I am/we are long NBIX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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