Neurocrine Is Seeing A Welcome Pick Up In Ingrezza, But Pipeline Catalysts Are Thin (NBIX)

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Neurocrine Biosciences (NASDAQ:NBIX) is in a challenging spot for a biotech. Although the company has three approved drugs on the market, only one (Ingrezza) contributes meaningful revenue, and there has been considerable worry on the Street about whether the company had already plucked the low-hanging fruit with this drug, setting the stage for weaker sales growth. At the same time, the list of near-term clinical catalysts is relatively sparse, leaving the stock a little short on news to stoke investor enthusiasm.

The second quarter improvement in Ingrezza sales was certainly welcome, but the negative clinical update on NBI-827104 in essential tremor was disappointing (although not a big surprise), and there isn’t likely to be a lot of thesis-changing information from the company outside of Ingrezza sales for the next couple of quarters.

All of this complicates the investment case a bit. While I like Neurocrine, and I do see upside in the pipeline, the reality is that I think the valuation is pretty fair today on a risk-adjusted basis. Clinical read-outs in 2023 could drive some meaningful upside to my fair value, and that keeps me directionally positive on the shares, but I can’t say this is a superior bargain in the sector today.

A Nice Beat From Ingrezza, But Sustainability Remains A Question

Neurocrine investors wanted a strong quarter from Ingrezza, and they got that in the second quarter. Revenue from Ingrezza (which represents over 90% of total revenue) rose 32% year over year, with a similar underlying increase in subscribers. This result was good for an 8% beat relative to sell-side estimates, and I believe this result exceeded the highest Street estimate. I say “believe” because third-party sources for earnings estimates don’t always agree, and not all of the published estimates may have been captured by those sources.

Management didn’t give a lot of detail on the drivers of the stronger performance of Ingrezza in the second quarter, but it sounds like it was a byproduct of multiple moving parts, including the company’s substantial investment into direct-to-consumer advertising, a larger sales force, and the ongoing normalization of sales calls and patient visits as the pandemic fades. With this, the company saw record new patient starts as well as improved/strong persistence and compliance rates.

As for the rest of the business … the best I can say is that the company didn’t really deviate from low expectations. Ongentys sales were up 20%, but still only amounted to $2.4M, while collaboration revenue (largely sales of elagolix by AbbVie (ABBV) declined 12%.

I continue to believe that Ongentys is a real opportunity, but it’s clearly one that the company is going to have to support with marketing resources to drive revenue towards its potential. As a reminder, this is a differentiated therapy for Parkinson’s, but it’s one that is going to require meaningful physician engagement as awareness of the drug (and what differentiates it from other COMT inhibitors, which have poor side effect profiles) is not high.

The big question now for Neurocrine is whether the company can maintain that momentum in Ingrezza. I believe they can, with that position grounded in my view that the tardive dyskinesia patient population is under-medicated, but it will require strong consistent execution on the marketing front, including both physician and patient outreach and education efforts. Getting Ingrezza back on a steady growth trajectory would likely do a lot of good for investor sentiment ahead of more meaningful clinical updates in 2023.

A Clinical Failure In Essential Tremor

Neurocrine announced that NBI-827104 failed to show meaningful efficacy in its Phase II proof-of-concept study in essential tremor. I had outlined the opportunity for this drug in a recent article, but also noted that the odds of success were rather low. With insufficient evidence of efficacy, the company will no longer develop the drug for essential tremor, but the company still has an ongoing Phase II study in a rare pediatric epilepsy (referred to as CSWS) that will read out in the second half of this year.

I don’t believe that expectations for ‘104 in essential tremor were high. It would have absolutely been a great win if the trial had shown strong efficacy, but the low odds of success meant that it only contributed about $1/share to my fair value for the stock. I likewise assign very low odds of success in the CSWS study, but a strong signal of efficacy could add a couple of dollars to my fair value, with total per-share upside in the high single-digits to low double-digits (as mentioned, it’s a rare condition, which does constrain the upside).

The Outlook

Unfortunately for investors, there’s not a lot of thesis-changing news on the schedule for the remainder of 2022, leaving the shares more sensitive to the revenue performance of Ingrezza as well as overall investor sentiment toward biotech stocks. Apart from the Phase II read-out on ‘104 in CSWS, there’s nothing else expected in terms of clinical data for 2022, though 2023 will see multiple read-outs that can drive meaningful changes to the stock’s fair value estimate.

I would note, though, that Karuna (KRTX) is expected to announce Phase III results for its study of dual M1/M4 agonist KarXT in schizophrenia. Phase II showed a 12-point placebo-adjusted improvement in patient PANSS scores, and a strong result here could generate more optimism around Neurocrine’s NBI-1117568, an M4 agonist that the company announced will be moving into Phase II for schizophrenia later this year.

Neurocrine’s Q2 Ingrezza sales were better than I had expected (my estimates were higher than the Street), but not enough to really change my model. I’d like to see more follow-through before getting more bullish. With that, and subtracting ‘104 in essential tremor, my fair value moves to around $109 – only modestly above the current share price.

The Bottom Line

I do see opportunities for Neurocrine’s fair value to rise in FY’23; success with crinecerfont, for instance, would add around $10-$15/share to my fair value estimate. Likewise there are multiple early-stage programs that will read-out in FY’23 that could drive $20/share or more in incremental value.

Whether that upside is enough to justify owning the stock now is up for investors to decide for themselves. I also acknowledge that the near-term valuation is not necessarily compelling given the risks to sales growth momentum in Ingrezza and the inherent risks of developing CNS drugs. Were the shares to really run on a renewed enthusiasm for the sector, I might consider selling down some, but I still lean positive on these shares and am not in a hurry to sell today.

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