Neurocrine Biosciences: Disappointing data from a key read hits stock hard (NBIX)

Focused on neuroscience Neurocrine Biosciences (NBIX) had been on a number of positive, including strong, news stories Ingrezza sales and unexpectedly positive results from a phase II study of NBI-1065845 in major depressive disorder, but all of that came to a crashing halt on Aug. 28 with the announcement of disappointing Phase II data on NBI-1117568 (‘568), the company’s lead M4 muscarinic receptor agonist for schizophrenia.

Although 568’s results weren’t a total failure, and management tried to argue that the drug was approved and competitive with rivals such as Bristol-Myers‘ (BMY) xanomeline-trospium chloride (commonly called KarXT) and AbbVie’s (ABBV) emraclidin, but Street doesn’t have it. While I think the backlash after this disappointing reading is overblown, that’s the nature of immediate reactions to major candidate disappointments, and it’s entirely possible that Neurocrine could lose significantly cash on an ultimately uncompetitive drug.

I haven’t cut my value on ‘568, but at nearly $5.50/share, it’s no longer a significant value driver. It will take time for investors to get over this disappointment, but with a fair value of around $155 versus a current share price (at the time of writing) of $122.50, I think this is a worthwhile name considered, especially since Neurocrine has a healthy pipeline. of other muscarinic agents that may ultimately yield more competitive candidates if further ‘568 studies do not show better results.

A win that is really more of a loss

Neurocrine’s ‘568 Phase II study did not fail technically—the target dose of 20 mg/day showed a statistically significant decrease in the Positive and Negative Syndrome Scale (or PANSS) total score at Week 6, as well as other statistically significant secondary efficacy objectives. The drug was well tolerated and there were no apparent tolerability or safety issues.

The problem is the magnitude of the effectiveness, as well as the lack of dose-dependent responses. Usually you want to see a consistent dose-response relationship (higher dose = higher response), but that wasn’t the case here. That said, as management has gone to some lengths to point out, this isn’t as true in neuroscience clinical trials as it is elsewhere, and Neurocrine has always considered 20 mg/day to be the optimal dose based on preclinical testing.

The lead led to a placebo-adjusted improvement of 8 points or better in the PANSS, and earlier results from KarXT and emraclidine led the Street to seek double-digit improvement as evidence of a significant competitive profile.

However, what “568” provided was only a 7.5-point reduction in the placebo-adjusted PANSS. While ‘568 showed a 10-point improvement in Week 5, the bottom line was 7.5 points, and you don’t need to roll back the clock on a post-hoc basis.

Other secondary endpoints such as the Clinical Global Impression of Severity (or CGI-S) scale (placebo-adjusted -0.7) and Marder Factor Score – Negative Symptom Change (placebo-adjusted -1.9) were positive and compares well with KarXT phase results. III EMERGENT-3 study (-0.5 and -0.8 respectively), but this is not sufficient at this time.

Same with effect size. As highlighted in the company’s own slide, the effect size here for ‘568 was 0.61 – below the 0.75 seen in the Phase II study of KarXT and the 0.68 seen in the Phase Ib study of emraclidin. If 568 saw the same erosion between Phase II and Phase III that KarXT saw (and it is common to see deterioration between Phase II and III), the effect size would fall below that of antipsychotics already on the market.

Could 568’s design lead to a differential outcome in phase III?

One of the reasons I’m not lowering my expectations for 568 is that there is at least a chance that the nature of the drug will lead to a different Phase II-Phase III experience than seen with other drugs.

Neurocrine’s ‘568 is the only known orthosteric M4 receptor agonist in clinical development. Unlike allosteric agonists, orthosteric agonists bind at the active site (allosteric agonists bind elsewhere and change the conformation of the protein binding site). In theory, this should mean more consistent and predictable results and less translational risk in subsequent studies. In other words, you could try to argue that because of the ‘568’s design, there is a greater likelihood that the results seen in Phase II will repeat themselves in Phase III.

If so, the efficacy comparisons become more interesting – KarXT would still have an advantage in terms of PANSS reduction (a placebo-adjusted reduction of 8.4-9.6 points), but here it is possible that secondary endpoints and tolerability /security could balance out that advantage.

I think that’s a big ask and it’s not what I expect to see. I think it’s much more likely now that the ‘568 is an “also” competitor in the emerging M4 space, and that Neurocrine probably won’t win back the development cost. Management certainly doesn’t see it that way and repeatedly tried to demonstrate during the post-launch conference call that this was an impressive, effective and competitive drug.

what now

Management said they see the outcome of this trial as encouraging and plan to move ‘568 into phase III testing early next year, as well as consider other potential indications for the drug. When asked explicitly if they would consider prioritizing 568 in favor of an earlier-stage asset in their muscarinic agonist pipeline, they said they would not.

I don’t rule out the possibility that ‘568 will somehow return to Phase III and offer a more promising commercial profile. Neuroscience studies are complicated, and I’d remind investors that this wouldn’t be the first time a company has gone ahead despite equivocal earlier-stage results and been proven right (I’m thinking specifically of Ingrezza development, although the problem there had to do with the subjectivity of symptom assessment/drug response).

I lowered my market share estimate for ‘568 by 70% and kept the odds of success at 35% – well below the typical Phase III program (which would be 50% to 65%, with neurological drugs usually lower ). This lowers my fair value per share for this drug from about $18 to about $5.50. If the Phase III result is an unexpected success, there would be a significant upside, but much would depend on the details of the study results.

conclusion

I’m not shocked that the stock is selling for more than I valued at ‘568. There were others who were more optimistic about this drug than I was, and that is also the nature of the “catalyst” addicted street; taking the ‘568 out of the picture (or at least dramatically shrinking the frame) leaves a gap in the positives, as FDA approval and the release of the crinecerfont likely won’t really move the stock.

For investors who can stomach the idea of ​​swimming against the tide, this is a stock to consider. The core Ingrezza the franchise is still worth more than $100/share and crinecerfont adds another $30/share or so. NBI-‘568 was an important part of the pipeline, but the unexpected success of NBI-‘845 in MDD basically offsets that loss and brings the stock’s fair value back to around $155 – a decent potential return relative to today’s price after this failure.