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Player Avatar bhessel (34.03) Submitted: 12/27/2007 2:26:49 PM : Outperform Start Price: $11.34 NBIX Score: +64.12

22 May 07

As with Élan—one of our other biotechs—Neurocrine Biosciences (NBIX) have had their ups and downs. The stock was at an all-time high $70 14 months ago when the FDA somewhat surprizingly turned down their proposed anti-insomnia product, Indiplon. The stock dropped down to $60 when it appeared that a quick fix might be possible, at least in part…but five weeks later, Pfizer (PFE) terminated their four-year old worldwide Indiplon partnership with Neurocrine and the stock plummeted to $10. And it has pretty much remained there ever since.

Indiplon’s claim to fame is that it works and—even if you take it in the middle of the night after waking up and not being able to get back to sleep—there is no “hangover” the next day. Many insomniacs find that the products currently on the market, while effective, inhibit their ability to operate normally the next day.

Exactly what happened back in 2006 is a little unclear, but the New Drug Application (NDA) submitted by Neurocrine-Pfizer was for 5mg and 10mg fast-acting capsules and 15mg slow release tablets, and the FDA issued an approvable letter for the capsules and a non-approvable letter for the tablets. In retrospect, it appeared that Neurocrine-Pfizer screwed up on the 15mg dosage, submitting more data relevant to a 20mg dosage (for which they did not seek approval) and then applying for a expedited approval and even failing to get results from one relevant study to the FDA in time for it be included in their review. In any event, five weeks after the 15 May decision, Pfizer evidently reached the conclusion that the cost of getting the 15mg dosage approved—presumably another study—outweighed the benefits, and as that long-acting dosage was projected to account for half the product revenue or more, the prospective approval of just the 5mg and 10mg fast-acting dosages did not suffice to continue the partnership.

At first, it appeared that a new three-month safety and efficacy study would be required for the capsules, too, but fortunately, after several months of discussions with the FDA, NBIX management announced in January of 2007 ( http://phx.corporate-ir.net/phoenix.zhtml?c=68817&p=irol-newsArticle&ID=952589&highlight= ) that all the FDA required was “the resubmission [of] further analyses and modifications of analyses previously submitted to address questions raised by the Agency in its initial review. The FDA also requested, and the Company has completed, a supplemental pharmacokinetic/food effect profile of indiplon capsules including several meal types.” The revised NDA is expected to be resubmitted to the FDA in 2Q07 (this quarter) and the FDA should announce a decision within six months. So barring a weird screw-up, the company should be marketing “indiplon lite” by early in 2008. It is no longer a potential billion dollar product at these light dosage levels and without the marketing power of Pfizer behind it. But $70MM of revenue in 2008 and eventually up to $250MM/year seem reasonable.

Which is nice, but not the half of it. There is another potential blockbuster in NBIX’s pipeline: their small molecule gonadotropin releasing hormone (GnRH) agonists agent, NBI-56418, which is currently being tested (phase 2) against endometriosis. Endometriosis ( http://en.wikipedia.org/wiki/Endometriosis ) is a common medical condition characterized by growth of tissue like endometrium, the lining of the uterus, beyond or outside the uterus. It is frequently very painful and occasionally, depending on the location of the growths, can interfere with normal functioning of pelvic region organs such as the bladder or bowels. About 89MM women worldwide are affected, including about seven million in the USA.

GnRH agonists are probably the most effective medication available to treat endometriosis. They drastically reduce estrogen levels, which is quite effective in discouraging production of endometrium tissue. Unfortunately, they also induce unpleasant menopausal symptoms, and extended use incurs a risk of osteoporosis. This is where NBI-56418—Neurocrine’s proprietary, orally-active small molecule Gonadotropin-Releasing Hormone (GnRH) receptor antagonist—comes in. The company believe they have engineered a GnRH agonist that is effective at reducing estrogen levels but with fewer adverse effects. In January, they reported preliminary results for a second phase 2a study ( http://phx.corporate-ir.net/phoenix.zhtml?c=68817&p=irol-newsArticle&ID=947584&highlight= )—successful results from their first phase 2a study were reported in 2006—and they are presently enrolling patients in a larger phase 2b study.

The company also are working on a CRF R antagonist ( http://www.neurocrine.com/html/clin_anxietyDepression.html ) in conjunction with GlaxoSmithKline (GSK) for the treatment of depression/anxiety and on NBI-69734 ( http://www.neurocrine.com/html/clin_urocortintwo.html), a drug designed to mimic the effect of the protein urocortin 2 with respect to the treatment of congestive heart failure. These show promise but are at a more preliminary stage than the others.

So here we have a biotech worth just over $400MM with one drug—indiplon—with a potential of $100MM-to-$250MM in annual revenues likely to be approved in December (with the possibility of follow-on approval for the long-acting 20mg dose which could generate considerably more revenue) and a second drug in phase 2 testing that has $1B potential. This appears to us to be the most potentially undervalued US biotech company out there.

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Member Avatar bhessel (34.03) Submitted: 12/27/2007 2:33:16 PM
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12 Jun 07 update

Neurocrine Biosciences (NBIX) announced after the close of the market today ( http://phx.corporate-ir.net/phoenix.zhtml?c=68817&p=irol-newsArticle&ID=1014569&highlight= ) that they had resubmitted their new drug application (NDA) to the FDA for indiplon, their prospective insomnia product. The resubmitted NDA is a response to the approvable letter issued by the FDA in May 2006 with respect to the company’s original NDA for 5mg and 10mg dose capsules; the company is not currently responding to the nonapprovable letter issued back then for the 20mg tablets.

NBIX management expect the FDA to respond within six months.

Member Avatar bhessel (34.03) Submitted: 12/27/2007 2:35:36 PM
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21 Aug 07 update

Neurocrine Biosciences, Inc. (Nasdaq: NBIX) announced today that the FDA have accepted the company’s resubmission of its NDA for 5 mg and 10 mg capsules of the prospective insomnia drug indiplon and that the FDA has set a PDUFA action date of 12 December 2007.

Member Avatar bhessel (34.03) Submitted: 12/27/2007 2:38:22 PM
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2 Nov 02 update

Neurocrine Biosciences (NBIX) announced a new partnership ( http://phx.corporate-ir.net/phoenix.zhtml?c=68817&p=irol-newsArticle&ID=1070814&highlight= ) for marketing indiplon, their prospective sedative hypnotic product, in Japan yesterday. The partnership is with Dainippon Sumitomo Pharma Co, Ltd. (DSP), a 110-year old company with annual sales of $2.2B. Per the terms of the partnership, NBIX received an immediate $20MM and is due an additional $10MM milestone payment when indiplon is approved for sale in the USA by the FDA (expected by 12 Dec 07).

According to the press release, “An estimated 24 million people in Japan experience insomnia, but only 7 to 8 million are currently being treated,” and the market for sedatives in 2006 was $500MM.

Member Avatar bhessel (34.03) Submitted: 12/27/2007 2:45:03 PM
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13 Dec 07 update

Wow. It has not been a good couple of days for our biotech, Neurocrine Biosciences (NBIX).

The company announced that yesterday, the FDA issued an approvable letter in response to NBIX’s revised New Drug Application (NDA) for their prospective insomnia product, indiplon. This in itself was a big surprize and very disappointing, in that the FDA had issued an approvable letter in response to NBIX’s original NDA for the product back in May 2006 and the company took a year to respond to all the concerns the agency had listed in that letter (and then the FDA took six months to review the response). Thus it was widely expected that the FDA would approve the product this time around.

Even more surprizing were the concerns the FDA cited for not approving the product this time.

First of all, they want a new study focused on safety and efficacy for elderly users of indiplon. This actually echoes a concern expressed by the agency in May 2006, but the company had worked with the agency for months thereafter and management believed they had mutually agreed that no additional study was necessary. The resubmission of the NDA included significant safety and efficacy data for elderly users. Apparently either management misunderstood months of guidance by the agency, or the FDA changed their minds.

Second of all, the agency wants a new safety study comparing indiplon with an unnamed product already on the market focusing on major adverse effects such as sleepwalking. Such events appear to be very rare with indiplo—there was only one at the applied for dosages of 5mg and 10mg in all the studies conducted to date—and so it would appear on the face of it that to obtain a meaningful statistical base of such AEs would require minimally a six-month study with a 5,000 or more patients. This requirement is unprecedented—no other approved sleep remedy has ever been tested in this way—and would be very expensive.

The third concern is even more bizarre. The agency wants a new study on the effects of indiplon on third-trimester pregnant animals. Indiplon was administered to pregnant animals as a matter of course during pre-human testing and there were no indications of any effect on mammalian fetuses but the agency now wants an expanded study focusing on this issue. This is particularly weird in view of the fact that indiplon is not indicated for use by pregnant humans (nor is any insomnia remedy currently approved for use by the FDA; nor has such a special study ever been required before).

Management conducted a teleconference this morning and are evidently clueless. They plan to meet with the FDA in the next few weeks to seek clarity with respect to the agency’s concerns, but clearly investors at this point need to discount indiplon completely. If the FDA does not ameliorate their demands, it is probably too expensive for NBIX to pursue approval. And even if the agency does relent in part, does it make sense to throw good money after bad when apparently they are apparently either unwilling to approve new insomnia remedies or so incompetent as to be likely to come up with fresh irrational objections?

So kissing the $100MM-to-$250MM of projected indiplon annual revenues goodbye, is NBIX still worth owning here? We still have a potential $1B product: the GnRH antagonist receptor anti-endometriosis agent currently in phase 2b testing. The problem is that revenues there are three years away at best, and the company has only $125MM cash. Layoffs are coming—the company had built up a sales staff in anticipation of FDA approval of indiplon—the costs of which will eat into that hoard. In any event, the cash on had might cover a year of operations at best. So a need for additional financing to the tune of $200MM or so before we see any serious income is probable. At the close yesterday (management did not announce the FDA decision until 3am today), the company had a market cap of $378MM…so for the sake of argument, if this bizarre FDA decision costs shareholders $200MM, then let’s say the company should now be worth $178MM. In point of fact, the stock opened today at $5.50—an overnight decline of 46%, in keeping with our observation about it being a bad couple of days for NBIX—which amounts to a marketcap of $203MM, so evidently The Street more or less concur with this back-of-the-envelope figuring.

Of course, what The Street say the company is worth, while interesting, is not how we determine valuation. (Logically, if it were, then there would never be any reason to buy or sell a stock, as the current valuation as determined by The Street would always be correct.) If we posit GnRH agonist approval in early 2011 and sales ramping up to $1B in the next four years, then at a valuation of 15x sales, NBIX should be worth $15B by 2015. But the GnRH agonist product is still in phase 2, and the FDA have gone insane, so let’s discount heavily for risk…say, 40% per year? Working backwards, a reasonable valuation for NBIX would then be about $250MM here.

So bottom line, we think The Street have overshot the mark here in correcting NBIX’s valuation, and we are sticking with the company. Since May 2006—when the nonapprovable letter with respect to the 20mg tablet killed off the chance for $1B revenues—indiplon has been a sideshow. Management should attempt to sell the drug to a better-capitalized company in need of product who can afford to contend with the FDA’s schizoid demands. The focus now has to be on the GnRH product. In today’s teleconference, NBIX CEO Gary A. Lyons stated that he expected to be able to announce a partnership agreement with respect to the GnRH product by early January, possibly by the end of the year. That could be a good next step towards realizing the inherent potential value.

Member Avatar bhessel (34.03) Submitted: 1/29/2008 2:12:17 PM
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[14 Jan 08 update]Well…we still don’t have a GnRH agonist partner yet, as CEO Gary Lyons promised us we would by the end of 2007 or early 2008…and now we don’t have Lyons, either.In a press release posted after the close of the market today, Neurocrine Biosciences (NBIX) announced that Lyons had resigned as CEO and President, and that COO Kevin Gorman—who like Lyons has been with the company since its founding in 1993—has been promoted to CEO/President and appointed to the Board of Directors. Lyons will also continue to serve on the BoD.We don’t expect this change to have a big impact on the company or the stock. While under Lyons Neurocrine had failed twice to obtain FDA approval for the company’s indiplon anti-insomnia product, it appears from the outside that management was blindsided by changed requirements and (the first time) pressured by then-partner Pfizer into inopportune choices that weakened their NDA. Arguably management could have resisted Pfizer and done a better job with the 2006 application; conceivably there might have been some way to foresee the agency’s new off-the-wall requirements to run additional trials on pregnant animals and for competitor’s already-approved products that derailed the 2007 application. But it doesn’t seem likely that Gorman, who was part of the incumbent management team for both those NDAs, would have done better.On the other hand, given the presumably advanced partnership negotiations for the company’s potential blockbuster GnRH agonist candidate product (now in Phase 2 trial), bringing in a brand new CEO might have been disruptive, but it seems likely that Gorman will be able to smoothly run with that ball.However much he was at fault, for sure Lyons had a credibility problem with The Street after two big failures to deliver in two years. Gorman starts with a clean slate, and if he can deliver on some promises, NBIX’s valuation might recover faster with a new CEO. We look forward to hearing from him. An update on the GnRH agonist partnership discussions would be a good place to start.

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