Neurocrine Biosciences, Inc. (NBIX)

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.