5 - Zacks Investment Research
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|Neurocrine Biosciences Inc. |(NBIX - NASDAQ) |$5.08 |
Note to Readers: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q07 and FY07 Earnings Update
Prev. Ed.: December 20, 2007; Second approvable letter for Indiplon IR
Brokers’ Recommendations: Neutral: 53.4% (8 firms); Negative: 33.3% (5); Positive: 13.3% (2) Prev. Ed.: 8; 6; 3
Brokers’ Target Price: $6.13 (↓ $1.05 from last update; 8 firms) Brokers’ Avg. Estimated Return: 20.6%
Recent Events
On February 5, 2008, NBIX announced its 4Q07 and FY07 financial results. Highlights are as follows:
• Total revenue was $0.5 million in 4Q07, down 94.7% y/y, and $1.2 million in FY07, up 96.9% y/y.
• Net loss per share was $3.35 in 4Q07 versus $0.39 in 4Q06, and $5.45 in FY07 versus $2.84 in FY06.
Overview
Analysts have identified the following factors for evaluating the investment merits of NBIX:
|Key Positive Arguments |Key Negative Arguments |
|The future of NBIX depends on Indiplon, and if approved, it could change the|Much of the current valuation and future EPS growth are based on Indiplon. |
|fortune of the Company. | |
|There are a number of other potentially positive mid-stage drugs in the |Analysts in the Digest group do not expect Indiplon IR to be finally |
|pipeline. |approved by the FDA after receipt of the second approvable letter from the |
| |agency. |
| |Relies heavily on pipeline candidates as none of its products is |
| |commercialized |
Based in San Diego, California, Neurocrine Biosciences, Inc. (NBIX) is a product-based biopharmaceutical Company focused on neurological and endocrine diseases and disorders. The product portfolio of the Company addresses some of the largest pharmaceutical markets in the world, including insomnia, anxiety, depression, irritable bowel syndrome, pain, and CNS-related disorders. The Company’s lead drug candidate is Indiplon, obtained through a licensing agreement with DOV Pharmaceuticals in 1998. The product is currently under the U.S. Food and Drug Administration (FDA) review for insomnia and sleep maintenance. The sleep disorder market is large, and growing at an impressive rate. NBIX has several intriguing drugs in the clinical development stage, including NBI-34041, NBI-5788, NBI-6024, an oral GnRH small-molecule, and Urocortin 2. NBIX’s website is .
Note: The company’s fiscal year coincides with the calendar year.
February 11, 2008.
Revenue
The company reported total revenue of $0.5 million in 4Q07 versus $9.4 million in 4Q06. The company recognized $0.5 million in license fee revenues during 4Q07 related to the licensing of the Japanese rights for indiplon to Dainippon Sumitomo Pharma Co. Ltd. (DSP). In FY07, total revenue was $1.2 million versus $39.2 million in FY06. The company attributed the decrease in revenue to the cancellation of collaboration agreement with Pfizer. The sales force allowance earned under the collaboration agreement was $16.5 million in 2006. The company also recognized milestones under the GSK collaboration agreement of $9.0 million during 2006. Zacks Digest average revenue in 4Q07 and FY07 was in line with the company report.
|FY Ends December |4Q07A |2007A |1Q08E |2Q08E |
|Indiplon |$0.0M |$0.0M |$0.0M ↓ |$6.3M↓ |
Other Pipeline Products
GnRH (gonadotrophin-releasing hormone) or 56418 is a small molecule antagonist for endometriosis, uterine fibroids, and prostate cancer.
On the 4Q07 call, Neurocrine updated plans for the GnRH program, and announced that the name ellagolix had been chosen for the lead drug candidate (formerly NBI-56418). During 4Q07, the company completed the enrollment of 252 patients and expects to announce, topline, 6-month results in 3Q08. The trial is a multi-center, randomized, double-blind, study and includes three treatment groups, with two doses of NBI-56418, 150 mg once a day and 75 mg twice daily, and an active comparator, Depo-Provera. In addition to confirming the effect of NBI-56418 on endometriosis symptoms, this study is designed primarily to assess the impact of longer-term treatment on bone mineral density as measured by DXA scan at the conclusion of dosing and at 6-months and 12-months post-treatment. The study will continue after the treatment period for DXA scans and safety assessments. The 6-month results, together with data from the other Phase II studies, will be the basis for securing agreement on a registration plan with the FDA.
The company is also conducting two additional randomized, placebo-controlled Phase II clinical trials in FY08. The clinical endpoints for both of these trials will be a reduction in pelvic pain associated with endometriosis, utilizing a new scale proposed by the FDA. The first Phase II trial will use a new tablet formulation in two doses, 150 mg and 250 mg. This trial was initiated in late FY07 and is expected to enroll approximately 150 patients with topline results from the first three months of treatment expected at the end of FY08 or early FY09. The second trial is a four-arm comparator trial of two doses of NBI-56418, placebo or Leuprolide Depot. This trial will be conducted in Central/Eastern Europe and will begin enrollment in 1H08. Topline data from this 3-month double-blind trial should be available in early FY09.
Neurocrine is also investigating the potential of certain GnRH antagonists in treating other hormone dependent diseases in Men's Health and Women's Health such as uterine fibroids and benign prostatic hypertrophy as well as oncology indications.
Based on the expected size of the registration program in endometriosis, analysts believe that NBIX will require the assistance of a partner to successfully execute multiple Phase III trials. NBIX however indicated that partnership discussions are ongoing for GnRH program. With the Indiplon setback, the focus of all analysts has shifted to GnRH.
876008 is a corticotropin releasing factor (CRF)-receptor antagonist compound for treatment of social anxiety disorder (SocAD). During 4Q07, CRF-receptor antagonist (876008) completed a Phase II proof-of-concept trial, in collaboration with GlaxoSmithKline. No statistically significant differences were observed in the key efficacy endpoints between 876008 and placebo at 12 weeks. This study included more than 200 adult subjects and assessed efficacy, safety, tolerability and pharmacokinetics of the compound, and the drug was generally well tolerated with no serious adverse events reported. The anxiety indication is now on hold based on the lack of an efficacy in this trial. The Company’s 876008 is also currently in a second “proof-of-concept” Phase II trial in patients with irritable bowel syndrome (IBS). Approximately 130 patients have been entered into this cross-over design trial. Standard assessments of safety, tolerability and pharmacokinetics will be conducted. The clinical endpoints reflect changes in symptom frequency and severity via validated scales for IBS, and the data should be available in 1H08.
NBIX indicated that GlaxoSmithKline is advancing the second lead CRF1 receptor antagonist, 561679, into a Phase II depression study later in FY08. GlaxoSmithKline also initiated a Phase I single-dose escalating clinical trial with 586529, an additional CRF1 receptor antagonist compound.
34041 is a CRF-receptor antagonist (corticotrophin releasing factor) for the treatment of anxiety, depression, and irritable bowel syndrome (ISB). NBIX has a partnership agreement with GlaxoSmithKline (GSK) for Phase II “proof-of-concept” trials for lead corticotrophin releasing factor R1 (CRF1) receptor antagonist in social anxiety disorder (SocAD) and irritable bowel syndrome (IBS). GSK has also advanced a back up CRF receptor antagonist into a Phase I single dose study during 1Q06, which is currently in a Phase I multi-dose study. The CRF program has identified multiple unique preclinical compounds that are in various stages of development for anxiety, depression, and irritable bowel syndrome (IBS). A second CRF trial in irritable bowel syndrome is ongoing with data expected to be available in 2H08. One firm (Merrill) believes this is a disease that could also demonstrate a high placebo effect thus increasing the uncertainty of the program. The firm expects no milestones from Glaxo until late FY09.
NBIX initiated a Phase I study in 1Q06 of a new compound, NBI-75043, for the treatment of insomnia. NBI-75043 is an orally-active, highly-selective, and short-acting agent. The Phase I study would evaluate the safety and pharmacokinetics (PK) of single and multiple doses, as well as selected sleep-related parameters.
NBIX has developed Urocortin 2, an endogenous peptide ligand for the CRF-R2 receptor. The compound is indicated for endocrine, metabolic, and cardiovascular disorders. Initiation of longer term (up to 72 hours in duration) Phase II clinical trials of Urocortin 2 are awaiting additional preclinical data. The Company has identified a preclinical formulation that allows for the necessary preclinical work to be completed by 3Q08. NBIX plans to seek a cardiovascular partner for Urocortin 2 after finishing preclinical studies.
NBIX is currently working on a new compound, a selective norepinephrine reuptake inhibitor (sNRI), for the treatment of neuropathic pain and psychiatric disorders. Based on its selective pharmacologic effect as a norepinephrine re-uptake inhibitor, this drug also has potential clinical utility in a variety of other therapeutic areas, including psychiatry, gastroenterology and urology. Phase I clinical trials are successfully completed and the Company is analyzing data. The single ascending dose study in healthy volunteers demonstrated that the drug was well tolerated and the pharmacokinetic characteristics were suitable for clinical development. The company indicated that it will not proceed into multi-dose Phase I clinical trials at this time in order to focus resources on the GnRH program.
NBIX has an exclusive worldwide licensing agreement for valnoctamide stereoisomers with the Hebrew University of Jerusalem. Valnoctamide and its individual stereoisomers have been shown to be active in a number of preclinical models, and have the potential to treat epilepsy, bipolar disease and neuropathic pain. The parent compound is a uniform combination of four valnoctamide stereoisomers. It was marketed as an anxiolytic in several European countries. Valnoctamide stereoisomers are in a similar class of molecules to JNJ's Depakote (valproate), a $1.5 billion product. Management plans to file an IND on this candidate in early 2008.
Margins
Research and development expenses were $24.3 million in 4Q07 compared to $18.6 million in 4Q06, primarily resulting from severance costs of $4.9 million and higher external development costs related to the GnRH clinical program, offset by lower laboratory and personnel costs. In FY07, research and development expenses were $82.0 million compared to $97.7 million in FY06. The company indicated that the $15.7 million year-over-year decrease in research and development expenses was due to lower personnel and laboratory costs, a result of staff reductions in FY06 and lower external development costs.
Sales, general and administrative expenses were $10.8 million in 4Q07 compared with $7.1 million in 4Q06, a direct result of $2.0 million in severance costs incurred in FY07, and increased marketing activities in 4Q07. In FY07 sales, general and administrative expenditures totaled $37.5 million compared to $54.9 million in FY06. The decrease in expenses is primarily a result of the severance program enacted during 3Q06.
As per Zacks Digest, SG&A expense is expected to decrease by 45.3% y/y in FY08 and increase 9.4% y/y in FY09 and R&D expense is expected to decrease by 24.8% y/y in FY08 and increase 3.3% y/y in FY09, thereby showing an upward trend in expenses. In comparison, revenue is expected to increase by 339.3% y/y in FY08 and 70.2% y/y in FY09, showing a downward trend. The above trend shows that the increase in revenue is more than the increase in expenses thereby reflecting significant operating leverage in the years ahead.
|2008E Margins |Gross Margin |R&D expense |SG&A expense |
|Digest Estimate |82.9%↓ |$61.1M↓ |$24.0M↓ |
Earnings per Share
The company reported a net loss of $128.0 million or $3.35 loss per share in 4Q07 compared to a net loss of $14.7 million or $0.39 loss per share in 4Q06. In FY07, the company incurred a net loss of $207.3 million or $5.45 loss per share compared with a net loss of $107.2 million or $2.84 loss per share in FY06. The increase in net loss is primarily the result of one-time non-cash impairment charge of $94.0 million related to the write-off of the Indiplon prepaid royalty during 4Q07. Additionally, the company incurred a $6.9 million charge related to a severance program enacted in December 2007. According to the Zacks Digest average, pro forma loss per share was $0.89 in 4Q07 and $2.94 in FY07.
|EPS |
|Positive |13.3%↓ |
|Neutral |53.3%↑ |
|Negative |33.3%↓ |
|Avg. Target Price |$6.13↓ |
|Digest High |$9.50↓ |
|Digest Low |$4.00 |
|No. of Analysts with Target price/ Total | 8/15 |
Neurocrine's primary risks are: delay in regulatory approval for Indiplon, competitive dynamics in the insomnia marketplace, failure of its mid-stage pipeline candidates, and inability to sign licensing partners for any of its compounds.
Capital Structure/Solvency/Cash Flow/Governance/Other
The company's balance sheet on December 31, 2007, reflected total assets of $276.7 million, including cash, cash equivalents, and marketable securities of $179.4 million as compared with balances as on December 31, 2006, of $389.7 million and $182.6 million, respectively. The company's cash reserves were replenished during 4Q07 to beginning of year levels. This was achieved through receipt of the $20.0 million upfront license fee from DSP for licensing of indiplon in Japan, and the sale and leaseback of the company's campus, which netted approximately $61.0 million in cash.
The company expects the net cash burn for 2008 to be approximately $65.0 million to $70 million.
On December 6, 2007, NBIX announced that the company closed its sale and leaseback agreement with Veralliance Properties for its real estate assets. Total consideration received by Neurocrine for the properties was $109 million. Concurrently with the closing of the transaction, Neurocrine leased back its corporate headquarters for a 12-year term, with renewal options. Neurocrine also has certain options under the lease to repurchase all of the properties included in the transaction at certain times during the lease period. Under the terms of the asset purchase agreement, Neurocrine will receive cash of approximately $61 million net of fees, expenses, and existing indebtedness.
On January 14, 2008, NBIX announced that Kevin Gorman, Neurocrine's Chief Operating Officer, has been appointed President and Chief Executive Officer and a member of the Board of Directors of Neurocrine Biosciences. Gary Lyons will step down as President and Chief Executive Officer of Neurocrine and will continue to serve as a member of the Board of Directors.
February 11, 2008
Potentially Severe Problems
There are none other than those mentioned in the other sections.
February 11, 2008
Long-Term Growth
All the firms believe the future of Indiplon is the key to NBIX growth. NBIX has received two approvable letters for the 5 mg and 10 mg Indiplon capsules (IR) and a Not Approvable letter for the 15 mg tablets (MR). The insomnia market is relatively large at nearly $3 billion in current revenues but is considered to be much underserved. This situation has begun to change with a wave of new products entering the market, including Lunesta, Rozerem and Ambien CR.
NBIX has created a solid pipeline of several Phase I/II compounds that are in development for a range of indications. The Company has the highest hopes for a GnRH antagonist that is in development both for endometriosis and BPH. Urocortin II completed Phase II development for acute CHF treatment in a hospital setting. Other Phase II projects are targeting anxiety/depression and gastrointestinal disorders.
February 11, 2008
Upcoming Events
| Date |Events |
|May 06, 2008 |Expected 1Q08 financial results |
|1Q08 |Meeting with FDA to discuss 2nd Indiplon IR Approval Letter |
|1Q08 |Preliminary 12-week data from 6-month Phase II(b) study of NBI-56418 in endometriosis (603 study) |
|3Q08 |Dexa scan of 603 study |
|End 2008 |GSK to make “go/no go” decision on compound for next steps in CRF program |
|End 2008 |Report topline data from Aligolix 702 study in endometriosis |
|1H08 |Expected IND filing of Valnoctamide |
Individual Analyst Opinions
POSITIVE RATINGS
Natexis Bleichroeder Inc. – Buy ($9.00) – February 6, 2008. The firm maintained its rating, but reduced the target price from $9.50 to $9.00.
Lehman – Overweight ($9.50) – February 6, 2008. The firm maintained its rating and the target price. INVESTMENT SUMMARY: The firm points out while the prospects for Indiplon appear bleak following another approvable letter, it believes that upside potential could exist from a GnRH program partnership and CRF data visibility.
NEUTRAL RATINGS
Stanford – Hold – February 6, 2008. The firm maintained its rating. INVESTMENT SUMMARY: The firm reiterated its rating as it sees a lack of relevant catalysts in the near term.
Zacks Investment Research – Hold ($6.00) – February 6, 2008. The firm reiterated its rating and the target price. INVESTMENT SUMMARY: The firm believes that the best chance for share price appreciation could come this summer with the Phase IIb GnRH DXA scan data, followed by a worldwide partnership with a large pharmaceutical Company.
Cowen – Neutral – February 6, 2008. The firm reiterated its rating. INVESTMENT SUMMARY: The firm maintained a Neutral rating as it is not convinced that Indiplon will be a commercial success, and awaits the maturation of NBI-56418 and the rest of Neurocrine’s pipeline.
Oppenheimer – Perform – February 6, 2008. The firm reiterated its rating. INVESTMENT SUMMARY: The firm remains on the sidelines due to pending progress by new management and clarity on partnership details.
R W. Baird – Neutral ($5.00) – February 6, 2008. The firm reiterated its rating and the target price.
Thomas Weisel – Market Weight – February 5, 2008. The firm reiterated its rating. INVESTMENT SUMMARY: Given the uncertainty surrounding Indiplon, the firm believes NBIX is fairly valued at current levels.
UnionBankSwitz. – Neutral ($6.00) – February 5, 2008. The firm reiterated its rating and the target price.
Wachovia – Market Perform ($5.50) – February 5, 2008. The firm reiterated its rating and the target price.
NEGATIVE RATINGS
Bear Stearns – Under perform – February 6, 2008. The firm reiterated its rating.
Jefferies – Under perform ($4.00) – February 6, 2008. The firm reiterated its rating and the target price. INVESTMENT SUMMARY: The firm views NBIX's cost-cutting efforts and shifting focus away from Indiplon as a step in the right direction, but feels that the Company’s pipeline lacks significant catalysts.
Merrill – Sell – February 6, 2008. The firm reiterated its rating. INVESTMENT SUMMARY: Given meager near-term revenues and continued cash burn without any return on investment, the firm expects NBIX to trade at cash until a clear value driver emerges.
MorganStanley – Underweight – February 6, 2008. The firm reiterated its rating. INVESTMENT SUMMARY: The firm continues to see no reason to hold the stock given the very little data on the early stage pipeline so far. It also fully discounts Indiplon given FDA’s extensive requirements for approval. Until some additional data is seen for the remaining pipeline (expected in 2H08 and after), the firm remains on the sidelines.
Piper Jaffray – Sell ($4.00) – February 6, 2008. The firm reiterated its rating and the target price. INVESTMENT SUMMARY: The firm remains cautious on the future outlook of NBIX given the uncertainty surrounding the Indiplon and GnRH programs.
COVERAGE CEASED
Bernstein – September 28, 2007. The firm has ceased coverage of the stock based on the lack of potential in the Company's current pipeline and outlook of its lead compound Indiplon.
Appendix-A
Analysts’ sales estimates by product and a consensus income statement are available in the file NBIX.xls.
Research Associate: Naseem Aslam
Copy Editor: Pushpanjali B.
Content Ed.: Kinjel Shah
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Zacks Research Digest
February 11, 2008
Research Associate: Naseem Aslam, MBM
Editor: Kinjel Shah, CA
Sr. Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771, x9417
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