Neuren eagerly awaits the FDA’s approval

There is a very limited selection of Biotechnology stocks of substantial size available for investment on the ASX. One stock that has rapidly propelled itself onto that short list is Neuren Pharmaceuticals (ASX:NEU). Neuren’s market capitalisation is now hovering around A$1 billion making it the fourth largest biotech stock on the local bourse. The share price was $1 back in November 2020. Last week it peaked above $9 before retracting below $8 this week.

There have been two significant catalysts that have led to this share price appreciation.

1. In December 2021 they announced that the treatment to address Rett Syndrome, Trofinetide, had successfully completed a phase 3 trial. The share price rocketed from about $1.80 to $4.00 on the news.

2. In July 2022 they announced that their partner Acadia Pharmaceuticals (NSQ:ACAD)  had submitted a New Drug Application (NDA) with the US Food and Drug Administration (FDA) for Trofinetide to treat Rett Syndrome.

In September the FDA accepted the NDA for priority review. This triggered the first milestone payment from Acadia to Neuren for US$10 million which was received in October.

Neuren is developing therapies for neurodevelopmental disorders. They have two drugs in the pipeline. The most advanced is Trofinetide which looks to address Rett Syndrome and Fragile X, two developmental disorders that both stem from a mutation in the X Chromosome. The second compound, known as NNZ-2591, is for the treatment of Phelan-McDermid, Angelman, Pitt Hopkins and Prader Willi syndromes. At present, there are no approved treatments available for any of these conditions.

Source: Neuren, Jefferies London Healthcare Conference 2022 Presentation, 18/11/2022

The next major milestone for Neuren is to achieve FDA approval of Trofinetide for Rett Syndrome with the target action date set for 12 March 2023. Historical studies have shown that drugs for neurological disorders are approved about 83% of the time. If approved, Neuren will be one of only a handful of ASX listed companies with an FDA approved pharmaceutical product.

Approval would trigger the transition from a clinical development company to a company generating substantial revenues and cash flows. At this point, Neuren’s compound Trofinetide is well ahead of any of the competing solutions that are under development. Should the treatment receive marketing approval and prove effective, this head start, along with patents and exclusivity periods should see it able to benefit from a monopoly position for a number of years. Neuren has patents in most major jurisdictions out to 2032.

Rett Syndrome is a debilitating neurological disease that almost exclusively affects girls. It leads to symptoms such as loss of speech and motor control, cognitive and intellectual disability and can even affect their ability to eat and breathe. It can be life threatening.

Fragile X causes intellectual disability, behavioural and learning challenges. It is the most common, known cause of autism. Whilst Fragile X is an inherited genetic condition, Rett Syndrome is not. Both are classified as rare diseases.

Trofinetide also produced positive results for Fragile X patients in a small scale Phase 2 clinical trial. The next stage for this indication will be to conduct a larger Phase 2 trial.

In 2018 Neuren partnered with ACADIA Pharmaceuticals to complete clinical testing and commercialise Trofinetide in North America. ACADIA is responsible for clinical trials, FDA approvals and then commercialisation. If approval is received, the next milestone payment Neuren would achieve is a payment of US$40 million upon the first commercial sale of Trofinetide in the US. They will also receive royalties on a sliding scale, 10% or higher, on total sales from the North American region plus up to US$350 million in additional milestone payments.

An additional source of potential revenue is from the Rare Paediatric Priority Review Voucher that will be received if Trofinetide receives marketing approval for Rett Syndrome. These vouchers can be sold in the secondary market and an expectation of $US100m is not unrealistic. Neuren is entitled to one third of the proceeds.

Drugs developed to treat rare diseases, known as Orphan drugs, are able to access incentive schemes in the USA, as well as many other jurisdictions. They are granted exclusive periods from the time of marketing approval for 7 years in the US and 10 years in Europe and Japan. Whilst the patient populations that Neuren is looking to treat are small, orphan drugs can still be lucrative due to the incentive structures as well as the ability to charge high prices. All of Neuren’s programs have been designated as Orphan drugs.

There are three elements to Neuren’s potential future success and therefore its valuation. First is the partnership with ACADIA and the success of Trofinetide in North America. Second, Neuren has the global rights for Trofinetide outside North America. And third is the development of NNZ-2591.

Neuren has retained all rights for Trofinetide to regions outside North America and also has the right to use the clinical trial and FDA submission data when applying for approvals in other regions. They are currently exploring options for the best way to capitalise on those markets and evaluating potential partnerships.

Neuren has received approval for phase 2 clinical trials of NNZ-2591 for Phelan-McDermid, Angelman, Pitt Hopkins and Prader Willi syndromes from the FDA. Phase 2 clinical trials have commenced for Phelan-McDermid, Angelman, and Pitt Hopkins syndromes and are scheduled to commence soon for Prader Willi syndrome. The number of people impacted by these disorders is five times higher than Rett Syndrome. Neuren retains global rights for the compound.

Source: Neuren, Jefferies London Healthcare Conference 2022 Presentation, 18/11/2022

Valuing a biotech company of this nature comes down to working out the potential revenue they could earn if the treatment is successful, and then estimating the probability of that success. This can be broken down into three parts:

• Trofinetide in North America for Rett Syndrome and Fragile X

• Trofinetide outside North America

• NNZ-2591

Probabilities can then be assigned to each of these scenarios being successful. The more advanced in the development process the higher the probability of success.

Calculating such a valuation goes beyond the scope of this article. Though on traditional metrics it's obvious to see a view that the stock is overbought, which is typical and appropriate for a company at such an early stage of its development.

This hasn’t stopped momentum being incredibly strong as you can see with a score of 81.

Since the start of this year the price rose strongly on the back of increased activity in the US at that point. Also, as mentioned at the start of this article, the submission in July 2022 by Acadia of an NDA to the FDA for Trofinetide drove strong price momentum.

Following an amazing run, the price has started to oscillate around the $8 level and it has led to the momentum score easing over the past 30 days. Despite this the trend has been strong as the market awaits further developments.

March will be a key time for Neuren. FDA approval of Trofinetide for treatment of Rett Syndrome would likely be a positive catalyst for the share price, but a rejection of the NDA could see a spectacular fall. Such is the nature of investing in Biotech. The outcomes are very binary.

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The author holds interests in the following stocks mentioned in this article: NEU. This position can and will change at any time without notice.