Description

Summary

Neurocrine Biosciences (NBIX) is a pharma company focused on the treatment of neurological and endocrine-related diseases and disorders, principally Tardive Dyskinesia (TD) through its flagship drug Ingrezza, approved in April 2017. TD is caused by use of antipsychotic drugs (primarily used to treat schizophrenia and bipolar disorder) and will evidence in 5-8% of these individuals after long-term use. Sufferers experience involuntary abnormal movements of the tongue, lips, and jaw (smacking, grimacing, sticking the tongue out), which Ingrezza addresses. Ingrezza has grown to $645 million of LTM sales and comprises the vast majority of the Company’s $10 billion valuation (>400% 5-year performance) as investors expect Ingrezza to become a blockbuster.

Aurelius Value just put out a report focusing on the Company’s sales force and their relationships with prescribing physicians. Simply put, it alleges that Neurocrine has become a platform for these bad actors and has driven Ingrezza sales. Given (1) the overlap of both physicians and sales reps with Avanir, in addition to (2) the torrent of Cafepharma posts supporting these allegations, and (3) high speaker payments (the 2,427 payments made in 2018 implies the Company is sponsoring 6.6 speaking engagements per day, every day of the year, which seems implausible), there is likely something to this idea, in my view.

However, in addition to the potential nefarious sales tactics, Ingrezza has a far more challenging road ahead vs. investor expectations as the drug is (1) simply not all that effective, (2) overpriced, and (3) is thus now facing payor pushback which has been glossed over by the Street.

Ingrezza: High Pricing vs. Limited Value

Ingrezza is approved only for the treatment of tardive dyskinesia (TD). This puts the drug at a disadvantage to Austedo, which has an indication for both chorea associated with Huntington’s Disease, and for TD. Neurocrine’s phase 3 study, KINECT-HD study to evaluate efficacy, safety, and tolerability of valbenazine [Ingrezza] to treat chorea in subjects with Huntington's disease holds estimated completion dates in March 2021, so it’s likely that Austedo continues to take share in this market.

Neurocrine also hoped that Ingrezza would test well in Tourette’s patients. However, after its third attempt, the Company admitted in December 2018 that its most recent trial did not meet its primary endpoint, and gave up the effort altogether. Shares fell 21% on the news, as the sell-side pegged a potential Tourette’s indication at roughly an ~$800 million opportunity. Meanwhile, Teva’s Austedo is in the midst of a phase 3 clinical trial for Tourette’s, with an expected primary completion date of May 2020. 

Finally, Teva is also running a phase 3 study for Austedo in Cerebral Palsy in children and adolescents (RECLAIM-DCP). The study is still in the recruitment phase, with expected completion dates in September 2021. Though longer-term in nature, Neurocrine has no comparable study. 

On the other hand, physicians are also reluctant to prescribe for TD, as it implies that they’re responsible after having likely having prescribed the antipsychotic drugs which caused the TD in the first place. Against this backdrop, we can understand the potential temptation to push off-label use.

Pricing Context

The Company initially guided the Street to a $20,000 to $60,000 annual range for Ingrezza, while it then decided on $63,000, or $5,275 WAP per month, above the high end of the range. Moreover, in December 2018, the Company hiked the price once again; GoodRx currently cites $7,445 per month. On a net basis, the Company received ~$5,600 to $5,800 per script over the past several quarters. However, many investors now have estimates that call for upwards of $90,000 ($7,500 per month) per script in ~2022 through 2025. These estimates ought to prove far from reality, as (1) Ingrezza’s price massively outweighs its clinical impact, (2) Ingrezza is priced at a significant premium to comparable drugs, and (3) while NBIX enjoyed first-mover advantage, Austedo is growing swiftly.

ICER report calls for 85-90% price decreases

In early 2017, the Institute for Clinical and Economic Review (ICER) began an 8-month project to evaluate the clinical effectiveness and value of therapies to treat tardive dyskinesia, including Ingrezza. Core to ICER’s study is the idea of a QALY, or a quality-adjusted life-year; one QALY is equal to one year in perfect health. Though the use of QALYs and their justified values remain under debate, ICER sets a value of $100,000 to $150,000 per QALY, representing a benchmark of sorts for where healthcare dollars ought to be spent so as to have the greatest impact. For example, Advil is cheap and cancer radiation therapy is expensive. From what I can find, the concept is used more extensively overseas, and increasingly in the US; in November 2018, CVS Caremark set a threshold of $100,000 per QALY. What ICER found with respect to Ingrezza is that it had more of an Advil-like impact with radiation therapy-like prices, representing horrible value for payors.

Valbenazine (Ingrezza) was priced at effectively $752,000 per QALY, making its cost extremely high as compared to its impact. This led ICER to state that:

To fall within ICER’s threshold value range of $100,000 to $150,000 per QALY, valbenazine would require a discount of 85-90% …

Without these reductions, patient access to these potentially beneficial drugs will likely be restricted by payers as a way to manage overall drug costs. In such a context, the importance of substantial price reductions far outweighs that of any recommendation that follows in this document … 

The pricing also throws a wrench in the massive TAM and market penetration narrative. Management frequently touts the under-diagnosis of TD, which is true, but per ICER:

Assuming standard discounts, only one in five eligible Americans with TD could be treated with the new therapies before crossing ICER’s budget threshold of $915 million per year. As a result, ICER is issuing an Affordability and Access Alert as part of its final report on VMAT2 inhibitors for treating TD.

It’s interesting to note that from analyst notes I reviewed, TEVA analysts are certainly aware of the ICER study and “price it into” the Austedo’s narrative, but I’ve never found it mentioned by NBIX analysts. Happy to be proven wrong here if so, but it appears relatively under-discussed given the drastic conclusions.

Comparable indications also in far lower price range:

One can also look to drug prices utilized in comparable indications. Though these drugs are primarily generics, it is useful to illustrate the massive disparity in pricing vs. the relatively similar diseases addressed by the drugs and alternatives:

For example, Cafepharma boards allege that,

Physicians are being coached to take patients off of Cogentin (no matter the issue) and put them on Ingrezza (by Neurocine reps). This has been told to me 3 times so far in one area. I am now recording these conversations on my end. I will be taking any and all recordings to the FDA. I am already in contact with a FDA field rep in Beltsville, MD.

I know my region USNY headed by EF is being instructed to convince Drs that if a pt has been on Cogentin for more then 6 months and still has some movement, it has to be TD. There are several things it could be, one which is TD, but not every case is TD.

Austedo closing the gap

Ingrezza was approved in April 2017, while Austedo was approved in August 2017. With respect to efficacy, Austedo demonstrated a placebo-adjusted difference in AIMS scores of -1.8 to -1.9 at 24mg and 36mg, respectively. Ingrezza demonstrated a placebo-adjusted difference in AIMS scores of -1.8 at 40mg and -3.1 at 80mg. As efficacy is about the same in each, with a slight technical advantage to Ingrezza, physicians have historically opted for Ingrezza due to it being (1) first to market, and (2) a once-daily solution, whereas Austedo is twice-daily. However, Teva has invested behind Austedo and the Company is closing the gap in recent quarters:

Given Teva’s balance sheet / overall position, they’re incentivized to show growth wherever they can. Unlike Neurocrine, which uses 3 specialty pharmacies to distribute, hence protecting its pricing despite its admittedly easier solution (once daily dosing, no complex titration like Austedo), Teva contracted directly.

Cafepharma boards also suggest that “Neurocrine is Hiding Ingrezza Hospitalizations” by way of not informing physicians of a change in its label. The original Ingrezza PI makes no reference to potential Parkinsonism as an adverse reaction, only somnolence (sleepiness) and QT Prolongation (heart takes longer to recharge between beats):

However, in the updated label currently in use, apparently modified in July 2019, Parkinsonism and Hypersensitivity have been added as adverse reactions:

This may be a contributor to Ingrezza’s relatively less safe profile vs. Austedo: YTD 2019, the drug has caused 2,765 adverse events vs. 90,600 TRx, or a 3.05% rate. Austedo has 383 adverse events on 69,301 TRx, or a 0.55% rate. This isn’t to say that Ingrezza is overwhelmingly unsafe, but if physicians come to a fuller view of the risk of Parkinsonism in Ingrezza, they could defect to Austedo.

Payors Already Pushing Back, High Patient Churn

This high pricing has been recognized by payors. Per a 2018 sell-side initiation report:

The psychiatrists we spoke with tended to note a high price that can be tough to get coverage, especially from managed care companies. This feedback makes sense given that many of the drugs psychiatrists prescribe are less expensive or generic, while neurologists seem more comfortable. Other criticisms of Ingrezza include disappointment in efficacy, side effect profile that is less than ideal with 20-25% of patients complaining of feeling tired and drowsy.

However, due to Ingrezza’s rapid growth, it appears that payors now have their sights on Ingrezza and have already begun pushing back. Management has cleverly avoided addressing payor pushback or patient churn explicitly; for example, see from Q2 2019 conference call:

So while there's a lot of paperwork, while there are prior authorizations, at time, there are appeals that one needs to go through from plan to plan. It does not require us to pay for any of that access. But as the drug has grown and as payers have gotten more in tune with what this is looking like, as you can imagine, they can start may be trying to enforce some of the things a little more strongly that they put in front of you. And what we want to make sure is that our patients always have access to the drug. 

Then on the Q3 call:

Our third quarter sequential growth of 3,200 TRxs was primarily driven by another record quarter of new patient additions, tempered slightly by seasonal pressures impacting refill rates per patient.

Guidelines indicated no reauthorization necessary for Austedo, while Ingrezza required a 12-month reauthorization. See from Caremark, Cigna, Amerigroup, Wellmark Blue Cross Blue Shield, and UnitedHealthcare. There are two things to note here: (1) 12-month is not a January reauthorization, implying that payor pushback is not only seasonal in nature, while (2) reauthorizations require documented clinical response, which results in more churn in Ingrezza’s patient base vs. what analysts believe. For example, Caremark requires an AIMS decrease of at least two points:

A decrease of this magnitude is especially difficult; in the Company’s own clinical study KINECT-3, even at the higher 80 mg/day dosage, only 40% of patients had an AIMS response:

At week 6, 23.8% of participants in the 40 mg/day group (p=0.02) and 40.0% of those in the 80 mg/day group (p<0.001) had an AIMS response, compared with 8.7% of those in the placebo group.

Moreover, included in Ingrezza’s Medical Reviews was a PGIC assessment, which is based on self-reported judgments of the patient’s own improvements in their symptoms. In these medical reviews, patients reported no difference attributable to Ingrezza,

Overall, it appears that 6 weeks of blinded valbenazine treatment may not improve subjects’ impression of their own TD symptoms, even if their symptoms are decreased by objective clinical assessment. This is consistent with previous findings suggesting patients are frequently unaware of their own dyskinetic movements [30]. It is not clear whether the possible superiority of placebo over valbenazine on the PGIC is a chance finding related to small sample sizes and multiple statistical tests, or whether valbenazine might cause a negative cognitive bias and decrease subjects’ appreciation of treatment benefit … 

As the authors note, other studies have found that patients can be unaware of their own TD, but when insurers require reauthorizations based on documented patient improvement, if the majority of patients and their doctors find no difference, reauthorization becomes difficult. In more crude terms, I believe everyone has started to wonder why they’re paying >$70,000 a year for a drug that only somewhat works in 40% of patients.

Though management would prefer to maintain the narrative that “we want to make sure is that our patients always have access to the drug,” they have also already implicitly admitted payor pushback in quarterly conference calls. However, it doesn’t seem that analysts have properly parsed the details of this commentary to recognize it as such. In several calls since the Ingrezza launch, CCO Eric Benevich has offered both (1) the portion of prescriptions written that are ultimately filled, and (2) the portion of patients that pay $10 or less per month. See for example from the Q1 2018 call:

So far in our launch, approximately 80% of the time when a prescription gets written, it gets filled ... And INGREZZA's affordable, 80% of patients pay $10 or less per month.

These comments are in the table below, and as shown, have deteriorated since Ingrezza’s launch:

As these figures are referenced not on a quarterly basis, but on a cumulative basis from Ingrezza’s launch in Q2 2017, the results are worse on a QoQ basis. Analysts bought the idea of reauthorizations being seasonal, but the combination of evidence above suggests it’s also structural.

FInally as mentioned in the Aurelius Value report, Express Scripts excluded Ingrezza in favor of Austedo in April 2019, and other drug schedules also prefer Austedo. While the ESRX exclusion was not a bombshell as it was less than 1% of revenues, it is symptomatic of the broader issues that Neurocrine faces in garnering and retaining the broad clinical and payor acceptance that is implied by the current share price.

Valuation

The Company has additional opportunities outside of Ingrezza (Orilissa / CAH / Voyager / PD), but these are relatively inconsequential (sell-side notes say ~$20 per share) in light of the disparity in Ingrezza expectations.

I have less of a hard valuation / price target in mind, but the core of this is that Ingrezza isn’t worth ~$8 billion / ~$90-100 per share. Analyst consensus calls for both Ingrezza pricing and volumes to increase significantly through 2022+, which is low-probability based on all the above. I admit timing may be difficult, but at a current valuation of ~10x forward / 2020 revenues, there’s not a lot of room for error. 

Catalyst

payor & physician pushback