Description

Despite a highly experienced deal-focused management team, Ovid Therapeutics (OVID) suffered through a late-stage drug failure which burned investors who have cast the company aside. Like many other companies in the sector, it is now trading below cash.  OVID is a microcap with a CEO who previously ran a company with a $30 billion market cap at the time and who prior to that was responsible for the acquisition that forms the basis for one of big pharma’s largest franchises today.  After its blowup, the CEO cleaned up its pipeline and through some savvy deal making created a free option on potentially lucrative cash milestones and sales royalties on Takeda’s most advanced neuroscience drug candidate.  Soticlestat is currently in 2 Phase 3 trials for 2 rare forms of epilepsy.  OVID recently announced a restructuring that gives it a cash runway to the estimated approval date of the Takeda drug while at the same time allows it to move at least 2 pre-clinical compounds forward.  It could have a drug of its own in the clinic by year-end.  Valuing only the Takeda compound and assuming that OVID’s cash is spent with zero return on R&D, if the trial is positive then the stock in two and a half years could be worth anywhere from a double to a ten-fold return depending on the success of different elements of the Phase 3 trials.  If that compound is unsuccessful, there could be some residual value in the current or future internal pipeline.  Finally, this stock trades around $350,000 per day but some days it is even more illiquid. 

Business Description

Ovid Therapeutics is a neuroscience company that has been led by Jeremy Levin since 2015.  Levin was CEO of TEVA in 2012-2013 before controversially being forced out (but also before the Actavis acquisition which crippled the company).  Before Teva he was the SVP of strategy, alliances and transactions at BMS for five years and the global head of strategic alliances for Novaris’ Institute for Biomedical Research for the five years prior to that. At BMS, he was one of the key architects of the $2.4 billion Medarex acquisition in 2009 that included two checkpoint inhibitor compounds, Yervoy and Opdivo, that today generate almost $10 billion in revenue.     For more on Levin see: https://en.globes.co.il/en/article-jeremy-levin-i-really-dont-know-what-vigodman-was-thinking-1001214015

Levin’s background is exciting and by 2020 OVID had OV101: an asset in Phase 3 for two similar rare neurological diseases called Angelman syndrome and Fragile X (it acquired the drug from Lundbeck in 2015).  In December of 2020 OV101s Phase 3 did not reach its primary endpoint.  Not everyone was surprised by this as that compound’s Phase 2 data suggested failure was a strong possibility despite management’s insistence that it had designed the Phase 3 to account for concerns from the Phase 2.  Investors in the August 2020 $46.7 million offering at $8.00 were certainly unhappy with the outcome that four months later saw the stock at $2.50 (although they obviously were aware of the data).  All work on this program ceased but in February 2022, OVID granted UK private company Healx a one-year option to advance OV101 in Fragile X on its own dime/shilling. 

In 2017, OVID also began a collaboration with Takeda through Phase 2 on another compound called OV935.  In March 2021, Takeda purchased OVID’s 50% share for $196 million in upfront cash (the source of OVID’s cash balance) and up to an additional $660 million of development, regulatory and sales milestones.  Thereafter, OVID will be entitled to a sales royalty of between low double-digits and 20% if the product makes it to market.  Takeda renamed OV935 as soticlestat and has launched two pivotal phase 3 trials called Skyline and Skyway.  The indications are for two rare epilepsies called Lennox-Gastaut syndrome (LGS) and Dravet Syndrome (DS).    Data was initially expected in 1H23 with potential approval by March 2024 but in May 2022 Takeda pushed back the timelines to data by March 2024 and approval by its fiscal year-end 2024 (actually 3/25) due to slow enrollment in China (COVID lockdowns) and Ukraine.    I will discuss soticlestat further in the valuation section below but OVID spent zero on this program in the last quarter: it’s all on Takeda. On p. 32 of Takeda’s most recent 20-F soticlestat is the most advanced neuroscience compound in its pipeline.  Similar to OV101, the phase 2 data on the LGS side was not a slam dunk but Takeda obviously knew this when it decided to transact with OVID for full ownership. 

Beyond soticlestat, everything is very early stage.  During 2019, OVID unveiled a preclinical program called OV329 for infantile spasm/rare epilepsies that it now projects will reach the IND stage by the end of this year.   This was internally generated based on patents licensed from Northwestern University in 2016. 

After all this, in December 2021 OVID licensed a pre-clinical compound from AstraZeneca for $5 million in upfront cash and $7.2 million of OVID shares (~3% of the company) that is now OV350.  This would treat certain drug-resistant epilepsies.   In the first quarter, OVID partnered with a lab at Tufts that will support translation and development of OV350.  Some additional data was also published in May that is available on the company’s website but we do not have a firm development timeline yet.  In November 2021 OVID set out a goal of three INDs in three years and this is likely one of them. 

In March 2022, the company announced a restructuring which reduced headcount by 20%.  It also appears to have deprioritized three of its gene therapy-based preclinical programs (OV882, OV815 and OV825 which I do not discuss).  These actions extended its cash runway to last into 2025 which implies a quarterly burn rate of around $15 million. Presumably this burn is driven by the advancement of OV329 and OV350 since the company does not have to spend anything on soticlestat.      

To round things out, the COO ran the $3 billion MS franchise at Novartis before joining in November 2019, the GC was assistant GC at Celgene and the Head of R&D was SVP of Regulatory at Alexion after a 24 year career at BMS. The Chief Medical Officer left last summer as part of the post OV-101 restructuring.  For more color see: https://www.fiercebiotech.com/biotech/ovid-staff-shuffle-reads-like-a-who-s-who-big-pharma-as-biotech-pivots-from-angelman

Valuation

Acknowledging the futility of such an exercise in advance, I will attempt to value at least the order of magnitude of the soticlestat opportunity which is the crux of the investment thesis.  In earlier investor day material Ovid suggested that there are 15,200 refractory DS patients and 58,400 LGS patients (together 73,600) while roughly implying a treatment price of $25,000.  Thus the rough market opportunity would be $380 million in DS and $1.46 billion in LGS.  If we apply the same relative percentages to the $660 million in milestones that OVID could earn from Takeda, they could get $136 million for DS and $524 million for LGS.   Given that there are other therapeutic alternatives, I am assuming 25% penetration (this could be way off in either direction of course) which would suggest $95 million of sales for DS and $365 million for LGS.  With royalty rates of low double digits to 20%, I apply 15% to the revenue to suggest that OVID could earn annual royalty income of $14.25m for DS and $54.75m for LGS.  I apply a 15x royalty sales multiple to suggest that if unrisked, these assumptions suggest a value of OVID of $213.75 million for DS and $821.25 million for LGS.  With milestones that is $350 million for DS ($4.88 per share using primary and convertible preferred shares of 71.7m but excluding out of the money options of 12.8 million) and $1.375 billion for LGS (this time also including 75% of the 12.75m options that strike at $4.60).  So if everything works by 3/25, under these assumptions OVID could be worth order of magnitude over $20 per share.  If just DS works, this methodology yields a nearly $5 per share price. This all assumes that all cash ($167m at 3/31) is spent unproductively but get us to the inflection point.     

Today, the value should be risked and discounted back.  Further applying the average Phase 3 to approval success rate of neuro trials from Bio (Clinical Development Success Rates and Contributing Factors 2011–2020 which is available online) of 46% for DS suggests that a risked value of around $2.25 per share that when discounted back 2 years (assume we are looking for year-end value) at 8% arrives at $1.93 present value of the DS opportunity – around the current stock price giving no credit for cash.  Risking the larger LGS opportunity is more complicated.  Recall that the Phase 2 endpoint did not reach statistical significance but could be interpreted as encouraging.  We do not know what Takeda was thinking other than it was willing to pay Ovid $196 million on seeing the data and it has decided to run a Phase 3 trial in LGS.  Even though it is in Phase 3, if we apply the average Phase 2 to approval success rate of 12.3% to the LGS value (as a lower bound) then it is worth $2.04 per share which when discounted 2 years at 8% would be worth $1.75.  Together DS and LGS would be worth $3.67 per share at year-end vs. the approximately $2 stock price.  To give a sense, if the Phase 3 to approval success rate is used (instead of Phase 2), the risked and discounted value of LGS would be $6.50 and together the option value of the indications under these assumptions could be worth $8.50 at year-end.  Bottom line is that OVID is undervalued compared to this analysis of the entirety Takeda option or fairly valued with the chance to more than double on data even if LGS is worth zero. 

OVID also has its other two pre-clinical epilepsy programs and is spending $15m per quarter advancing them. One could be clinical by year-end and the other thereafter.  If they progress then the stock should not be worth zero if soticlestat fails but barring early termination for poor efficacy or safety, we have more than two years to see what OVID can do internally.  We also have time to see what other business development its deal-savvy team can put together.    For example, it has a small investment in an undisclosed private company on its balance sheet which is tied to a future potential pipeline addition. 

Investment Positives

The company is trading below cash and the sentiment on the biotech sector, the subsector (neuro) and the company are each awful.

OVID has to spend zero dollars to benefit from Takeda’s 2 phase 3s of soticlestat if they are successful.

Recent restructuring shows that management understands that it’s only mission-critical job is to not run out of money until Phase 3 data and that data could be very valuable.  Since it is still burning cash (~15 million / quarter) it has room to cut more if necessary to ensure it can make it to then. 

Intangible BD factor: it is unusual to see someone of the caliber of the former TEVA CEO in a microcap. In its recent restructuring announcement, OVID said it would continue to pursue additional candidates and technologies through business development so deal acumen could matter. 

Its other programs are early stage but there are several shots on goal.  Future cash burn is not necessarily unproductive. 

Other small nearly free options: Healx could find an application in Fragile X for the discarded OV101 and OVID’s undisclosed private company investment could turn into another shot on goal. 

Investment Concerns

Neuroscience is a graveyard and many promising drugs have ended up failing. 

Even if successful, rare epilepsy (LGS and DS) is an increasingly competitive area.  Larger epilepsy company UCB recently acquired Zogenix for $2b in 2022 as its Fintelpa was recently approved for these disorders in June 2020.  In February 2021 Jazz Pharma acquired GW Pharma for $7b in part for Epidiolex which also treats LGS and DS.  There are other potential treatments in clinical development at various companies.       

There are questions on soticlestat‘s signal in LGS (the larger of the two opportunities) based on Phase 2. Though upon a detailed review Takeda elected to buy out OVID’s stake and advance that indication into Phase 3, big pharma is not infallible.  If it is successful in DS but not LGS it would still be excellent for OVID although the magnitude of the economics would be much smaller. 

If there are more delays by Takeda on soticlestat, OVID will need to cut back further to ensure it reaches potential milestone payments. As discussed above it has room to do this if elongated timelines require it.   

If option value is not recognized beforehand, the stock price could drift lower with burn. 

Management credibility questions arose after the late stage OV101 failure. While true that management proved to be overly optimistic, there was no shareholder litigation. 

Internal assets are early stage and are far riskier than a more mature pipeline.

It would be a good problem but OVID would owe large milestone payments to AZ of up to $203 million on advancement of OV350.  It’s still preclinical and these payments are likely back-end loaded per industry practice but they obviously could not be funded today. 

High salaries are the flipside of big company experience.  The base plus possible bonus of the top 4 officers totals $2.5 million annually. 

Ugly dilution is always a risk in biotech.  As cash dwindles two years from now if there is no improvement in the valuation then most of the potential upside could be handed to new investors who fund the company.  The company has a $75 million ATM facility in place if the opportunity presents itself to extend the runway. 

Disclosure 

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst

Initiation of human trials, additional business development deals, improvement in sentiment, recognition of value of Takeda phase 3 / positive data