Description

An overreaction to negative but largely irrelevant data has created an irrationally attractive opportunity for:

1. High PoS Ph2 readout (validated mechanism [CRF1 inhibition in CAH], comparable biomarker data to nearly approved CRF1 inhibitor crinecerfont)

2. Downside protection: Price to net-cash = 0.36. Price to net cash post-Ph2 readout = ~0.5

Summary

SPRB is developing tildacerfont, a second-generation CRF1 antagonist for the treatment of congenital adrenal hyperplasia (CAH). A discussion of CAH pathology and standard of care follow below. CRF1 is a validated mechanism (first-gen CRF1 antagonist, crinecerfont, will likely be approved in April).

SPRB is a single-asset company, and has everything riding on tildacerfont. Last week, tildacerfont failed in a Ph2 CAH trial (study 203). Typically, when single-asset biotechs fail in Ph2, the company is dead. The market has decisively taken this position, and sent shares down ~85% on the news.

SPRB is not dead. The company will release results from a second, more relevant, Ph2 (study 204) in 3Q24. I would argue that 203’s failure has little impact on the future of the company and that the trial was designed such that it tells us nothing about the prospects of study 204, which are quite positive.

Study 204 is being run in a much more appropriate patient population, and has a good PoS (60%-70% in my opinion).

At present, the market is offering an irrational price at which one can make a bet on 204’s outcome with a reasonable degree of downside protection (cash).

• Market cap = $29M (not fully diluted – warrants priced way OTM) 

• Net cash = $81M

• Burn = ~$12M per quarter

• Quarters to data = 2

• Projected net-cash post Ph2 readout = ~$57M

Though I’m typically not inclined to assume downside protection from cash in dev-stage biotechs (and SPRB management is not very invested), the cash here is considerable.

Though I’m not relying on a short-term price prediction, it wouldn’t shock me if SPRB traded up into data as investors digest the fact the study 203 data weren’t interpretable positively or negatively, and I would consider selling before 204-readout if offered a fair price.

CAH

Patients with classic CAH are unable to make cortisol due to a genetic deficiency in the enzyme (21-hydroxylase) responsible for its production. Cortisol is a negative regulator of a signaling pathway called the hypothalamic-pituitary-axis (HPA). Below, I do my best to explain the HPA’s role in CAH, in plain English:

Androgens are hormones produced by the adrenal gland which have an effect on bone density, muscle mass, and reproductive development among other things. The best known example of an androgen is testosterone.

Androgens are produced in response to a signal from the pituitary gland to the adrenal gland. The signal molecule is called ACTH.

ACTH is produced in response to a signal from the hypothalamus to the pituitary. The signal molecule is called CRH. The pituitary receives the CRH signal through a receptor called CRF1.

The amount of CRH production by the hypothalamus (and thus ACTH and androgen production) is negatively impacted by the presence of cortisol, which is produced by the adrenal gland in response to ACTH. Thus, a hyper-active HPA will produce more cortisol, which puts on the HPA’s brakes and keeps it in check. Conversely, an under-active HPA will produce little cortisol, which can boost it. Lots of signaling pathways maintain homeostasis in a similar way.

Because patients with CAH cannot make cortisol, they have over-active HPA’s, and make way too many androgens. A whole lot of bad things happen when patients produce too many androgens—examples include deformed genitalia, early puberty, shortened stature, and inability to regulate salt concentrations.

Additionally, cortisol absence results in other problems unrelated to androgen production.

CAH treatment

The two main goals of treatment are 1) resupply the body with cortisol, because it needs it, and 2) resupply the body with cortisol to dampen the HPA and reduce excess androgen production.

As such, patients take a glucocorticoid (GC; a steroid; basically cortisol). Since they can’t make cortisol, they’ll have to take a GC for the rest of their lives.

CAH patients need to take very high GC doses to dampen androgen production, which leads to significant side effects such as stunted growth, obesity, increased risk of developing type 2 diabetes, cardiovascular disease, osteoporosis, skin toxicities, gastrointestinal disorders, and reduced lifespan. GC doses also need constant readjustment. Basically, they’re not fun to take.

CRF1 inhibition

If we refer back to the mechanism of CAH pathology, it would seem that if you could block the signal (CRH) from the hypothalamus to the pituitary, that might have the same effect of dampening the HPA as cortisol does. One could achieve this through the design of an antagonist (drug) that binds CRF1, blocking CRH’s access to the receptor.

Does this work? Yes, we already know that it does. Crinecerfont (Neurocrine) is a first-generation CRF1 inhibitor that generated positive Ph3 data in CAH. Patients on crinecerfont were able to reduce GC usage to a stat-sig greater extent than patients on placebo. Moreover, 68% of patients on crinecerfont reduced GC usage to a physiologic level, compared to 18% on placebo. The drug will likely gain FDA approval in the coming weeks (PDUFA date April 30). Estimates of peak sales are in the $1B range).

Tildacerfont

Tildacerfont is a second-generation CRF1 antagonist. Compared to crinecerfont, tildacerfont has better pharmacokinetics and is being dosed once-daily vs. twice-daily.

Does tildacerfont work? It appears to… we have proof of mechanism/target engagement. Here’s what we know:

In patients with poor disease control, tildacerfont (when they take it) significantly reduces elevated ACTH, 17-OHP, and A4 levels (the latter two are downstream markers). Biomarker levels rose again upon termination of treatment (see below).

In patients with good disease-control (patients without severely elevated androgens), tildacerfont didn’t have much of an effect. That’s not such a bad thing— the goal is not to lower androgens (which are already successfully controlled in this population), but to allow these patients to reduce their GC usage.

These biomarker responses were approximately similar to those observed after 2-weeks of treatment with crinecerfont (see below)

All this to say, tildacerfont has a good shot at reading out positive data in study 204, which has the same primary endpoint as crinecerfont’s phase 3, and a similar patient population.

Why this opportunity exists: Phase 2 failure

There are two types of CAH patient:

1. Patients with severe-CAH and poor-disease control. These patients struggle to control their HPA’s despite GC usage. The goal in treating these patients is to bring their androgen levels back towards the upper limit of normal.

2. Patients with good disease-control. These patients, through GC usage have androgen levels close to or within the normal range. The goal in treating these patients is to allow them to reduce their total GC usage.

Spruce decided to run two Ph2 trials–one in each patient group, with the goal of 1) improving disease-control in poorly controlled patients and 2) allowing patients with good control to lower their GC usage. The Ph2 in patients with severe-disease patients (study 203) read out last week. The Ph2 in patients with good disease control (study 204) will read out in 3Q24.

203 did not meet its primary endpoint – a reduction in A4. This looks like a very bad sign and the market reacted mercilessly. There are 40M shares outstanding, and 37M shares traded in the three days following data read-out.

Why did this trial fail and what does this mean for the next one?

The company is blaming their Ph2 failure on poor patient compliance, and I find this to be a reasonable explanation—only 50% of patients were >80% compliant.

The low compliance is cause for concern because a safety/tolerability issue could derail the drug. The company is making the argument that low compliance is an attribute of the poorly-controlled-CAH patient population. I don’t like to blindly trust management teams when they make statements like this, but take comfort in their disclosure that compliance is much higher in study 204. Moreover, discontinuations were quite low at 10% (typically you’d expect around 20%) and there were no safety issues.

The company found a KOL to attend their post-data investor call and say that “The CAHmelia-203 results underscore the complexities inherent in managing a patient group with challenges related to androgenic control and GC compliance. Based on my clinical experience, patients within this group may face difficulties adhering to any therapeutic interventions, potentially impacting treatment outcomes…”

When pressed on the call as to the reason for the low compliance in the 203 population, she insinuated that these patients are often poorly-controlled as a result of their low adherence to medication. This sounds reasonable, but again, what’s important is that we already know compliance is much higher in study 204.

The KOL added that the population in the ongoing Ph2 is more indicative of the patients that are seen in the clinic.

In sum, given the validated mechanism, observed biomarker data, and improved compliance, I give the ongoing Ph2 a 60%-70% PoS.

Valuation

The valuation range post-positive data is wide, but I’m not concerned with precision since the value is most assuredly multiples of $29M.

Sell-side analysts are projecting $500M peak sales (could be higher, as they project crinecerfont peak sales of $1B). At 2X peak sales, accounting for exercise of options/warrants plus 30% dilution on top, I arrive at $13/sh on approval. Discounted back two years and adjusted for PoS, I arrive at $7.5/sh of fair value today. It sounds a little crazy to say that the FV today is 10X the current price given study 204 data is on its way in two quarters, but I would consider that a week ago the stock was trading in the $5 range and, in my opinion, the prospects of the drug haven’t changed at all. Though I can’t predict short-term price action, I would not be surprised to see this trade up into data and would consider getting out before 204 read-out if given a fair price. 

Catalyst

Study 204 data in 3Q24