Description

Strongbridge is a biotech company with two approved drugs that are currently in medium to early stages of marketing. It also has a phase III drug read-out in the next few weeks (“mid-summer”) for Cushing’s disease. After the sell-off over the last two months, we think that the market is ascribing very little option value to the phase III read-out – offering an attractive risk/reward on data, with a short time horizon.

Background:

The CEO and Chief Commercial Officer were senior marketing and sales people at Shire, one of the more successful orphan disease companies. When the company IPO’d at $10 per share it had only its phase III asset. Over the last two years it acquired two revenue-generating assets.

Existing Approved Assets:

Keveyis - $18-20mm of sales guided for this year (1^st full year). This drug treats primary periodic paralysis, a condition that affects 4,000-5,000 patients. Patients have unpredictable paralytic attacks of varying duration, and frequency. There’s a tremendous impact on quality of life given the unpredictable nature of the condition. Keveyis has been shown to cut the number of attacks by more than half. If we assume 25% market penetration – peak sales reach $125-150mm. Assuming just a 1x peak sales multiple, that’s worth $2-3 per share (multiples in the industry are higher than that).  

Macrilen – Macrilen is a therapeutic used to test for growth hormone deficiency.  The test was launched mid-July 2018.  The tests commonly used to diagnose growth hormone deficiency have been FDA approved and are invasive and time consuming. Comparison of the offerings: https://www.macrilen.com/hcp/aghd-testing-landscape . There are 50,000 tests done per year today with these sub-optimal and unapproved testing methods. However, new medical guidelines also suggest that all moderate to severe traumatic brain injury patients be tested for growth hormone deficiency. There are 2mm traumatic brain injuries (“TBI”) per year (not all moderate to severe).  Conservatively, one could anticipate the number of total tests growing by 3-4x the 50,000 annual already administered.  Given the other tests require substantial time, have significant risk of safety events, and aren’t even approved, Macrilen should grab dominant share of the existing market.  Strongbridge will be heavily marketing to try to expand into the traumatic brain injury segment as well.  At $2.5k-$3k per test and assuming just 40-50k tests per year – this product could easily generate $100mm of sales at peak. This is worth ~$2 per share on a 1x peak sales basis.

Phase III Asset – Recorlev

Cushing’s syndrome is characterized by high levels of the stress hormone cortisol, which leads to obesity, diabetes, cardiovascular disease and depression. The only therapy used today to lower cortisol is the antifungal ketoconazole, which is prescribed off-label (no formal FDA approval has been received).  In addition, ketoconazole has a black box warning on its prescribing label due to risk of liver toxicity.  Given the lack of treatment options, ketoconazole is used off-label in approximately 30% of patients.

Ketoconazole is at a molecular level a mixture of two mirror images of the same molecule. Recorlev takes one of those mirror images and isolates it. Purification and isolation of mirror images has been a strategy that has been used successfully by several pharmaceutical companies historically as the mirror images can have vastly different properties as far as potency and selectivity. Recorlev is believed to be more efficacious, and lead to less liver toxicity. Strongbridge Phase 3 trial needs to demonstrate normalization of cortisol levels in 25% of the patients to be deemed effective, a reasonably low bar given that anecdotal reports suggest ketoconazole can normalize about 50-70% of patients treated.  A reduction in the number of patients that experience liver enzyme elevations would also help Recorlev gain FDA approval and market adoption.

As far as market potential, Corcept, whose drug Korlym is marketed to reduce hyperglycemia  associated with Cushing’s and expected to record $292mm in sales in 2018, trades at a $1.5bn market cap or 7.5x Strongbridge’s current market cap.  Even if you assume the odds of the Phase 3 trial are no better than a coin toss, 50% likelihood of success, Recorlev should be worth about $7.50 per share.  

Summary:

There is a decent range of values you can ascribe to the two revenue producing orphan drugs given uncertainty about penetration and time to ramp, but even if you take the lower end of the range, you are probably paying $3.50-$4 per share for the existing assets today and ~$1-$1.50 for Recorlev with Strongbridge’s stock trading at just below $5 per share.  $1-$1.50 per share to bet for the upside that could come with Recorlev’s approval seems like a good risk/reward. 

Catalyst

Phase III read out in "mid-summer".