4 Reasons I'm Not Bullish on This Biotech

Kanak is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Neurocrine Biosciences (NASDAQ: NBIX) has gained significantly in the last few months based on positive trial results, news of collaborations, and the general unfathomable nature of the stock market. However, this stock looks like a value trap right now, for four reasons.

Few products in the near-term pipeline

Neurocrine has 11 programs in various stages of research and development, of which six programs are in clinical stages. However, except for Elagolix, none of the products will see Phase III trials, let alone market and money, for a few years. Even Elagolix (for endometriosis) is a collaboration product and may only yield royalties. Elagolix for uterine fibroids is a long haul product, as are the others.

Take the case of NBI-98854, which targets medical conditions like Tardive Dyskinesia (TD) and Tourette’s syndrome (TS). Neurocrine expects some earnings from this one, as might the market. After all, half a million Americans suffer from TD and there is no approved drug for it. Similarly, TS has 200,000 U.S. patients and no first line therapy. Even better, apparently, was the fact that NBI-98854 showed good trial results. However, unless it gets into a partnership with a company, it won’t be making money from NBI-98854 for a few years; if it does involve a bigger partner, though, it will relinquish hopes of blockbuster earnings.

The following table speaks for itself. A company in this stage needs its own funding, and Neurocrine, as we shall soon see, does not seem to have enough of it.

Table 1:

<table> <thead> <tr><th> <p><strong>Products</strong></p> </th><th> <p><strong>Indications</strong></p> </th><th> <p><strong>Status</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Elagolix</p> </td> <td> <p>Endometriosis pain</p> </td> <td> <p>Phase III</p> </td> </tr> <tr> <td> <p>Elagolix</p> </td> <td> <p>Uterine Fibroids</p> </td> <td> <p>Phase II</p> </td> </tr> <tr> <td> <p>561679</p> </td> <td> <p>Stress related disorders</p> </td> <td> <p>Phase II</p> </td> </tr> <tr> <td> <p>NBI-98854</p> </td> <td> <p>Movement disorders</p> </td> <td> <p>Phase II</p> </td> </tr> <tr> <td> <p>Urocortin 2</p> </td> <td> <p>Cardio metabolic</p> </td> <td> <p>Phase II</p> </td> </tr> <tr> <td> <p>GPR119 agonists</p> </td> <td> <p>Type II diabetes</p> </td> <td> <p>Preclinical</p> </td> </tr> <tr> <td> <p>GnRH Antagonists</p> </td> <td> <p>Men's and women's health</p> </td> <td> <p>Preclinical</p> </td> </tr> <tr> <td> <p>VMAT2`</p> </td> <td> <p>Schizophrenia</p> </td> <td> <p>Preclinical</p> </td> </tr> </tbody> </table>

Source: Pipeline

Collaborative payments expiring

Out of funding necessity, Neurocrine discovers and develops products in collaboration with other companies. A few products are owned by the company. AbbVie (Abbott) had been a key collaborator since June 2010 to develop and commercialize Elagolix and other drugs. Neurocrine already received $75 million as upfront payment, $480 million as ongoing development costs, and $50 million to commercialize the product.

The agreement expired in December 2012, as Elagolix entered Phase III study successfully. There was no milestone payment for the last two quarters. This affected its top line performance badly. Though Neurocrine expects royalties on sales of Elagolix, I expect revenue potential of only $10 million-$20 million at best by 2016.

Other partners include Boehringer Ingelheim and Dainippon Sumitomo Pharma. Neurocrine and Boehringer Ingelheim had a two years collaborative agreement to develop GPR119 agonists that started in June 2010 and ended in June 2012. It included $10 million as upfront payment, $3 million as milestone, and $223 million for development and commercialization. GPR119 agonist is a Phase II candidate and it is premature to decide on the future of the candidate.

Table 2:

<table> <thead> <tr><th> <p><strong>Products</strong></p> </th><th> <p><strong>Partner company</strong></p> </th><th> <p><strong>Indications</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Elagolix & other GnRH antagonists</p> </td> <td> <p>AbbVie</p> </td> <td> <p>Men & Women's health</p> </td> </tr> <tr> <td> <p>GPR119 agonists</p> </td> <td> <p>Boehringer Ingelheim</p> </td> <td> <p>Type II diabetes</p> </td> </tr> <tr> <td> <p>Indiplon</p> </td> <td> <p>Dainippon Sumitomo Pharma Co. Ltd.</p> </td> <td> <p>Insomnia</p> </td> </tr> </tbody> </table>

Source: Alliances

Neurocrine’s gloomy performance

Performance has been poor. In the second quarter ended June 30, 2013, total revenue was $0.7 million, compared to $10.6 million same period last year. Revenue declined $9.9 million due to completion of collaborative revenue from AbbVie for Elagolix in December 2012 and Boehringer Ingelheim for GPR119 in June 2012.

Currently, limited options are available to support top line growth, resulting in negative earnings. Net loss per share was $0.18, compared to $0.01 per share in the same period last year. The available cash is mostly used in the development of products.

During the first half of 2013, net cash used in operations was $7.9 million over $18.1 million in the same period last year; a change of $10.2 million was primarily due to receivables of $14.1 million reported in the first quarter from collaborative agreement. As of June 30, 2013, cash & cash equivalents, investments and receivables were $167.5 million, compared to $188.3 million as of Dec. 31, 2012.

Established players competing in the same space

Neurocrine is competing with well established companies in developing novel therapies to treat endometriosis and uterine fibroids.

Zoladex from AstraZeneca (NYSE: AZN) is used to treat endometriosis and uterine fibroids in women. The product is also used for the treatment of breast cancer. AstraZeneca is, of course, a far bigger company. By performance, in the second quarter of 2013, AstraZeneca’s total revenue was $6.2 billion, decreasing by 4% at constant exchange rate, due to the loss of exclusivity of major brands, including Seroquel IR and Atacand, in many markets and Crestor in Canada.

The company lost around $500 million from patent loss, however, that was partly offset by a $400 million growth from emerging markets, and its Brilinta, diabetes, and respiratory franchises. Adjusted EPS was $1.20, down by 21% at constant exchange rate, compared to the same period last year.

In addition, Visanne from Bayer (NASDAQOTH: BAYRY.PK) is used to treat endometriosis. By performance during the second quarter of 2013, Bayer’s group sales were nearly $13.7 billion, up 1.9%, compared to $13.5 million last year. Low growth was due to decrease in sales from the Material science segment, partly offset by increased sales from the Healthcare and Crop Science business. Adjusted EPS was nearly $2.04 (€1.54) in second quarter, compared to $1.92 (€1.45) last year.

Conclusion

By the end of this year, Neurocrine is expected to have about $130 million in cash. This is enough to support one or two, but not all, of its development programs for the future. Given everything I just discussed, I think that this is a decent investment as long as euphoria does not set in. However, only invest if you are constantly keeping yourself informed about the company. If Neurocrine can support its programs through phase III and marketing, if it gets more money out of its partners, and if it doesn’t face very tough competition, it can probably make it.

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Kanak Kanti De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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