Neuren – Where to from here?

Data from the Phase 3 trial showed that Daybue is efficacious in 37.7% of patients (discussed in more detail in Appendix). Therefore, if we assume that 37.7% is the long term persistence rate and a net price of US$375k, Daybue's peak revenue would be approximately US$1.3b. Neuren would receive ~A$242m in royalties and ~A$540m (US$350m) in milestone payments.

The key unknown is the long term persistency rate of Daybue. Acadia have reported that persistency at month 7 is 63% which is considerably above what we had assumed given that only 37.7% of patients should see efficacy at the 3 month mark. 

A key point to note is that Acadia holds global rights to Daybue for both Rett Syndrome and Fragile X. Consequently, an acquirer wanting to obtain Daybue would need to acquire Acadia rather than Neuren. Based on Acadia’s current market cap of ~US$3b and the insights derived from the above analysis, we view Acadia as representing a prime acquisition target. Such an acquisition would have significant positive implications for Neuren. Notably, Acadia currently lacks infrastructure outside of the US, which suggests that RoW rollout of Daybue may encounter delays compared to if Daybue rights were held by a large multinational pharmaceutical company.

2. How would an acquirer value NNZ-2591?

The Reata acquisition also provides a useful benchmark when thinking about what value big pharma might attribute to NNZ-2591, Neuren’s second compound currently progressing through clinical trials. While some of the comparisons for NNZ-2591 from Table 1 above are still to be determined, we can make the following observations:

• Pricing: the most important determinant of pricing is efficacy (discussed in more detail below). We believe the efficacy of NNZ-2591 in relation to Daybue is a good way to think about pricing. That is, if NNZ-2591 delivers comparatively superior efficacy with a similar or better safety profile, it can be priced at a premium to Daybue.

• Patient population: The key to NNZ-2591’s attractiveness to an acquirer is its potential use in many orphan and non-orphan diseases. The current Phase 2 trials are exploring four different orphan diseases which have a total prevalent population of greater than 100,000 patients in the US (as shown in Table 1).

• Future potential: Within orphan neurological diseases, there are many other indications that Neuren or an acquirer could pursue. Outside of orphan diseases, we see potential for this drug in neurodegenerative diseases such as Alzheimer’s disease and other dementias. In addition, we see a solid scientific rationale for this drug being trialled in autism. Given this broad applicability of the mechanism of action, NNZ-2591 is a pipeline in a drug.

It's worth noting one significant complication in the potential acquisition of Neuren for NNZ-2591; Acadia holds the global licenses for NNZ-2591 in Rett Syndrome and Fragile X. Consequently, any acquiring entity would need to collaborate closely with Acadia through a steering committee for NNZ-2591's development. This partnership could pose a considerable obstacle to potential acquirers, greatly complicating both the developmental and commercial aspects of NNZ-2591. For instance, detailed plans for which indication will be sought for approval first, the market launch strategy, marketing approach etc. would all require close coordination with Acadia. Furthermore, unforeseen issues such as adverse reactions in a trial of a specific patient population or unfavourable pricing in certain markets could significantly impact not only the drug's development trajectory, but also the approved label, price and eventual commercial success.

These concerns would be mitigated if the acquirer were to acquire both Neuren and Acadia. This would grant the acquirer total global rights to both Daybue and NNZ-2591 for all indications without any obligation to pay royalties.

3. What is the potential for NNZ-2591?

Neuren recently announced topline data from its Phase 2 clinical trial in patients with Phelan McDermid Syndrome (PMS) which is the first set of data we have seen of NNZ-2591 in patients.

The headline results were very impressive with positive data across a range of efficacy endpoints. Importantly, the gastrointestinal (GI) side effects that are seen with Daybue are not present in this trial. This presents a significant advantage for the practical application of this drug in a real-world setting.

The Phase 2 trial of NNZ-2591 for the treatment of PMS was an open label trial, meaning there was no placebo comparator, and the trial was not blinded. When assessing a trial like this we need to:

1. Assess what the placebo response might be in this patient population. This is particularly important for a condition like PMS as the efficacy measures are based on subjective parent or physician assessed rating scales. To do this we generally look for other placebo-controlled blinded trials and see what the response rates are in the placebo arm.

1. Compare these results with findings from other completed Phase 2 studies to assess how this result compares and to better understand the probability of success. Specifically, we aim to assess whether the outcomes observed in Phase 2 trials of other drugs were corroborated in Phase 3 trials, and if not, to ascertain the underlying reasons for any disparities.

There are some very important caveats that we will call out upfront in our analysis of this efficacy data.

1. The trial’s sample size is very small, 18 patients. PMS is a heterogeneous disease meaning symptoms are varied, progression is sporadic and different for all patients.

1. As stated above, the trial is not blinded and does not have a comparator arm. When assessing such a trial we must make cross-trial comparisons which are normally very difficult to make. In PMS, very few clinical trials have been completed. In fact, Clinicaltrials.gov has only 14 trials listed for PMS of which only 8 are interventional trials assessing a treatment for PMS all with very small sample sizes. These factors further complicate a cross trial comparison.

1. No Phase 3 trials have been conducted in PMS. Thus, we are unable to compare how a drug’s Phase 2 results and Phase 3 results compare.

These trials allow us to observe the placebo response in a blinded randomised controlled trial to get an idea of what the placebo response might be in the NNZ-2591 trial. This data indicates that it is unlikely a CGI-I of 2.4 achieved in the NNZ-2591 trial is due wholly to a placebo response.

While this data is positive and indicates that NNZ-2591 is having a therapeutic effect, the data is derived from small sample sizes. We eagerly await results from Phase 2 trials in Angelman’s, Prader Willi and Pitt Hopkins Syndromes in the coming months.

4. Putting it together

Table 3 below looks at how our views on valuation have changed since we published our last Wire and incorporates the new information we have discussed above in relation to Daybue.

While the gap between Neuren’s market cap and intrinsic value has closed since our last Wire, we still see Neuren as undervalued based on the Daybue opportunity in Rett Syndrome alone.

Generally, an acquirer would be a company that already has a presence in the given field with an established sales force and back office to ‘plug’ NNZ-2591 into. As such the marginal cost to commercialise NNZ-2591 to an acquirer would not be significant. Simplistically, in this scenario an acquisition might be a multiple of peak revenue with a discount to reflect the risks and costs of clinical development and time value of money. The typical price to sales ratio for pharma is approximately ~3x. When applied to our risk adjusted peak revenue estimate, this results in a risked valuation for NNZ-2591 at ~US$12.3b.

At the time of acquisition, Skyclarys' projected peak revenue stood at ~US$1.5b by 2030, yielding a peak sales/price multiple of around 4.8x. Employing this multiple as a benchmark for assessing our valuation, if we apply it to our forecasted peak revenue for NNZ-2591 of US$22b (as per table 4) and factor in a significantly conservative discount of 90-95% to account for clinical and regulatory risks, the resultant acquisition price still ranges between ~US$5.3b to US$10.6b.

The discussion above ignores the value of NNZ-2591 in Rett Syndrome and Fragile X which Acadia has licensed. There are no costs associated with these programs for Neuren and act as a free option if the programs are developed and launched.

5. Key risks

#1: As we discussed above, long term persistency of patients on Daybue is the key risk to Neuren’s valuation in the short term. Although current data suggests that adherence rates exceed those observed in clinical trials and above our expectations, it's important to recognise that the date is still early. We will keep a close eye on Acadia's quarterly updates for any new insights.

#2: The RoW rollout of trofinetide presents potential execution challenges given Acadia has no infrastructure outside of the US. However, we see this risk as mitigated given the lack of approved treatments in Rett Syndrome, coupled with a significant unmet medical need and the drug’s successful launch in the US. We continue to assess how Acadia is building up its RoW business with a specific focus on Europe.

#3: Clinical development risk of NNZ-2591. Notwithstanding the strong preclinical and Phase 2 results, significant clinical risk exists for any drug at Phase 2 stage in neurology. That said, we believe that Neuren is undervalued even when ignoring the NNZ-2591 opportunity, thus we view NNZ-2591 as a ‘free option’ at the current market valuation.

#4: Competing treatments in development can pose a risk to Daybue. Taysha Therapeutics is currently trialling a gene therapy for Rett Syndrome which has entered Phase 1. Early data from 2 patients shows that the drug is safe, but it is too early to assess efficacy. Similar for NNZ-2591, numerous therapies are in development for the disease states.

6. Summary

Since our last update, there’s been a notable shift in the landscape of pharmaceutical M&A, which is one of the reasons we have spent time on Neuren’s acquisition value in this Wire. While orphan drugs have consistently garnered interest as targets for M&A, there has been a significant resurgence in the appeal of neuroscience drugs among major pharmaceutical companies. This trend is exemplified by several high-profile acquisitions, including Bristol Meyers Squibb's acquisition of Karuna, AbbVie's purchase of Cerevel, and Biogen's takeover of Reata. This evolving market dynamic positions Neuren advantageously, as its portfolio spans both the orphan drug and neuroscience therapeutic domains, thus accentuating its potential as a strategic target for future M&A endeavours.

Over the last two years, Neuren has achieved important milestones, with the company providing a much need treatment for Rett Syndrome and delivering significant value to its shareholders. We continue to see a bright future for Neuren driven by the clinical development of NNZ-2591, Neuren’s jewel in the crown. The early trial data for NNZ-2591 has prompted a reassessment of our thesis, leading us to earnestly contemplate the value potential it holds. We are eager to review the results from the upcoming Phase 2 read outs, as we firmly believe in the tangible pathway for substantial value realisation for patients, Neuren and its shareholders in the foreseeable future.

References

1. May D et al (2023) Epidemiology and patient journey of Rett syndrome in the United States: a real-world evidence study. BMC Neurol. 2023 Apr 4;23(1):141. doi: 10.1186/s12883-023-03181  
2. Kolevzon A et al (2002) Clinical trial of insulin-like growth factor-1 in Phelan-McDermid syndrome. Mol Autism. 2022 Apr 8;13(1):17. doi: 10.1186/s13229-022-00493-7
3. Neul JL et al (2024) Trofinetide for the treatment of Rett syndrome: a randomized phase 3 study. Nat Med. 2023 Jun;29(6):1468-1475. doi: 10.1038/s41591-023-02398-1 

Appendix: Short Report

Some readers may be aware that a short report was released earlier this year. While in general we would prefer not to dwell on such reports, there are a number of factually incorrect and highly sensationalist claims in the report which are worth touching on. We’ve addressed a number of these below.

Poor response and side effects: The report emphasises, based on chart 3 below, that only 13% of patients showed a “much improved” CGI-I score (which assesses how much the patient's illness has improved or worsened relative to a baseline state at the beginning of the intervention), while 92% experience adverse events such as diarrhoea, vomiting, and seizures. This information was already known from Acadia’s Phase 3 results. From conversations we have had with key opinion leaders (KOLs), a one-point change in the CGI-I is considered clinically meaningful. Thus, the data from the Phase 3 trial showed that 37.7% of patients had a clinically meaningful response to Daybue over 12 weeks.