A De-risked bio-tech with 4X upside - Karst Peak Capital, page-25

Great report by Karst Peak. Worth going through it in detail.

Firstly, this valuation is pretty much based upon Rett’s alone. It includes zero for Fragile-X (which has 3x larger market than Retts), and in Hashan’s own words a ‘free option’ for NNZ-2591 (which Neuren stated has 5x market of Rett’s).

So on Rett’s alone Karst is valuing Neuren today at AU$2.0-$2.5 billion or AU$17 – AU$21 per share.

Examining his reasoning we find some interesting aspects to this valuation:

Firstly, he admits that for NA “We believe these assumptions may prove conservative. Indeed, Anavex forecast a total addressable market of US$2-5b for a drug for Rett Syndrome”. So Anavex is forecasting a TAM of AU$2.7-6.8b? Looks like quite some upside. Lets just stick with Hashan’s ‘conservative upside’ for now of AU$1.6b.

In evaluating EU market despite stating “Commonly, for drugs that have completed Phase 3, royalty rates are ~20-30%” Hashan then choses 17.5% - a number outside this range, and one barely higher than 10-15% of the Acadia deal. Hard to see why the ROW royalty rate would be lower than normal – seems more likely it would be towards the 30% range and indeed E&P Analyst in Nov 2021 report used 50% in his model. If we update Hashan’s model to use an arguably more realistic 30% royalty we get a 70% increase in his EU valuation.

There are also 30% more Rett’s patients in Europe than the USA (based on Neuren's numbers), yet Hashan has put _less_ not more patients in his model for Europe - just 4,000 vs 5,000 for USA. Why? There’s no evidence I’ve read suggesting Orphan drug takeup in Europe is lower than the USA (feel free to share if there is!). If we simply follow the same assumptions from USA through to EU (in the absence of any good evidence suggesting otherwise) then we get 1.3 x 5,000 = 6,500 patients, updating into the model gives a further a 60% increase in his EU valuation. Hashan states that orphan drug prices are 22% less in Europe, then uses a 30% discount. Let’s leave aside whether Trofinitide justifies higher discounts in Europe than the average orphan drug (probably not).

Recalculating the EU market using the arguably more realistic numbers above (call them the upside if you like) we get an increase in the EU market valuation of 170% to AU$1.9 b. This passes the common sense test – the EU market is both bigger and more profitable (higher royalties) than USA.

Updating Hashan’s valuation model with these ‘upside values’ and then leaving out the token $200m for NNZ-2591 now gives us A$1.6b + A$1.9b = A$3.5b or A$29 a share.

In conclusion, if we assign zero value to Fragile-X (3x larger market than Retts), zero value to Neuren’s ‘jewel in the crown’ (in the words of Neuren CEO) NNZ-2591 (5x larger market than Retts and US royalty rate 2-3x higher) and zero value to Asia & ROW we get a ‘conservative upside’ valuation of Neuren of A$29 per share. Note this is a calculated Net Present Value (NPV), not a future value.

To paraphrase, if you leave out Neuren’s most valuable assets the company appears to represent a value of $29 per share (A$3.5 b) or to quote Karst Peak Capital Neuren is “a de-risked biotech with 7x upside and a NNZ-2591 ‘free option’”.

A really interesting question is how much would Neuren's most valuable asset (NNZ-2591) add on top of this valuation if it was properly included in the Hashan's model?