NNZ2591 As a Platform: In my last email a key proposition that I...

NNZ2591 As a Platform: In my last email a key proposition that I discussed was whether NNZ2591 represents a platform-play: a single molecule that can be used for multiple disease indications. At that time only the PMS indication had completed a phase 2 trial. I said we would need to see the results of the Pitt Hopkins and Angelman phase 2 trials to answer the platform question. Since then, both indications have completed their respective trials with excellent efficacy, safety and tolerability profiles. NNZ2591 can now credibly claim to be a platform-play.

Hypoxic-Ischemic Encephalopathy: A few months ago NEU announced a new game-changing indication: Hypoxic-Ischemic Encephalopathy, or HIE. HIE occurs in newborns whose brains have been deprived of oxygen. It is a devastating condition. The only treatment option is to lower the infant’s temperature through hyperthermia. But hyperthermia mainly serves to limit the damage caused by reperfusion when blood flow is restored in the brain. There are no FDA approved drug treatments for HIE. NEU aims to offer NNZ2591 to mitigate brain damage and neurodevelopment impacts caused by HIE. To offer the first such FDA approved treatment.

Beyond its use for HIE, NNZ2591 could become a “gateway” drug for a wide range of devastating conditions like stroke, traumatic head injury—even drowning. While the root causes for them are different, the common factor with HIE is the loss of blood flow to the brain and resulting brain damage. It seems reasonable that if NNZ2591 can substantially mitigate brain damage due to HIE, it’s reasonable to feel optimistic that it could provide similar clinical benefits for these non-HIE indications. Certainly, any success NNZ2591 has with HIE would motivate ER doctors to try out NNZ2591 for their trauma patients.

Much like a HIE clinical trial, these non-HIE indications could be trialed in emergency room/ICU settings. Once ethics approvals are in place patient recruitment boils down to screening incoming patients with brain injuries for those that could benefit from NNZ2591 treatment. This should greatly simplify the recruitment effort and lower trial costs. If NNZ2591 could be approved for these non-HIE indications the addressable market would be off-the-charts. Every hospital would need an adequate supply of NNZ2591 on hand.

Takeover Challenges:
There are many models used to determine the value of a biotech. But much like in the case of real estate, you can always look for a comparable sale to gain a “ballpark idea” of a biotech’s valuation. I found Biogen’s purchase of Reata for USD$7.3 billion to be a reasonably good fit as a comparable for NEU. Using Reata, I value NEU’s current value at USD$7 billion. The benchmark price. While not nearly as complete as a discounted cash flow (DCF) model, I find using a biotech comparable to be a simple, street-smart way to estimate a biotech’s “reasonable” value. A good starting point for negotiation.

Now the question becomes when is the right time for NEU to seriously court a buyout offer? If NEU were to entertain a buyout offer today, they would run into a serious challenge: the buyout premium. As of 31 August, NEU’s current market cap is roughly AUD$2.4 billion. To fetch a USD$7 billion buyout (AUD$10.7 billion) the buyer would have to pay 4.5 times the current market cap. This would likely be a pill too bitter to swallow for most pharma CEO’s who must satisfy market analysts and conventional thinking.

An obvious solution is to wait until the PMS trial completes, which will likely take 24 months, or more. With good PMS trial results NEU would be in a much stronger position to demand what it sees as fair value. In addition to PMS, NEU would likely have 2 additional phase 3 assets—PTH and HIE—in the pipeline. Indications that would likely gain FDA approval 12-18 months after PMS, adding add weight to NEU’s valuation. IMO, once PMS gains FDA approval NEU would likely be worth between USD$7 billion and USD$10 billion.

A Practical Takeover Solution: If NEU management wants to entertain a near-term offer (over the next 3-9 months) the buyout terms could be structured along these lines:·
An up-front cash payment·
Backend milestone payments·
The use of Contingent Value Rights (CVR) to pay for backend milestones.

A CVR is a common way to bridge the valuation gap between buyer and seller. The CVR could be structured as a stock grant to pay for any future milestone. The cost-basis for all share grants could be the 30-day volume-weighted average of the buyer’s share price at the time of the NEU buyout. Here is a hypothetical NEU takeover (all figures are in USD):
$3.5 billion in cash upfront
$0.5 billion when the PMS trial completes (CVR)
$2.0 billion with FDA approval for PMS (a CVR)
$1.0 billion with FDA approval for the Pitt Hopkins indication (CVR)
$1.0 billion with FDA approval for Angelman indication (CVR)
$1.0 billion with FDA approval for HIE (CVR)
$1.0 billion with FDA approval for SYNGAP-1 approval (CVR)

In this hypothetical takeover of NEU, the total value of the deal would be $10 billion, with $6.5 billion as backend milestones payments. To pay for each milestone the buyer would grant the following number of shares:
Total-shares-granted = milestone-price / cost-basis
For example, if the granted share’s cost-basis was $100 (the share price at the time of the buyout) and the milestone price is $2 billion (for example, for the FDA approval of PMS) then 20 million shares would be granted to pay for that milestone. The buyer would only be risking $3.5 billion. Conversely, NEU shareholders would get a risk-free payout of $3.5 billion, which roughly equates to AUD$42.40 per share. However, if the buyer’s share price were USD$125 when the PMS milestone is reached, then those 20 million shares would be worth $2.5 billion, not $2 billion. Shareholders would share in the economic uplift that NNZ2591 provides the buyer over time, increasing the effective total value of the buyout.

NNZ2591 Intrinsic Value:
Even if NEU were to receive “fair value” for its neurodevelopmental pipeline, IMO, shareholders would still be sold short. Much like the tip of the iceberg, the bulk of NNZ2591’s intrinsic value is well below the waterline, so to speak. The non-HIE spinoff indications—like stroke, head trauma and so on—could produce an addressable patient population in the millions per year. There are around 800,000 cases of stroke each year, in the USA alone. These non-HIE indications are likely to be 100X larger than NEU’s planned neurodevelopmental indications.

Taking on these “new” indications are very likely beyond the financial and operational capacity of NEU. One interesting vehicle for pursuing these non-HIE indication would be to form a joint venture company, in partnership with the eventual buyer of NEU. NEU could present this joint venture as a way to fully monetize the intrinsic value of NNZ2591.

How I See NEU:I don’t believe the market fully understands the real value of NNZ2591. I’m hard pressed to find another drug with NNZ2591’s safety and efficacy, that can address such a wide range of diverse neurodevelopmental diseases—from a single molecule. A buyer would have no risky and expensive R&D activities when taking on a new disease indication. The ongoing operations would consist primarily of designing and running clinical trials. A commercial activity with well-known costs (around USD$75 million/trial). The buyer could run its entire NNZ2591 operation with a staff headcount under 50.

With NNZ2591 we have a single drug that can produce growing recurring revenue in the multi-billion-dollar range—for each disease indication! NNZ2591 is a goose that actually lays golden eggs. It’s not very often in life do you run into such an animal. I don’t think these benefits will be lost on any serious buyer.