Based upon the latest info I thought I'd update my DCF. Changes since I last updated my model include:
- Neuren unlikely to proceed to Ph 3 for Prader Willi or Angelman in near future.
- Neuren looking at doing Phase 3 for Phelan-McDermid and Pitt-Hopkins themselves.
- Estimated US$50-$100m for each Phase 3 trial
- Acadia’s Phase 3 for Retts suggested as a good reference for time for Phase 3 - 2 years for trial, 1 year for FDA review & approval. This would mean PMD and PHD could be approved by start of 2028.
- Neuren is investigating “less than 10” additional indications for NNZ-2591, some of which they would presumably progress to Phase 2 during the 2025-2027 period.Possibly a priority would be put on indications with no competition.
Model assumptions
In updating my model I’ve therefore removed Prader Willi and Angelman and have made the following assumptions:
- Daybue takes 5 years to reach peak sales of US$1b (as per my earlier post this still seems a realistic target even with the recent Acadia guidance down-grade).
- Daybue achieves 30% market Retts penetration at peak
- NNZ-2591 achieves 50% market penetration at peak sales (refer previously posted analysis for basis for this higher number)
- PMD and PHD reach market in 2028 and take 5 years to reach peak sales.
- Rest of World peak sales for Daybue and NNZ-2591 will be equal to that of USA sales (which is the historical average for the drug market)
- Daybue & NNZ-2591 take 7 years to reach peak sales for Rest of World due to the extra delays in getting approvals and ramping sales in multiple markets.
- Gross margins after marketing & sales expenses are 80% for North America and 50% for Rest of World (with lower margins in Rest of World due to multiple jurisdictions and less economies of scale).
- Pitt-Hopkins with 7,000 patients is priced the same as Daybue - $375,000.Phelan-McDermid has double the patients of Retts so I’ve assumed it may be priced lower at $300,000 due to this condition being slightly less rare.
- Discount factor of 12%
- Acadia does not develop NNZ-2591 for Retts or Fragile-X.I think its highly likely they will develop NNZ-2591 further (they’d have rocks in their heads if they didn’t…), but seeing as there is no action on this currently have left it out.
Peak sales & net revenues
Above assumptions gives peak US$ sales below
| | USA | Rest of World |
|---|
| 1 | Daybue, Retts | $1B | $1B |
|---|
| 2 | NNZ-2591, Phelan-McDermid | $3.3B | $3.3B |
|---|
| 3 | NNZ-2591, Pitt-Hopkins | $1.3B | $1.3B |
|---|
Taking into account royalty rates and sales costs for NNZ-2591 net sales are:
| | USA | Rest of World |
|---|
| 1 | Daybue, Retts | $0.15B | $0.25B |
|---|
| 2 | NNZ-2591, Phelan-McDermid | $2.65B | $1.65B |
|---|
| 3 | NNZ-2591, Pitt-Hopkins | $1.05B | $0.65B |
|---|
| 4 | Total | $3.85B | $2.55B |
|---|
Total net peak sales is therefore US$6.4B.
Neuren’s FY2023 accounts had G&A expenses of AU$6m and R&D costs of AU$27m. The R&D costs were presumably the cost of running the Phase 2 trials.
I’ve assumed going forward that Neuren’s expenses will consist of:
- G&A of AU$8m in 2024 increasing by $2m a year ongoing.
- Costs of two Phase 3s spread over 2025/2026 US$100m each.
- R&D expenses of AU$30m per annum over the next 3-4 years for running further Phase 2 trials on new indications.
I’ve assumed Neuren gets two additional milestone payments of US$50m and the US$150m payment for reaching $1b sales (worldwide) in 2028.And also US$35m + US$15m for first commercial sales in Europe and Japan (in 2026).
Putting all this into the model with a 30% tax rate we reach net income of US$5.4B in 2032, rising to US$6.4B by 2035.To account for this I’ve assumed sales start dropping significantly by 30% per annum from 2038.
Valuation after FDA approval
With Neuren now taking the position of going it alone to Phase 3 with Pitt-Hopkins & Phelan-McDermid what would be the NPV once both drugs had been taken through to approval?
I get $25 a share for Retts, $140 for PMD and $55 for PHD, for a combined $221 per share.
| | US$ NPV as at Jan 2028 | AUD per share |
|---|
| 1 | Daybue, Retts | $2.2B | $26 |
|---|
| 2 | NNZ-2591, Phelan-McDermid | $11.6B | $140 |
|---|
| 3 | NNZ-2591, Pitt-Hopkins | $4.6B | $55 |
|---|
| 4 | Total | $18.4B | $221 |
|---|
Comparison with Reata
How does this valuation stack up compared to Reata?
Reata was sold for US$7.3B.Most of this value was presumably for Skyclarys for Frederichs Taxia, with the rest of their pipeline being one Phase 1 drug and several pre-clinical.If Daybue is subtracted from the earlier $18.4B we end up with ~$16B for Neuren, or a bit over twice Reata.This certainly passes the common sense test – as Neuren would have two approved indications at that point.
However, it probably still undervalues Neuren by comparison.Frederich’s Taxia has just 5,000 potential patients in the USA vs combined potential patents of 29,000 for PMD + PHD, nearly six times as much. There are certainly far more existing diagnosed patients of Frederichs Taxia vs Phelan-McDermid and Pitt-Hopkins.However, Skyclarys is also only approved for patients 16 yrs+ whereas NNZ-2591 is aiming for paediatric use also (2 yrs and over?).
When Skyclarys was launched analysts viewed it as having a sales potential of $1.5B by 2030 (7 years after launch).By comparison in the modelling I’ve done Phelan-McDermid and Pitt-Hopkins show combined sales of $6.4B 7 years after launch, or 4x that of Skyclarys.
So if Neuren was valued at a similar multiple we’d get $30B or $360 per share.
In summary, the $18.4B valuation for Daybue Retts + PMD + PHD still seems conservative when compared with Reata.
What’s the premium for a platform drug?
Of course Neuren’s not stopping at just PMD & PHD. As Jon stated, from his point of view the key significance of the Angelman results were that (to quote one of the releases) they “strengthen confidence inpotential of NNZ-2591 for multiple neurodevelopmental disorders, independent oforigin of underlying genetics”
Neuren’s key thesis now is NNZ-2591 is a platform drug.If Neuren has another half a dozen or more successful Phase 2s under their belt, how much is this potential worth
I can’t find any data on the premium paid for a platform drugs (or “pipeline-in-a-drug”) vs normal drugs.But if just 2 indications achieve a valuation of US$16B once approved and with the large number of untreated neurodevelopment disorders (not to mention Autism which Neuren has a patent for) you’d have to think it could be 10x this in the long run.
But let’s be conservative and assume by 2028 Neuren can only make the case for an additional 1x PMD + PHD.If you put a 50% discount on Ph 3 success (which is well under the average for Orphan Phase 3 success), Neuren would need successful Phase 2 results targeting another 60,000 US patents, or another 4-6 disorders similar to PMD or PHD to achieve this.This seems pretty reasonable and in fact looks very much like the plan Neuren is following.Once Neuren release their plans for additional indications later this year I can update this modelling further.
So adding the same value again for these additional indications takes us to ~US$40 billion or $500 a share.This is still, believe it or not, the conservative number. For example, if we used the 4x ratio of Reata mentioned earlier this logic would take us to ~US$60 billion or AU$700 a share.And if you’ve achieved 2 successful phase 3s and 4-6 successful phase 2s, then I’m sure there’d be still more value on the table to negotiate
So we’re getting back to the $1,000 a share that Eagle0 first put out there some years back.
As Jon stated in the last call, there is huge value upside in taking things all the way through Phase 3.Why on earth would you take $45 now (as some punters are suggesting) when you could get $500 in 3 years time?
Addressing the low share price
I thought Jon’s response on last call re a share buy back was interesting. He said they would have enough cash to fund two Phase 3 trials and then made the comment there is no point paying out money and then having to do a raise again. But he still didn’t seem to rule out a buy back - suggesting it was still on the table as an option.
And the modelling I’ve done suggest suggests they’d have more than enough spare cash to do a buy back. Although Jon seemed to give the impression Neuren would only just have enough cash to do the two Phase 3s the modelling I’ve done suggests this is far too conservative.
Based upon the assumptions I’ve outlined Neuren would receive about US$800k (AU$1.2B) gross revenue over 2024 to 2027. If US$30m is allocated to G&A, US$80m to Phase 2s and US$200m to Phase 3s this leaves an after tax profit of US$360m over 2024-2027. Add that to the AU$213m profit they already have and you get ~AU$750m spare cash to Dec 2027. This doesn’t include interest (which would increase this to about AU$800m).
So it seems there would be plenty of cash to start doing share buy backs.
If Neuren does decide to go it alone to Phase 3 one of the concerns will be the share price in the meantime. As we’ve seen, the market currently seems to value NNZ-2591 at a big fat zero. Even positive news seems to have no effect. So there will be a real concern from shareholders that the share price could languish over this three year period until Phase 3 success is achieved.
One way to address this would be via share buy backs. And being able to invest AU$250m-AU$400m in this would be more than enough to move the needle.
This would be good use of funds. Warren Buffet’s Berkshire Hathaway has made very good use of share buy backs over the years to increase returns to long term investors. If shares are materially undervalued then it’s a great use of spare funds.
As an illustration, if Neuren were to use $250m-$400m to buy back 10% of their shares (I’m assuming the share price would rise to at least $25-$40 a share if share buy backs were started) this would increase the per share valuation by 11%. So $500 per share in 2028 becomes $555. Considering that $250m-$400m is worth just $2-$3 a share in the bank that’s a pretty good return on the $.
Why not take advantage of those idiots selling Neuren at $16 a share?
Share buy backs could help to put a floor under the share price over the next three years while we wait for the next big news, helping to satisfy those long term holders who’re getting tired of waiting for some increased value to be realized.
Takeover by Christmas?
I still think there’s a good chance Neuren will be gone by Christmas. However, I think Neuren is sending the clear message – pay up now or join the queue in 2028.
Biogen CEO Chris Viehbacher was recently quoted saying the Reata acquisition is one he’d like to repeat and “If we could find anotherReata-type acquisition, I think we would look for that, but you know, thosecome along pretty rarely,”… “We will continue to look but they don'tcome along every day.”
A key point was there’s a limited number of opportunities like Neuren.Why wait and take the risk you miss out?With most of the risk on NNZ-2591 resolved it would make more sense to move now and pay a premium to clinch the deal.NNZ-2591 has arguably already been FDA approved and on the market (in the form of Daybue).If you wait you’re gonna be too late…
Neuren is in the wonderful position of being able to have their cake and eat it.They’re not reliant upon a buyout or investor to move forward.Jon emphasised his view there was no advantage in someone else doing the Phase 3 vs Neuren doing it themselves.
For me, Jon was sending a clear message - Neuren is not going to leave most of that Phase 3 value on the table. Any deal done now will have to achieve that. To me that means at least $200 a share.
(20min delay)