With two excellent Phase II results and Neuren now openly...

With two excellent Phase II results and Neuren now openly discussing adding additional indications for NNZ-2591 I thought it was time to update my valuation models.I also wanted to leverage some research I did on Orphan drug success rates (see prior post https://hotcopper.com.au/threads/neuren-where-to-from-here.7916912/page-54?post_id=73096813) and drug penetration rates recently which have given me much greater confidence in the numbers I’m using for both of these now.(I haven’t posted the research on drugs penetration rates yet – but will soon - some interesting insights I thought).

I’ve focused on what I believe to be the most accepted method for pharmaceutical valuation –a probability weighted discount cashflow (DCF).But for comparison I’ve also looked at valuations obtained using multiples of peak sales and deal comparables with Reata.

One of the challenging things about Neuren is working out where to draw the line between Neuren and Acadia. No question it complicates things with Acadia in the mix.I’m not sure how much the Acadia agreement affects Neuren’s value. It clearly complicates matters and no question it reduces the value compared to if Neuren owned NNZ-2591 outright with no restrictions.

To get around this I’ve treated Acadia and Neuren as one entity – valuing them combined. I think hottod used as similar approach a while ago when analysing the Reata deal.

At the end we can make a call on how much of the combined value should then be apportioned each to Acadia and Neuren.

I’ve analysed two scenarios.One conservative and one optimistic.The optimistic one is, I think, the more realistic one from the data, but the conservative scenario provides a floor under the valuation range.To be honest, with the 100 neurodevelopment disorders Jon mentioned there’s still a huge amount of upside beyond the optimistic scenario – so this scenario is certainly not an upper bound either.

Drug development costs

I’ve estimated US$300 million for costs to bring each indication to market (Ph 3 and Ph 2s where needed) and another US$150 million to get the drugs to market in ROW, with these amounts spread over 3 years in the model (exact timing doesn’t make much difference to the model).I can’t help feeling these are high, but to be honest the exact amounts make little difference to the final valuation, the numbers involved are so far in excess of these.

Potential patient numbers

I’ve used Neuren’s patient population estimates.

	Disease	North America
1	Retts	9,000
2	Retts - 2591	9,000
3	Fragile X	30,000
4	PhelanMcDermid	22,000
5	Angelman	14,000
6	Pitt Hopkins	7,000
7	Prader-Willi	13,000

NNZ-2591 for Retts & Fragile-X

I’ve assumed that Acadia will progress NNZ-2591 for both Retts and Fragile-X.With the data we’ve seen on NNZ-2591 I think this is a certainty.Noone in their right mind would leave these on the table now.For example, on top of providing longer patent protection NNZ-2591’s greatly improved side-effect could double Acadia’s potential Retts revenue through a combination of higher up-take, higher retention and more patients on full dose.The business case is very strong.

Drug pricing

In terms of pricing I’ve taken Retts as the baseline, but adjusted the pricing down a bit for some of the indications that have more patients (Fragile-X has 3x patients of Retts) and where there is more competition (Prader Willi).Although I think future neurodevelopmental indications will likely be pretty rare diseases also like Retts I’ve still discounted the pricing to $300k to be conservative.

1		Retts	5k
2	Retts - 2591	$375k
3	Fragile X	$200k
4	PhelanMcDermid	$300k
5	Angelman	$375k
6	Pitt Hopkins	$375k
7	Prader-Willi	$200k
8	Other indications	$300k

All guess work of course, but trying to be as realistic as possible.I note that some of these could actually go higher than the Daybue Retts pricing – after all if NNZ-2591 is a superior drug perhaps it should be priced accordingly, particularly if some of the additional neurodevelopment disorders are rarer than the above diseases.I’d assume Neuren has initially targeted diseases with the larger populations, so I suspect some of the remaining indications are even rarer.

Probability of drug approval

Based on the research I’ve done on drug approval rates the average success rates for orphan drugs are:

Ph II to Approval: 35%
Ph III to Approval: 59%

CNS drugs were far less successful historically.But I think NNZ-2591 has broken the CNS curse and see no reason why it shouldn’t be treated like any other orphan drug now.Trofinitide was, after all, the first drug ever approved for a neurodevelopment disorder.

As Jon has pointed out, NNZ-2591 has well exceeded the bar required for success.It appears to be an unusually outstanding drug candidate with high effectiveness and low side-effects as well as positive results in multiple conditions now – each condition having a different underlying genetic cause. If Angelman results are strongly positive also – which I suspect they will be, this will be reinforced further.NNZ-2591 is also, of course, directly related to an already approved drug (Daybue).So every way you look at it NNZ-2591 should have better odds of success than the average orphan drug candidate.

Accordingly for the conservative model I’ve used a 60% Ph III to approval (basically same as the average) and a 45% Ph II to approval (10% higher than average).I’ve assumed no further Ph 1 studies will be required.

For the optimistic scenario I’ve used 75% Ph III to Approval (I’d wager it’s more like 90% based upon the results we’ve seen), and a 60% Ph II to Approval.

Additional (undisclosed) indications

We have a total of 6 indications – leaving Prader-Willi on the table still, with the 4 current NNZ-2591 indications totalling 56,000 patients in the US market.Neuren is doing preparatory work for another “less than 10” indications.Its possible some of these are rarer than the current indications, but there could also be more of them e.g. 8 indications each with an average half the patients.

To simplify things I’ve just assumed the additional indications have the same total addressable market as the current four NNZ-2591 indications already being targeted i.e. another 56,000 US patients.

In terms of the total patients in the wider neurodevelopment space (that 100 other indications), I don’t know what the total patient numbers are for these.However, I note that autism is a common theme with all these diseases and although releasing a drug generally for autism may not be the goal (even though Neuren does have a patent for NNZ-2591 for autism) it does appear autism may be an umbrella condition that encompasses a range of things all with different underlying genetic causes. With 5-10 million people in the USA with autism if only 2% of these were classified as orphan diseases treatable with NNZ-2591 (i.e. specific gene mutations) we’d have another 100k-200k potential patients.

Neuren only wants to stick with orphan diseases for now for reasons that have already been discussed.However, its worth nothing that the definition of an orphan disease in the USA is one that affects less than 200,000 people.So there’s a lot of room to have a much more common disease (such as some variants of autism) treated with NNZ-2591 without crossing over into mainstream drug territory.

The current diseases being targeted by Neuren are actually in the ‘ultra-rare’ category (one reason for the very high drug pricing).

If we did treat a far more common orphan disease e.g. a variant of autism, I’m sure the pricing would be lower.However, even if you ended up with pricing of $50k a year, if you got 50% penetration of a 100,000 patients market that would be another $2.5 billion a year in revenue.

Suffice to say, the upside for NNZ-2591 above even my optimistic scenario is still large.

Market penetration rates

Estimating penetration is difficult and makes a huge difference to the valuations.I’ve done some research on this (will post soon) and historical orphan drug penetration rates are actually pretty terrible – often just 5% of the patient population.A big part of the reason for this is problems with diagnosis.But as some have already posted we’re currently in the middle of a revolution in genetic testing and diagnosis which is likely to make a huge difference to this factor.By the time NNZ-2591 reaches the market (probably still 3-4 years away) this area will have progressed even further.

Despite this for the conservative model I’ve still only assumed Daybue only achieves a 20% penetration long term (1800 patients). For the optimistic 30% (2700 patients).

With NNZ-2591 having a superior side-effect profile (and arguably better effectiveness also) it should achieve better penetration.So I’ve used 30% for the conservative, but increased it to 50% for the optimistic scenario.

Market entry

In the conservative scenario I’ve assumed it will take 4 years to bring the drugs to market after a successful Ph II, and 5 years for Prader-Willi and the new undisclosed indications.This means 2028/2029 market entry in the USA.I’ve added another 2 years for ROW market entry – which takes this to 2030/2031.

For the optimistic scenario I’ve used 3 years from successful Ph II and 4 years for new indications, with ROW coming one year later. I’m assuming that once you get a large pharma involved you’d be working on all these fronts simultaneously, not sequentially as was done with Trofinitide.

Drug lifetime

I’ve extended the DCF model out 20 years from present date to 2044. The NNZ-2591 patent expires in 2034, so what would happen to sale after this date?Firstly there is 7 years marketing exclusivity for any new indications an orphan drug is approved for in the US, and longer periods (up to 10 years) in other parts of the world.Secondly, there are many other ways to protect a drug even after expiry of the original patent.Composition of matter patents for example, which I know Neuren has a few of already.

There is published research on orphan drug pricing after patent expiry and in general it doesn’t seem to have much effect – the drug pricing holds up pretty well.Possibly due to the small patient populations for orphan drugs they are less susceptible to competition by generics than mainstream drugs.

I haven’t tried to calculate a terminal value – just left it at zero. By the time you get 20 years out the discount is pretty high anyway. Who knows, perhaps in 20 years gene therapy will have provided cures and the market for NNZ-2591 will have evaporated.

Time to peak sales

I’ve assumed a linear growth rate with a 7 year time to peak sales in the conservative scenario and 5 years to peak sales in the optimistic.This means peak sales overall wouldn’t occur until the early 2030s. Possibly a large pharma could accelerate this, but these periods match with historical numbers for successful drugs. Using 5 to 7 years means peak sales for Daybue in Retts for example, would not be expected until 2027 to 2029.

Rest of world market size

Estimating the patient numbers and drug prices for ROW markets is difficult.So I’ve used a ‘rule of thumb’ based upon the fact that in the analyses I’ve read the US accounts for 50% of the worldwide drug market sales by revenues for both mainstream and orphan drugs. This seems incredible considering the US has just 4% of the world’s population. However, I guess we have to thank the Americans for subsidising drugs that the rest of the world then gets much cheaper.

In the conservative scenario I’ve assumed that ROW sales will be just 50% of the US sales and for the optimistic I’ve assumed they will be equal to the US sales.However, as above, I’ve modelled the market entry for ROW being a few years behind the US.

Margins

I don’t have much data on the marketing & sales costs for orphan drugs.However, considering the huge per patient pricing and the small number of patients it seems likely the margins must be high.I’ve used a 70% margin for the conservative scenario and 80% for the optimistic.At 80% this is saying that the costs to recruit and support each Retts patient are US$75k per annum (or US$750k per patient over a 10 year treatment ‘lifetime’.At this level you’d be able to employ a full time staff member for every two patients.So this still seems pretty generous to me. I note we already know that NNZ-2591 is cheaper to manufacture.

Tax

I’ve assumed a US pharma is the eventual owner.US company tax rate is 21%.So this comes off the profits in the DCF calculation.

Discount factor

I’ve used a 12% discount factor in both scenarios, which is in the middle of the 10%-14% commonly used in pharmaceutical valuations from what I’ve read.

Peak sales

Putting these numbers into the model gives the following peak sales (in US$billions).

$0.7b peak sales for Retts Daybue in conservative scenario, and $1 billion peak sales for the optimistic.I’ve assumed that NNZ-2591 will take over from Daybue in Retts in the next 5 years and will then achieve higher peak sales of $1 – $1.7b in the USA (this is 50% of patients).

The numbers coming out of this are pretty huge, with Fragile-X and Phelan-McDermid potentially worth US$6 billion in sales annually at their peak.This is even after discounting the drug price to $200k-$300k for these indications due to their having larger addressable markets.

Peak Sales (US$b)	Conservative			Optimistic
Disease	USA	ROW	Total	USA	ROW	Total
Retts	0.7	0.3	1.0	1.0	1.0	2.0
Retts - 2591	1.0	0.5	1.5	1.7	1.7	3.4
Fragile X	1.8	0.9	2.7	3.0	3.0	6.0
Phelan McDermid	2.0	1.0	3.0	3.3	3.3	6.6
Angelman	1.6	0.8	2.4	2.6	2.6	5.3
Pitt Hopkins	0.8	0.4	1.2	1.3	1.3	2.6
Prader-Willi	0.8	0.4	1.2	1.3	1.3	2.6
Other indications	5.0	2.5	7.6	8.4	8.4	16.8
Total	13.7	6.8	20.5	22.6	22.6	45.3

Valuation methods

As discussed earlier I’ve compared three valuation methods.

Firstly using DCF, which is arguably the most appropriate method.

Secondly,a valuation multiple of 3x peak sales.I note Hashan used both 3x and 4.8x in his recent modelling of Neuren, but I’ve stuck with the more conservative 3x.

Thirdly, comparing Neuren + Acadia with Reata.

Reata’s drug Skylarys is comparable to Daybue for Retts. It’s priced at US$370,000 per annum and has slightly less estimated patients – 1 in 50,000 (6,500) with currently about 5,000 diagnosed patients in the US.The Q4 2023 revenues for Skylarys were $56 million and the peak sales are forecast to end up being between US$1.0-US$1.5 billion.This is again pretty similar to Daybue for Retts.

Neuren + Acadia currently have 6 indications in the pipeline, with over 10x the combined patients number of Frederichs ataxia.If the additional “less than 10” undisclosed indications have at least the same number of patients as the current four NNZ-2591 targets then we’re talking about 16x the number of patients.And there will be potential beyond this.

So what multiple of Reata should we use for Neuren + Acadia?Clearly only one of these indications has been approved so far – so we’re not talking about 10 approved indications.However, the discounts that should be applied to a promising but not yet approved drug are not as high as you might think, as I’ve discussed earlier.

I’ve used 3x Reata for the conservative and 8x Reata for the optimistic. This is equivalent to an 80% discount for the 3x and a 50% discount for the 8x.These are still large discounts.If NNZ-2591 is truly a pipeline-in-a-drug I’d suggest 10x would be reasonable.One drug that can treat 10 different diseases is probably more valuable than 10 separate drugs that treat 10 separate diseases. i.e. One Neuren+Acadia that can treat 10x as many patients as Skylarys would be, all things equal, worth more than 10 Reata’s.

Peak Sales & NPV

Below are the results in USD for Peak Sales and Net Present Value using NPV.

Conservative	USA		ROW		Worldwide	USA	ROW	Worldwide
	Peak Sales	Year	Peak Sales	Year	Peak Sales	DCF NPV	DCF NPV	DCF NPV
Retts + Fragile-X	2.6	2035	1.3	2037	3.8	3.5	1.2	4.7
4 Orphan indications	3.0	2035	1.5	2037	4.4	4.2	1.4	5.6
Undisclosed Orphan indications	2.3	2035	1.1	2037	3.4	3.0	1.1	4.1
Total	7.8		3.9		11.7	10.7	3.6	14.3

Optimistic	USA		ROW		Worldwide	USA	ROW	Worldwide
	PeakSales	Year	PeakSales	Year	PeakSales	NPV	NPV	NPV
Retts + Fragile-X	4.7	2031/2032	4.7	2032/2033	9.4	9.3	7.8	17.1
4 Orphan indications	6.2	2031/2032	6.2	2032/2033	12.4	14.3	12.7	27.0
Undisclosed Orphan indications	5.0	2031/2032	5.0	2032/2033	10.1	10.5	9.1	19.6
Total	15.9		15.9		31.9	34.0	29.7	63.7

Valuation of Acadia + Neuren

Using current USD/AUD exchange rate of 0.67 this gives the following valuations for the combined Neuren + Acadia entity in AUD billions.

	Multiple of Peak Sales	DCF NPV	Multiple of Reata
Conservative	52	21	22
Optimistic	143	95	58

So how much is Neuren worth compared to Acadia in the ‘pipeline drug’ scenario.Acadia only has the rights to 2 indications for NNZ-2591 – Retts and Fragile-X. Neuren has the rights to an unlimited number of indications.However, Acadia’s value is more in their ability to block any of these indications by developing Trofinitide for them.Acadia theoretically have the ability to hold Neren to ransom by threatening to develop Trofinitide for any indication Neuren is considering.One of the worst outcomes would be one party buys Acadia and a different one buys Neuren.NNZ-2591 may be a superior drug, but if you can’t sell it because the buyer of Acadia has decided to develop Trofinitide then arguably NNZ-2591 is worth less than Trofinitide.

I don’t know what the right answer is here.However, although Acadia could block Neuren its likely they’d end up getting more $ long term by cooperating.The more indications NNZ-2591 could be brought to market for the larger the pie for all concerned.

So lets assume someone works out an arrangement that benefits both Acadia and Neuren.It still seems to me that Neuren should be worth more than Acadia as they ultimately hold the most IP.Even just on the current four indications that Acadia has agreed to not compete Neuren is worth a great deal more.

If we take the position that two-thirds of the combined Neuren/Acadia value should be allocated to Neuren this would still leave a huge amount of value on the table for Acadia shareholders to be happy about.This would then give us the following AUD per share valuations for Neuren.

	Multiple of Peak Sales	DCF NPV	Multiple of Reata
Conservative	$280 / share	$110 / share	$120 / share
Optimistic	$760 / share	$510 / share	$310 / share

So based upon this analysis Neuren is worth between AU$110 to AU$510 based upon DCF.$120 to $310 based upon a 3 to 8x multiple of Reata, and $280 to $760 based upon a 3x multiple of peak sales.

These are big numbers, and as I’ve discussed, the higher numbers still don’t represent anywhere near the limit of NNZ-2591 if it truly has a wide application drug across dozens of diseases.

Why are analysts valuations just $30?

The average analyst has Neuren at about $27-$30.If you’re using any of the above valuation methods its hard to get a value of just $30. For example, in the DCF I’d have to assume a drug penetration rate of just 7% in the conservative scenario and less than 1% of the patient population in the optimistic scenario.Alternatively, I’d have to adjust the likelihood of approval of NNZ-2591 in each indication to just 10% in the conservative scenario and almost zero in the optimistic scenario.This is consistent with $30 a share representing pretty much just the value of Daybue for Retts alone.

Frankly I think its impossible to get such low per share valuations using any half-sensible numbers.

I note its also not reasonable to provide numbers accurate to the nearest $, let alone to the nearest cent as Petra Capital appears to do.

There are so many variables in the modelling and all have considerable uncertainty – in many cases the uncertainty is +-50%.In any modelling these uncertainties multiply – with the result being a very large range of possible valuation outcomes that can vary by a factor of ten or more.

This is shown by the range of $110 to $520 I get from just two scenarios – neither of which is pushing to the extremes of what could be modelled.

Any modelling should provide a range e.g. a confidence interval. More sophisticated modelling, I understand, does try to model ranges of input value using something called ensemble forecasting. Out the other end you should theoretically get a bell curve of potential outcomes, and then be able to quote a 90% confidence interval with lower and upper bounds.

A number of analysts talk about ‘unrisked’ valuations.But even this makes little sense to me.They don’t make it clear what they mean by unrisked.But if it means they’re removing the risks of the drug not being approved then getting values of just $40 to $100 a share is again not believable.

If I adjust my model to do an ‘unrisked’ valuation of just Retts and the current four NNZ-2591 indications Neuren is targeting I get $370 a share, not $100.

It’s notable the analysts seldom share their models or the parameters that have gone into them.One of the only ones who has to date is Hashan, and when he’s actually analysed the numbers what did we get? We got valuations equivalent to $500+ a share.

So why do analysts provide just a single valuation number that appears wildly divorced from fundamentals?

This has puzzled me for a long time.But perhaps the answer lies in the fact many refer to their numbers as ‘price targets’.I suspect they are not trying to value companies, but rather forecast where the share price will end up in the near future, which is to be fair, what their customers are probably most interested in.

Forecasting the share price is a different question from doing a valuation of a company based upon fundamentals.On that basis using the current share price as your starting point makes some sense i.e. they’re saying I think the share price should rise 50% from here.How they can put any mathematical rigour behind forecasting the share price I don’t know. Share prices seem pretty unpredictable to me.

In summary, if you’re looking for the fundamental value of Neuren, not a share price prediction, then I feel the analyst’s ‘valuations’ are pretty meaningless.

How do we realize Neuren’s true value?

The 100 billion dollar question.If the above analysis does reflect how a potential acquiring large pharma would value Neuren then how do we achieve this value considering the current share price is a small fraction of this?

Ultimately this is the Neuren board’s job.Its their job to develop a strategy that can realize the fundamental value of Neuren for shareholders.I’m pretty sure Neuren’s end game will be a TO, as that is clearly the best way to maximise speed to market for the widest number of indications as well as realising maximum value for shareholders in the medium term.

However, I suspect the statements about being able to fund several Ph IIIs themselves, and possibly the rumours about 3^rd party funders like Blackstone are all part of Neuren’s strategy to extract this value. Neuren need to make it clear they have alternatives if someone won’t pony up the right $ amount.Neuren needs to be able to say the price today is $30 billion, and if you don’t like it come back in 2 years time when it will now be $60 billion.To make this credible Neuren has to be willing to go some way by themselves.

Ultimately, I’d have thought it should not be too hard to realize the fundamental value of Neuren.From what we know, a pipeline orphan CNS drug is very rare.We know there are many large pharma quite capable of paying US$30 billion for a valuable drug pipeline.So long as we have multiple parties bidding then there is no reason why Neuren would be sold at a significant discount to fundamental value, irrespective of what the share price is when bidding starts.

The one big question I’m left with is how Neuren will navigate the clear conflict of interest with Acadia.That to me is a significant complicating factor in selling Neuren.