Stuart Roberts - 25cps

Too big to paste whole thing but here's the juicy bit...


Valuing Neuren – How we get 25 cents per share
 We value Neuren using a probability-weighted DCF approach, with our model showing a 25
cent per share base case valuation and a 67 cent optimistic case valuation. Previously (ie
13 June 2014) we had a $0.26/0.66 range but adjusted this for current cash on hand and
shares on issue, as well as a slightly lower discount rate. As a consequence our target
price moves down 1 cent, to 25 cents, which is our base case valuation.
 Our WACC was 16.0% (Speculative) 4;
 We modelled payoffs for NNZ-2566 and NNZ-2591 only, allowing no value for other
projects.
 We model around 14 years of commercial exclusivity for the products after which sales
drop to 10-20% of their year 14 level as the product goes generic. When we talk about
‘Peak sales’ we mean sales at year 14.
Risk weightings
 We used a 38% probability of success for both products since this is the historical average
success rate for biological molecules at Phase II.
Commercial outcomes
 We assumed partnering deals for both compounds, NNZ-2566 in calendar 2015 (US$100-
200m in upfronts, US$300-500m in milestones, 16-20% royalties) and NNZ-2591 in 2016
(US$40-70m upfronts, US$120-150m milestones, 10-14% royalties);
 We assume average peak sales for NNZ-2566 of US$3.3bn-6.6bn, reflecting its use not just
in autism and brain injury (where we assume both indications enter approved clinical use)
but ultimately in other CNS disorders such as Alzheimer’s. For NNZ-2591 we modelled
US$2.9-3.7bn in peak sales.
 We assumed NNZ-2566 product launch by 2017 and NNZ-2591 by 2020.
Tax losses
 We assume Neuren is unable to take advantage of tax losses since they were incurred in
New Zealand and Neuren is now an Australian company.
Further capital
 As at September 2014 Neuren had $21m cash, having raised $23.5m at 11.5 cents per
share in a placement and SPP in October 2013. The company burns ~A$700,000 per
month. Given the licensing potential for NNZ-2566 we assume no further equity capital
needs to be raised.
How Neuren can re-rate to our target price
 We see a number of potential re-rating events coming up over the next twelve months,
including;
- Top-line results from the Phase II Rett Syndrome trial;
- Completion of enrolment in the Phase II Fragile X trial;
4 For a relevant discount rate, we use WACCs of between ~12% and ~16% depending on the risk for Life Science companies. This is derived
from a RFR of 3.3%; a MRP of 7.5%-11.5% (7.5% for ‘medium risk’ companies, 9.5% for ‘high risk’ companies and 11.5% for ‘speculative’
companies like Neuren); and an ungeared beta of 1.1 . We regard Life Science companies with existing businesses, or who have enough capital
to reach the market with their products, as ‘Medium’ risk. Companies that have small revenue streams from marketed products but that are still
potentially in need of capital are ‘High’ risk. Everything else is ‘Speculative’.
BAILLIEU HOLST RESEARCH
Neuren Pharmaceuticals Limited (NEU)
Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 6
- Completion of enrolment in the Phase II TBI trial;
- Top-line results from the Fragile X trial.
Leadership
 Executive Chairman Dr Richard Treagus brings to Neuren the commercial smarts he
developed as CEO of Acrux from 2006 to 2012. That drug delivery company had a big win
in 2010 with Axiron, a transdermal testosterone replacement product that was licensed it to
Eli Lilly for a US$335m deal package plus royalties.
 CFO Jon Pilcher came over to Neuren with Richard Treagus, with whom he worked at
Acrux as CFO from 2002. Prior to Acrux Pilcher spent time in financial roles at Medeva and
Celltech in the UK.
 Chief Science Officer Larry Glass, who brings strong connections with Uncle Sam’s
Medical R&D establishment, did the hard yards to get NNZ-2566 into the clinic as CEO
between 2009 and 2013.
 VP of Clinical Development and Medical Affairs Dr Joe Horrigan was previously Head of
Medical Research at Autism Speaks, giving him deep insights into paediatric neuroscience
drug development.
 Chief Operating Officer James Shaw brings to Neuren years of drug development
experience that includes stints at Quintiles and AstraZeneca.
 The Neuren board, which includes Treagus and Glass, also includes Dr Trevor Scott
(accountant) and Bruce Hancox (fund manager, representing Lang Walker).
The risks
 We see four major risks related to Neuren:
‐ Development risk. There is the risk that Neuren’s various drug development
programmes may take longer than expected to make it through the clinic;
‐ Clinical risk. There is the risk that NNZ-2566 fails at Phase II;
‐ Funding risk. There will likely be further capital required if the full potential of Neuren’s
programmes are to be realised; and
‐ Scientific risk. There is the risk that the mechanism of action of NNZ-2566, not being
fully understood, may hinder prospective partners from getting involved with the drug.