Regarding significance of Orphan Drug Designation / big pharma companies swooping in, Charlie Aitken agrees with you.
His analysis ignores the now real possibility of Breakthrough Therapy designation which would add multiples to the current share price from current val targets.
See Charlie's October 2013 Company Exert attached. While this is 12-months old the information is still relevant, excluding the pre-phase II Retts 17 cent price target:
Begin forwarded message:
Neuren Pharmaceuticals (NEU)
At the current market cap of $150m Neuren has the best risk reward of the biotech world we have looked at since we first started pushing Mesoblast (MSB) at 50c in 2009. The key to finding the right biotech is all about management, the core drugs or products being commercial, and the end markets in those products being multiple billion markets as that is what attracts big pharma in the end to the product or company.
We recently (18/10/13) raised $21.5m for Neuren (NEU) at 11.5c. As with all capital raisings there has been a little post-raising indigestion, yet that has been worked through and we believe NEU could well be a multiple billion dollar company over time if its products prove to be commercial as we believe they will. NEU could do very large partnering and licencing deals in time. This is not a red/black bet on a single outcome like some small biotech’s: it has multiple irons in the fire and that is why we like NEU here.
Neuren`s core areas are not widely known in Australia with the big end value drivers likely in the orphan drug space which is very hot in terms of big pharma globally at the moment, but given no Australian large healthcare company has exposure to the space, most analysts and clients don’t understand the opportunity.
We see Neuren having 4 trials on the go in the next 12 months, ranging from traumatic brain injury to concussion, fragile X syndrome trials and Rett syndrome trials. The US army is funding the traumatic brain injury study up to $23m dollars and remember how much exposure the US army has to that space given all the injuries from road side bombs around Afghanistan and other areas. On Concussion, as all old footballers know, there is still no treatment for it. You are just told to go home and rest.
Neuren has 4 main areas
But to us the main value drivers of this company, even though we like those 2 programs, are the opportunities in orphan drugs be with Rett Syndrome and Fragile X areas that nobody has looked at. Orphan drugs are for rare diseases with less than 200k patients in the USA or 250k in Europe. The opportunity is that many of these orphan drugs sell for $100,000 -450,000 per treatment per year do even if you have small patient markets, the revenue opportunities are multiple billions and that is why Big pharma has been doing a number of deals in the space be it via takeovers or via partnering deals with smaller companies.
Big pharma looks at 2 things with smaller biotech players: the data and the revenue opportunities. Neuren has excellent data to date and clearly the revenue opportunities are large. Also the FDA doesn’t given you fast track or orphan drug status if your early data doesn’t look good so these approvals NEU has received from the FDA for those various statuses are the FDA basically telling you the early data looks interesting.
There are a few main reasons why orphan drugs are so attractive to big pharma.
The period of extended exclusivity on the drugs is the key as you don’t have this generic competition that has become such an issue for big pharma and their core drugs. You can also bring the product to market faster with the trials smaller and less costly, you don’t need large marketing teams as the patient numbers are smaller, you get tax credits so there are multiple reasons for the space being so attractive.
The second reason big pharma is so focused on this space is the fact it is growing so much faster than the core prescription drug market withorphan drugs growing at +7.4% per year vs. 3.7% for the prescription drug market and you know big companies like growth and that market is growing at double the core market.
The Revenue Opportunity could be massive and that’s what big pharma will be watching. In terms of the core markets we see Fragile X alone as being a 70,000 patient market in the USA and at say $100,00 per annum per patient that would be a $7bn value end market and there is no drug that treats the disease at the moment. Rett syndrome is a 16,000 patient market and at similar pricing would be a $1.6bn revenue end market. So in those 2 core products alone before you talk about concussion, traumatic brain injury or other things is a very large end market and I cannot find a company globally in the space that has almost $9bn of revenue in end markets if their products work for $150m market cap.
Those alone are very big end markets and for any big pharma that does a partnering deal with Neuren but unlocking any treatments for Autism would be a big prize as part of these treatments. There are orphan drugs that work across multiple problems and they are very large as you can see below with some selling $7bn of product per annum and that is what the longer term partner or owner of Neuren could achieve down the track.
M&A and deals in the Orphan Drug Space
In recent months there has been multiple deals in the space with a $4.2bn takeover of Virpharma by Shire this week at a +68% premium to the pre takeover speculation price and the largest takeover being Amgen paying $10.5bn for Onyx Pharmaceuticals and there has been a lot of speculation of takeovers of other fast growing orphan players like Shire (15bn mkt cap) in the UK and Alexiron ( US$23bn mkt cap ) in the USA have been rumoured targets for Roche and other giants and the stock prices of many larger high growth players in this space have been flying.
Alexion makes the world’s most expensive drug Soliris at $410k per patient per annum and there are only 20k patients with the disorder who use that product which reminds you that you do not need large end patient markets to make great returns instead the reverse.
Remember these large companies pay multiples of revenue for companies so it all comes down to what they think the end value for your products could be assuming they are clearly commercial products.
Here are a couple of expensive drugs in the orphan space you would never have heard of
Cerezyme –Sanofi costs $300k per patient and eliminates fatty clumps that damage the spleen,liver, lungs and bone marrow
Elaprase –Shire Plc –costs $375k per year and treats hunter syndrome that causes flattened noses and breathing and brain damages and is only 2k patient market.
Cinryze –Viopharma costs $417k per year and prevents hereditary angioedema which is swelling of the abdomen and lips
Kalydeco –Vertex costs $294k per year and targets a genetic defect at the heart of lung disease and cystic fibrosis
Remember, with almost all these drugs targeting very rare diseases many of which have terrible side effects there is no issue with re imbursement as anything is better than the present and even though the costs of high at the moment the quality of life is terrible for the patients and that is the same for Fragile X and Rett Syndrome.
Management
Management are solid, with Richard Treagus the executive Chairman the man who took Acrux from $50m market cap to $500m market cap and got a phase 3 approval for his product from the FDA and a partnering deal with Lilly for that company. Richard knows his stuff and has plenty of skin in the game with 40m shares and has attracted his former CFO from Acrux John Pilcher across to NEU as well.
Register
The stock remains under owned with Lang Walker, the property developer who has an excellent track record in biotech investing, but less success in opening decent bottles of red wine, owning 16% of the company. There are also multiple sticky ultra-high net worth investors sub 5% , management have plenty of skin in the game and anyone who reads an annual report would even notice US Pharma giant Pfizer owns 8m shares which is tiny in the scheme of things for them but a good show of support.
My own view is that anywhere under 14c this stock is great risk/reward buying. There should be plenty of news flow in the next 6 or 12 months. There is deal flow in the space offshore almost every week and that won’t go away given the attractions for the orphan drug industry.
Last report from our analyst Tanu Jain with Speculative BUY recommendation and 12 month target of 17c target, but clearly we think this stock can be multiples of that target over time.
Have a good weekend.
See you all @6000
Go Australia, Charlie"
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