FDA Approval Puts Rocket Under Neuren Shares

This story features NEUREN PHARMACEUTICALS LIMITED. For more info SHARE ANALYSIS: NEU

Amidst a sea of red, the Neuren share price has skyrocketed in recent days following a world first approval for the biotech's treatment of Rett syndrome.

-Nueren share price surged by more than 50% in four days
-Neuren's trofinetide becomes first drug to be approved for the treatment of Rett syndrome
-Analysts see a much larger opportunity on the horizon for NNZ-2591 (still in trial phase)

By Danielle Austin

While the ASX coloured red with only the occasional gold company withstanding the global retreat in risk appetite, shares in biotech Neuren Pharmaceuticals ((NEU)) have surged by more than 50% in three days.

Neuren's treatment for Rett syndrome has become the world's first to receive approval from the US Food and Drug Administration (FDA). Neuren is not widely covered, but three stockbrokers explain the importance of last week's announcement.

The FDA, through Neuren’s North American partner Acadia Pharmaceuticals, has granted approval for the use of the treatment in both adult and paediatric patients over the age of two, and with a fast track designation the treatment is expected to be launched in the North American market by the end of April under the branded name Daybue. The treatment is expected to benefit patients through social communication, fine motor skills and breathing. 

Although Neuren will be first to market with a Rett syndrome treatment, other companies continue to investigate experimental treatments for the syndrome, and Acadia has already estimated a sales peak for the treatment of US$500m.

Neuren is a clinical stage drug development company with a focus on developing treatments for disorders of the central nervous system. The company has been consumed by development of its two lead candidate drugs, trofinetide and NNZ-2591. A licensing agreement has been in place between Neuren and Acadia since 2015, following positive clinical efficacy data from trofinetide trials. 

Neuren now stands to receive a US$40m milestone payment following the first commercial sale of trofinetide in North America. Bell Potter expects the drug will contribute $104m even before royalty payments in 2023. The broker (Buy, target price $13.67) points out the company will be eligible for double digit percentage royalties on trofinetide sales, as well as milestone payments equating to as much as US$350m upon reaching four sales thresholds.

The company’s NNZ-2591 drug has also been confirmed for Phase II clinical trials in three of its four targeted indications, these being Pitt Hopkins, Pheland-McDemott and Angelman syndromes. Bell Potter’s valuation on Neuren, reflects not only potential trofinetide milestone payments and royalties, but also the early opportunity in NNZ-2591. 

Drug pricing exceeds expectations, offers valuation uplift 

Wilsons was surprised by the price modelling of trofinetide as communicated by Acadia, with Neuren's partner assuming an annual cost to patients of US$375,000, based on a US$21.10 per millilitre price.  Wilsons (Overweight, target price $11.24) was surprised by the cost, having expected annual costs closer to US$150,000.

This broker points out the intense cost of care for Rett syndrome patients will be somewhat mitigated by the use of trofinetide. 

Around two thirds of patients look to be eligible for a -21.3% Medicaid discount, but Wilsons highlights a material impact to its estimates regardless. The broker highlights uplift to not only its trofinetide forecasts, but also to its assumptions for NNZ-2591, which it had expected would demand similar pricing.

For Evans and Partners (Speculative Buy, target price $9.40), the approval of trofinetide is testament to considerable time and effort on the part of Neuren, noting patenting of the therapy’s lead molecule dates back to 2002. While this broker notes the approval goes a long way in de-risking the trofinetide opportunity, successful commercial launch and a focus on ensuring access to the drug for Rett patients will be the next step. 

Evans and Partners also explains, post FDA approval, the valuation of Neuren is now subjected to metrics such as what is the uptake of the drug and future discontinuation rates. Such factors will determine what royalties will be received as well as Neuren's ability to claim commercial milestones from its partner.

On Evans and Partners' current forecasts, revenues are projected to grow from $14,5m in FY22, to $108m this financial year (FY23) to $190m by FY25 (with a dip to $92m in between). EBIT is expected to double from $80m this year to $163m by FY25.

A Bigger Opportunity

Neuren has to date retained all commercial rights to NNZ-2591 and Evans and Partners points out any success in clinical development from this asset would unlock a potentially larger commercial opportunity for the company than is trofinetide today. Phase II trial results are expected for later this year and in 2024.

In terms of earnings per share, Evans and Partners has penciled in 51c this year, 52c next year and $1.03 for FY25 (adjusted basis).

Bell Potter's underlying EPS projections see last year's negative -2.9c improve to 71.4c this year, dipping to 55.3c in FY24, and then surging to 87c in FY25.

Anticipating the FDA approval, Wilsons had only recently initiated coverage on the company (March 2). That maiden research report made one crucial statement: the opportunity for NNZ-2591 is at least five times as large as for trofinetide.

This broker is also of the view that approval for trofinetide significantly de-risks NNZ-2591 as both treatments target a relevant signalling pathway integral to brain cell health and development.

On an un-risked basis, Wilsons' calculations and projections suggest the value of Neuren shares can potentially rise to $39.03 per share, assuming everything falls into place in line with forecasts and all market opportunities are fulfilled.

We're a long way off from that scenario, of course.

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