Dr Boreham’s Crucible: Neuren Pharmaceuticals

Small Caps | Mar 11 2024

Tim Boreham reports Neuren Pharmaceuticals has suffered from accusations from an activist shorter who others have debunked.

By Tim Boreham

ASX Code: ((NEU))

Share price: $20.16

Shares on issue: 127,234,676

Market cap: $2.56 billion

Chief executive officer: Jon Pilcher

Board: Patrick Davies (chair), Mr Pilcher, Dr Trevor Scott, Dianne Angus, Dr Jenny Harry, Joe Basile

Financials (year to December 31, 2023): revenue $231.92m (previously $14.5m), net profit $157.08m (previously $184,000), earnings per share $1.236 (previously 0.001c), cash balance $247m (previously $43.2m)

December quarter 2023: receipts $10.11m, net cash inflows $4.776m, cash on hand $228.54m, quarters of available funding: lots

Major identifiable shareholders: Milford Asset Management 5.08%, Cameron Richard Pty Ltd 3.3%, Stuart Andrew Pty Ltd 1.95%, Essex Castle 1.89%

A year since Neuren and its US partner Acadia Pharmaceuticals gained US Food & Drug Administration (FDA) approval for their rare neurodegenerative disease drug Daybue (trofinetide), the companies have been reaping the financial rewards in dramatic style.

Last week Neuren reported a $157m profit for calendar 2023, compared with a $183,000 surplus previously. Corporate accounts usually describe such increments as ‘large’, but the company calls it out as an 85,270% increase – to be precise.

The profit derives from milestone and royalty payments from Acadia, which is selling the drug in North America and has the rights to distribute elsewhere. Daybue treats the paediatric ailment Rett syndrome, for which there is no other treatment.

Given the company is also swimming in cash, one would think that management would be afforded a ticker-tape parade.

Instead, Neuren shares had their worst fall in 12 months, partly the result of a research report from activist New York short seller Culper Research alleging Daybue had been a “complete flop”.

Neuren chief Jon Pilcher declined to comment on the report, which is aimed at Acadia and does not mention Neuren. But he couldn’t resist describing the missive as having “zero credibility”.

He adds: “there’s an atmosphere of people looking for negatives rather than taking a great story at face value.”

An overnight 20-year success story

A rare story of an Australian company getting a drug to market, Neuren (and Acadia) worked on Daybue for more than two decades.

Trofinetide was invented 20 years ago at Auckland University, in a program spearheaded by eminent chemist Prof Margaret Brimble.

A Nasdaq-listed neurological diseases specialist, Acadia acquired the North American rights in August 2018 as well as the responsibility for a phase III trial and securing FDA approval.

In March 2023 the FDA approved trofinetide for the treatment of Rett syndrome in adults and children aged two or more. In April, Acadia started selling the drug.

Acadia assumed the global rights in mid July 2023, triggering a $US100m upfront payment, as well as potential milestones of up to $US427m plus royalties.

Neuren’s chief financial officer since 2003, Mr Pilcher succeeded Dr Richard Treagus who stepped down in 2020 after seven years in the top job.

About Daybue

Affecting only girls – not the sort of affirmative action we want - Rett syndrome is caused by a genetic mutation that results in inadequate signalling between brain cells.

Rett syndrome is marked by problems including difficulties in talking, breathing, eating and sleeping.

Often the girls appear to be normal until about 18 months, but then they stop meeting developmental milestones.

There are about 15,000 sufferers in Europe and 28,000 in China.

In the US there are approximately 5,000 diagnosed patients, out of an estimated 6,000 to 9,000 in toto.

Based on naturally-occurring molecules in the brain, Daybue reduces inflammation associated with excessive inflammatory cytokines and normalizes abnormally low levels of the insulin growth factor hormone IGF-1.

Because Daybue targets the underlying problems but does not fix them, patients need to continue taking the drug over their lives.

Acadia’s FDA application was supported by the results from a 187-patient phase III trial, called Lavender.

Lavender replicated the results of an earlier phase II trial called Lilac and came up roses.

To date, 860 patients have been treated in the US.

Mr Pilcher says 80% of the patient population is covered by Medicaid or private reimbursement.

Finances and performance

Given Acadia bears the cost of selling Daybue, Neuren’s accounts are a simple case of the revenue from Acadia going straight to the bottom line.

Neuren reported revenue of $232m, 1500% higher than previously, generating the $157m net profit after the taxman took a $48.1m cut.

The revenue consisted of $27m of royalties, $59.4m of sales milestone payments and a $146m upfront payment for the global rights.

The royalties reflected Acadia’s fourth quarter Daybue revenue of $US87.1m, at the top end of the guided $US80-85.7m.

Neuren’s cash balance ballooned to $247m, from $43.2m previously.

Did someone mention dividends? Mr Pilcher says there’s no point paying them until the company pays more tax and accrues franking credits.  

Neuren shares fell -14% in reaction to the Culper report, but they are now only -8% lower.

The shares have tripled over the last year but after are adrift of their record high of $25.11 struck on December 28,  2023.

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