Neurocrine Biosciences, Inc. (NBIX) Earnings Call Transcript & Summary

Good morning, and welcome to the Morgan Stanley Global Healthcare Conference. I'm Jeff Hung, one of the biotech analysts. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. For this session, we have Neurocrine with CEO, Kevin Gorman; and CFO, Matt Abernethy. Welcome, Kevin and Matt.

Nice to see you.

So for those who may not be familiar with Neurocrine, can you provide a brief introduction?

Sure, Jeff, and thank you for the invitation. Thank you to Morgan Stanley also. Before I start, we're going to be making forward-looking statements. So I'd direct you to our most recent SEC guidelines. So Neurocrine is a neuroscience company. By that, we mean that broadly, neuroscience, we're in neurology, neuroendocrinology neuropsychiatry and we hope to move into neuroimmunology at one point in the future. Currently, we have our drug INGREZZA for tardive dyskinesia, and it's doing quite well. We recently expanded our sales force because of the demand that continues out there. We've only begun to scratch the surface of the tardive dyskinesia population. In addition to that, we have a robust pipeline. We have 13 compounds that are in the clinic right now. 5 of them are in registrational studies, 7 of them are in Phase II proof-of-concept studies and then 1 recently added Phase I study. And we're in a very good capital position right now. So we've -- as you've noticed, I think earlier this year, we brought down some of our convertible debt. We have over $1 billion in the bank, and we are cash flow positive. So with that, let's jump into your questions.

Great. I'm going to ask questions kind of in a backwards order. Normally, I would ask questions related to cash at the end, but my view I'd like to start up with upfront and we'll move to INGREZZA and the other pipeline assets. So you ended, as you mentioned 2Q with about $1.1 billion in cash and investments. What is your latest thinking on capital allocation?

Yes. So the -- it has stayed very consistent over the years. The next best dollar spent is always on INGREZZA. As we note, we raised our guidance just recently for the year from up to $1.35 to $1.4 billion in sales this year. And so that is where we spend the majority of our cash. Second, then in line is R&D. So with that pipeline of 13 products there. And then I would say, third is we're very active in business development, and so that we then invest in business development because no pipeline is large enough. And we just keep wanting to when we can find good quality assets and there's a deal to be done, then we want to be able to do that deal.

Now you're acquiring Diurnal, what kind of commercial presence do they have in the U.K, and what kind of synergistic play might there be with crinecerfont?

Yes, and so we hope - knock on wood - to have that transaction closed in the coming weeks. Diurnal was a small commercial company located in the U.K. They're an endocrinology company. As we've said for quite some time now that the new products in our pipeline, particularly late-stage products that we have like crinecerfont, which is for congenital adrenal hyperplasia that we'll talk about later. Those are worldwide trials, and we hope to then expand with that and some of our other assets into Europe. And so we've been looking for some time then to start that footprint. We've been working mainly through CROs over in Europe with no real feet on the ground from a development standpoint and not yet from a commercial standpoint. And we've known Diurnal for a lot of years, and we know them well and have a tremendous amount of respect for the company and the people that are involved there. So when this opportunity availed itself, it is a great jump start to be able to cement that and start that European presence. As I said, they have real high-quality people that are going to be very, very useful in continuing development and further development beyond the Phase IIIs for CAH. And then it gives us the start of a commercial footprint over there. So whereas we can bring crinecerfont in to satisfy the CAH population and controller disease, diurnal then has some very novel steroids and those patients are always going to need to take steroids. So we looked at it for a number of reasons as being a very good transaction.

And so what is your appetite for doing additional deals? What is the ideal profile of an asset you'd be interested in acquiring? Or is there a particular stage of development?

Yes. So what we look for is we don't look for incremental advances. We look at things that will actually change the standard of care for the patients that we want to serve. Again, we stay focused in neuroscience. But as I just said, neuroscience is actually quite broad for us. So we look for neuroscience assets. We look for those that have great science associated with it, as I said, the ability to really change standard of care. And third, to come with a very good intellectual property. We find those, and those are what we're mainly interested in. As far as stage of the assets, we look across everything from enabling technologies all the way to commercial products. But when you start getting into Phase III and commercial products in our space, that's a pretty small universe that you're looking at there. So we're very active, and we have been in the past 3 to 4 years. So we will continue and we will remain very active.

The only thing I'd add - recently, a lot of people have asked us how much capital can you guys deploy to a business development transaction. And what we've said is we could pull off the transaction in between the $3 billion and $4 billion stage, that's where we're comfortable with based upon our cash position and our access to capital. But it would likely come down to the asset and it'd be a Phase III or something in the commercial stage, which there is a scarcity of assets. So people have asked us, when we've made this comment, are you guys doing something? Are you guys doing something? It's just something as we've matured as a company, and our financial profile has changed, what we could actually execute and pull off has also changed. So it's an exciting time for Neurocrine to execute with what we have, but then also continue to look outside of our 4 walls.

And that was exactly my next question. So great. Let's talk about INGREZZA. 2Q INGREZZA sales came in strong above expectations. And as you said, you raised guidance. But you could be flat to slightly down in 3Q and 4Q and still meet guidance on the low end. So was that out of conservatism? Or what factors could result in INGREZZA sales for the year ending up closer to the $1.35 billion?

Yes. So the -- when you look at still the environment out there, it's really hard to predict what is going to be happening. And so we look at what are the external factors, what are the internal factors that affect INGREZZA and have in the past or could in the future. We don't have a crystal ball. But external factors have things to do with such as COVID, is it going to have a fall resurgence and into winter. Don't know, hope not. The next is that we see that doctors' offices like many businesses are understaffed, and they have a lot of turnover that takes place. And our sales force out there is actually a teaching sales force. They teach the entire office. So they're constantly having to reteach the new people when they come into the office about tardive dyskinesia, about the need for diagnosis and treatment of it. Telemedicine still remains out there to be being utilized to a great degree by the psychiatric community, whereas most physicians have come back into the offices and use telemedicine at a maybe a 5% to 10% of their practice, psychiatrists are still up at about 50% of their practice is telemedicine. And I think we've adapted extremely well to that. But who knows whether that will go up again from there. The intrinsic factors that we look at when we came up with this is that we expanded our sales force because we saw that there is still a great opportunity out there and the need to go deeper and broader with health care providers. We've -- as we said earlier in the year that we've seen good reception to our DTC campaign. And so we've continued to invest in that. And also, I would say that one of the really nice drivers of INGREZZA is that the drug is extremely sticky in a highly noncompliant patient population. Within the psychiatric space, most patients are compliant with their meds, not just their psychiatric meds, but all of the meds that they take at maybe a 50% rate. We have always been much, much higher than that. And INGREZZA continues to have that really nice high compliance. And with a larger sales force, we hope to continue the trajectory of increasing new patient starts as we have been doing. So there's the thought process that went into that guidance.

And Jeff, we have been called conservative before. But when you take a step back and think about where we're going to land for this year, it's growing $300 million year-over-year in the environment that Kevin described with telemedicine still being around 50% within psychiatry. It's just a testament, I think, to the future opportunity that we have as the environment improves and as we have our sales force actually in the field for a longer period of time.

And you talked about different uncertainties that still exist out in the environment. But historically, 2Q is seasonally the strongest quarter. Beyond seasonality, are there any other factors that we should think about for, let's say, 3Q?

So we're not going to give any intra-quarter guidance. So I'll just reiterate what we've said at our end of 2Q call with the Street, that Q3, for reasons even to the state, we're 5.5 years on the market, going on 6 years on the market, we really don't understand why Q3 is one of the softer quarters. Q4 is a better quarter. And as you said, Q2 is generally our strongest quarter. I'd like to say that I understand. I could give you reasons, but they'd all be ones that I don't have great data around. But no, I wouldn't say there's anything different or unique about this Q3 than there is about any of the Q3s that we've gone through over the last 5 years.

Okay. Well, you're filing an sNDA in Huntington's chorea by year-end. And can you talk more about the patient population that would treat?

Yes, sure. So we reported out the data at the end of last year, the top line data with the chorea associated with Huntington's. It was very strong data, a very significant effect on those patients. And the reason why it's taking until later this year is because we have the open-label safety study that we're completing, having the entire safety database put together and then submit to the FDA. There's about 30,000 Huntington's chorea patients in the United States. And 90% of them have chorea, 70% of those is very moderate to severe chorea that would need to be treated. So that gives an approximate addressable population of about 20,000 patients. Surprisingly, only 20% of them are on a VMAT2 inhibitor, which is what INGREZZA is. We're not the first VMAT2 inhibitor to address this market. But only 20% take a VMAT2 inhibitor. And we believe from the work that we've done, the reasons for that are the shortcomings to the existing VMAT2 that are approved in that patient population. There's a high pill burden to all of them. And if you think about Huntington's chorea patients that have moderate and beyond chorea, they have a lot of dysphagia, a lot of problems swallowing. So if you're giving -- requiring them to have anywhere from 4 to 6 to 8 pills a day, that's a big burden on them. In addition, with some of the VMAT2, 1 in particular VMAT2 inhibitor that's there, it's a modified release formulation, and these patients clench their jaws. So the danger is that they would chew down, bite down on that modified release formulation and could get a dangerous drug dump into their system. Those are all the factors that we believe have held back the VMAT2 class in Huntington's chorea, we don't suffer from any of that. It's 1 pill once a day. It's not formulated. So therefore, they -- it doesn't matter if they clench down easy to swallow that we have no complex titrations. You potentially have efficacy from the very first dose that you take, you don't have to go weeks in order to build up to an efficacious dose. So with all of that, we think we have a real -- bring a real true advantage into there, not just on one level, but on multiple levels. And we would see that the majority of our business would come from starting new patients who are naive to the VMAT2 class in Huntington's chorea. And sure, I'm sure that we'll bring over some that have already been on one of the older generations, but that's not where our focus would lie.

Great. Maybe let's shift to CAH. Crinecerfont, as we talked earlier, is in 2 Phase III studies with top line results expected next year. Can you talk about this program and how crinecerfont is differentiated from other assets like tildacerfont?

Yes. So let me step back for a moment. And CAH is an orphan disease. It's CAH stands for congenital adrenal hyperplasia. So what is that? First, I'll talk about how the normal biology works. You have what's called an HPA access, hypothalamic pituitary adrenal axis. And it controls quite a bit of your entire endocrine system - that access. There's different releasing hormones that come out of the hypothalamus. They go down to the pituitary, they cause the release of certain mediators there and then those go down to the adrenals. In the system that I'll be speaking about with HPA, here, we're talking about a CRF, small peptide that's released by the hypothalamus corticotropin releasing factor. [indiscernible] its receptor, the CRF receptor on the pituitary causes ACTH release, amongst other things. And the ACTH goes down to the adrenals and causes the release of all the sacsteroids, mineralocorticoids and the glucocorticoids that it causes release, particularly cortisol. It's a self-regulating system. Like much of the endocrine system is, once cortisol has been released, one of its functions other than keeping you alive through many different aspects of metabolism. It goes back up to the hypothalamus and decreases the amount of CRF that's released. So that's how you get this diurnal effect, if you will, of cortisol release. In CAH patients, they are born with the inability because of a genetic modification that makes them unable to make cortisol. So prior to the 1960s, these babies died because without cortisol, you can't live. But in the 1960s, hydrocortisone was introduced, mainly for inflammation, but the endocrinologists picked up on it real quickly and said, this can replace the cortisol that is now missing from these kids when they're born. And so they give them that and now they can live. If I could step back for a second. When you don't make cortisol then all the precursors are shunted into making massive amounts of the sex steroids. So you get this huge accumulation of all the androgens in the body, extremely unhealthy, multiple deleterious effects from that, and some of them are life limiting. So here comes hydrocortisone. Hydrocortisone at physiological levels when given at physiological levels can't do that feedback back up to the hypothalamus to gain control of CRF to then bring the HPA access into control. You have to give very high doses of hydrocortisone every single day in order to bring down that androgen accumulation. Hydrocortisone has a number of very serious problems when giving it at very high levels for long periods of time. So what does crinecerfont do? Crinecerfont is a small molecule, orally active compound and it blocks that receptor on the pituitary, the CRF receptor. So now that signalling that takes place in the HP axis, you can actually bring it down. And we've shown that in Phase II, and we've shown what we're able to do is recapture the HPA axis with crinecerfont, a CRF1 antagonist. And so we bring down all those endogenous androgens. That's great. It follows now that if you've brought down the androgens because you've captured the underlying disease. Well, then the exogenous hydrocortisone, you still need to take it every day. They still don't make cortisol, but you could bring that down, you could lower that potentially just the physiological levels because you don't need that now to try to recapture the HPA access. So that's what we're exploring in the Phase III trials, both in children and in adults, is to recapitulate what we've already shown that crinecerfont can bring down the androgens. And then now you can lower the hydrocortisone that they need to take each day in order to take care of both sides of their problem, the underlying disease and the huge amount of androgens and also the large amount of hydrocortisone that they have to take each day, bring that down. So there's the goals of the program. And the Phase IIIs will have top line data that we'll release next year.

And the Phase III though, if I remember correctly, they have different primary endpoints, right?

Yes. So we prioritized in both of the Phase IIIs, we are measuring end points have to do with the androgen levels and with the glucocorticoid levels. In the pediatric population, we prioritize the androgen levels because of growth and development and capturing control of those is very important. Yes, glucocorticoids are still important, so that's a key secondary endpoint. In the adults, it's switched. So they're adults now, the effects on their bone health and growth and development has already happened with the large androgens. So there, what we're prioritizing as the primary endpoint is lowering glucocorticoids. Secondary though, is still recapturing their HPA access and lowering their androgen levels.

And so for those 2 populations, what do you need to see in each to be clinically meaningful?

Well, so in our Phase IIs, we showed that in the vast majority of patients, more than -- I'm trying to remember it exactly right now, more than 75% of the patients, we had greater than a 50% reduction in their androgen levels. So we want to be able to show that in the larger Phase III studies. And then when it comes to glucocorticoids, we want to see a reduction in glucocorticoids, not to what level, working with basically all of the experts in CAH throughout the world and then also talking to experts in lupus, rheumatoid arthritis, where glucocorticoid, exogenous glucocorticoids are routinely used any decrease, they say, is going to be a game changer. That's important. So I'm not ready to say what is the level that we need to see or want to see. I think that what we need to see is a reduction.

Okay. Great. Well, you entered into a strategic collaboration with Sosei at the end of last year. Can you discuss where you are with your muscarinic franchise?

Yes. So it was very nice. We've been having an internal effort on the muscarinic system. I would say all of the muscarinics we've been working on for several years, both antagonist and agonists that we've been working on. And so we've kept track of all the different groups throughout the world that have also been working on that. And Sosei Heptares was certainly one of those, and they had a big effort, and they had a lot of traction with what they were doing. So we pulled the trigger on doing a deal with them for multiple compounds, the lead of which is an M4 orthostatic agonist, which means it's a pure agonist. It doesn't need the natural ligand in there in order for it to agonize. It agonizes all on its own. And so that one, we've entered into a Phase II study, a pretty large Phase II study. We're just beginning enrollment. So we'll give more information on when that would read out once we get our legs underneath us and see the enrollment curve and then we'll give more information on that. But it's a validated target in schizophrenia. So we're really looking forward to this program. Now -- in addition, it didn't just come with that one M4 compound. They have backups that we work together on. They also have mixed agonists, M1 M4, which can be interesting. So we're developing all those. They're in a preclinical phase right now, but we hope to bring one or more of those into the clinic at some point in the very near future.

Okay. Let's move to A27104, which is in Phase II for EECSWS. Maybe if you can talk about that study, what do you need to see to consider a success? And when you report top line data later this year, what should we expect to see? Will we get more than AP value?

Yes. So CSWS is a very rare pediatric epilepsy. It may be about 5,000 to 7,000 kids usually onset is between 2 and 12 years old. It's a very high number of seizures each day. And as we know from this one and many epilepsies, the compounding effect of seizures takes place in an neurodegenerative fashion. 104 is highly specific to calcium voltage channel. It hits 3.1, 3.2 and 3.3. Doesn't appear to hit any other channels or receptors that we've studied at this point and we've looked at a broad array. And we have it in the Phase II proof of concept to see can we have an impact on this disease. What level is calcium voltage channel involved in this disease. And so the way that we're studying this is that it's through looking at the number of seizures that take place in a 1-hour time frame while the kids are asleep. And so we compare that from study start to then study end and get a percentage. So it is powered to show an effect here, and we hope to see that we can have an effect on the seizure frequency. So by measuring it second by second, in an hour, you can imagine the number of seizures these kids are undergoing all evening long.

Great. Well, maybe in the last couple of minutes, you have multiple data readouts over the next 12 months. Which of the programs with readouts between now and the end of 2023 are you most excited about and why?

Well, I think that there are a number of them. I would say CAH, you might have inferred from my previous comments. We're really looking forward to that. It will internationalize Neurocrine. We have a lot of good Phase II data on that. We have a very nice well-behaved molecule there. And importantly, it's a molecule, we were founded on 31 years ago. The company was founded on developing for the first time, small orally active compounds that inhibit the CRFR1 receptor. Neurocrine was the first company to be able to do that. We've put multiples of them in the clinic over the years, first, looking at centrally active CRF antagonists, because it was thought for a long time that this would be the next great antidepressant anxiolytic. That's why many of the major pharmaceuticals jumped into it many, many years ago. We all proved that as far as what we could do from inclusion exclusion criteria, we couldn't show an effect in that. But we went back to first principles. CRF is an endocrine releasing factor. So that's when we walked into CAH with it. We have thousands of CRF antagonists -- and we chose from there one that does not cross the blood-brain barrier. It does not need to act centrally because we're going to be giving it to babies, all the way up to adulthood, why would you want to introduce that into the mix because it acts outside the blood-barrier [indiscernible] the pituitary. Very excited about that data. I would say that we talked about the M4 compounds. That's a really interesting mechanism to be in right now because it has been proven that this M4 system, you can -- by agonizing it, you can have a significant effect in schizophrenia and probably other psychiatric diseases. We have a number of compounds. We have another pediatric epilepsy compound, another rare pediatric epilepsy SCN8A that there were using a highly specific sodium channel blocker, blocks just 1.6. That was a purpose-built compound to just the substitution that exists in that sodium channel. So you don't get more precision medicine than you get there. And so I'm very much looking forward to seeing the effects of that precision medicine.

But from a data perspective, with that same molecule, we're expecting the focal onset seizure data next year, which is a large population that I think everybody is familiar with based upon the progress others have made. But that's something we're definitely looking forward to as well as Kevin said, the CAH will have data, the M4 and the SCN8A program. Those are the other priorities that we're enrolling, and we'll give updates in terms of timing when we get through this year.

And with more than a dozen compounds in the clinic, we can't answer that question completely in the 2 minutes that we have left.

Great. Well, it looks like we'll have to leave it there. Thanks so much for your time.

Thank you.