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

Good afternoon, everyone. Day 1, Jefferies Healthcare Conference. As I was mentioning, I think this room is a lot colder, which I enjoy. I have been dying in some of these meetings, but it also means that there's a lot of people attending, and that's always great to see. I have the pleasure of hosting the Neurocrine management team. Joining us is Kevin Gorman, CEO; Matt Abernethy, CFO. Kyle Gano, Head of BD and Strategy; and then Eric Benevich, CCO. So we've got the entire gamut here. It's quite exciting.

I will start off with maybe just some opening questions because I know we're running a little behind. So I want to give you guys some credit. I saw Teva settle on INGREZZA and I'm like, they have AUSTEDO, they have a reason to settle. Then Lupin settles. Now everyone has seemingly settled for your multibillion-dollar drug, INGREZZA, and you seemingly have patent life out to 2038. Really, really well done. The market has not necessarily given you credit. And I think part of that might be, there's just this question of like, okay, so how do we think about products that get impacted by the IRA and what does that do for pricing potential? And I don't know if that's necessarily fair, right? So I'd love to start off with, a, in terms of the IP settlement, how important is that for you? What does that open up strategically now that your lead product actually is projected out for well over a decade? And then number two, as you think about IRA impacted products, but you still have patent life, should The Street think that price is going to continue to go down every single year? Or are we going to get to some run rate stability where you guys can feel comfortable forecasting on a go-forward basis?

That's a simple and easy question.

Simple and easy question.

So first off, thank you very much for the opportunity to be here. And we will be making forward-looking statements, so I direct you to our recent SEC filings. It's very important for us to have been able to resolve the ANDA litigation. I think we did it in a very timely fashion, and it worked out really well for us that we do have patent protection out to or exclusivity, I should say, out to March of 2038. So approximately 14 more years that we have patent protection on our lead asset here, INGREZZA. We could spend the entire time here talking about IRA and then you guys -- you would all glaze over with that. I'm going to start off by saying the same thing I said the day that the IRA was passed, and I said that it is not going to remain the way that it is. It's not going to change for at least 2 years after it was passed. That's probably the soonest one could ever start seeing any changes to IRA, more probably like 2.5 years, if you use precedents for exceptionally large legislation like that. So I still believe that nothing has changed to date. IRA looks exactly the same as it did a bit over a year ago. So let's just take it as it sits today, what IRA looks like. Neurocrine, best guess that we have looking at how they're rolling it out, Neurocrine would be listed for negotiation in 2027. We'd be negotiated between 2027 and 2029. 2029, the negotiated price would then be set, and it would roll in between incrementally over 2029 to 2031, okay? So that's how the price part works. The key feature here is the least amount that they can reduce, how far can they take our price down from whatever it is in 2027. That's going to be the reference price of which the negotiations start is 25%. So the legislation says that they can take you down 25% from that price. They can't take you down any more than 34%. So you have a maximum deduction. I'm talking about for those companies that have the small biotech exception. That's 1 thing. There's a second part to IRA. That second part is the redesign of Part D. And I know for a lot of my European colleagues, this is all completely gibberish. So I apologize. And that is on where we will -- we believe we qualify for the small manufacturers' exemption. So that will be staged in for us from 2025 to 2031 also. And that's where no longer do we fill up the donut hole, but we will then be picking up in the catastrophic phase of Medicare coverage up to 20% of that. Again, many years starts out low, 1%, 2%, 1% for the first year, 2% for the second grows like that. That -- in the first couple of years, that's actually a tailwind. We will be paying less into Medicare Part D than what we currently pay for it today. Once you are negotiated, wherever you are in that going up to 20%, that goes away. You no longer pay into Part D because you're at negotiated price at that point in time. So when you start looking at that and seeing how all that works out, there are people who immediately came to the conclusion, "Oh my God, when you are negotiated, don't negotiate you -- like you're a generic. You're just going to be a generic drug, right?" Not even close. I mean not even close. We're going to have a much greater number of patients that will be on our drug between now and 2029 when the negotiated drug goes in place. We take very careful, cautious, no more than inflation price increases when we take them. So we will have a higher price that will be negotiated off of in 2027. And so it is not good for our industry, for the patients in the United States, most of the things are not going to be good in the long term for the -- from IRA. But it is not as draconian or devastating as I think many people have thought of in the past. So I'm -- that's wonky enough.

No, that's incredibly helpful. And actually, you said something there that I just wanted to press on a bit. There is this view that the IRA, it's like first amendment challenges, like you got your takings clause, you got your first freedom of speech and like either it's going to get killed or it's not. And that's not what we're seeing in terms of some of the legal challenges, right? Like AstraZeneca is talking about bona fide marketing. There's this question about excessive fines, right? And to me, when I look at the industry, a, it's really a play on the Supreme Court to your point. But number two, it's even at this idea, we just want a negotiation, right? Like even if it's a real negotiation, we would be okay with that. And I think part of that is the excessive fines component, right, where if you look at the CBO bill, they literally modeled no one opting out because they said it would literally destroy every single company. So when you talk, you mention things that could change from an IRA outside of, like, let's say, a constitutional challenge and the entire bill getting killed. What are some other modifications do you think that maybe investors aren't paying enough attention to right now?

Well, I mean there are certain things that right off the bat don't seem to make sense and I'll just pick one. It's the difference between small molecules and biologics. So you can't be negotiated earlier than 9 years. If you're a small molecule, you can't be negotiated earlier than 13 years on the market as a biologic. If I were to ask any of you in whatever country you're from, what is one of the greatest healthcare crisis that is going on, you would say mental health. If I were to ask you what's #2, you would probably say substance abuse. Both of those are only treated with small molecules and none of us are smart enough to see a way that there will ever be -- in the next 10 years, will there be a target to treat mental health or substance abuse, that's a biologic. Why would you handicap the development of those important medicines that are some of the big -- treating some disorders diseases that are the biggest scourge that we have today? And I could go on and on. The other 1 is what we normally see when you have an orphan drug approval is that's usually only your first orphan approval with that drug. You then go on and you invest hundreds of millions of dollars to get a second and the third orphan population involved there. There's a disincentive to ever do that because the clock starts on your losing your exclusivity right from that first approval. So why would you go off and then try to do that. And even sometimes people get an orphan approval to get proof-of-concept foot in the door, then they go after maybe larger indications. You would never do that. Your exclusivity clock starts at that first indication. There's a couple of things that you can say. There's also a massive amount of gray area where there is no guidance on what happens within this legislation. So massive legislation affecting one of the largest industries that we have in the world. And who's going to make those determinations? Well, then that's unelected officials, bureaucrats that are going to do that, that will be holding to no one. Those are real serious problems with the legislation. There are -- mind you, there are good things in the IRA. There are things that biotech and pharma have fought for, for years, and they wanted to protect elderly patients. They wanted to have protections for the out-of-pocket costs. That has been capped at $2,000. That's two big thumbs up. That was great that they did that. The legislation maybe took away some of the protections but left most intact that we care about as our most vulnerable is the elderly who are poor, and they are still protected within the legislation. So that is good. So there are some good things, but clearly, on balance, the word innovation is thrown about a lot. I would say for life-changing medications, there will be fewer of them if it stays in place the way that it is.

Understood. That's really, really interesting. Now I do want to maybe kind of step back. You saw Jazz talk about -- like there was a headline that Jazz is looking at alternative options. Obviously, they're not commenting on these type of rumors. But there is this kind of question of consolidation in CNS companies and leveraging OpEx that's been built out and getting kind of plug-and-play assets there, right? And it seems like you guys are very well positioned to do that with some of the footprint and the success you've had with INGREZZA and now crinecerfont. Now that you also have IP for your lead asset for, as you mentioned, 14 years, how does that change, a, what you guys are willing to do from a BD perspective? You guys have talked about kind of a $3 billion to $4 billion potential deal, but not like -- but at the same time, I look at your company, you guys are going to generate $10 billion in EBITDA over the next decade. I mean you could do far more than that.

Yes. So you're absolutely right. It's the smart question.

It's a nice problem for us to have.

Yes. Let's go on to the question.

Sure. So I guess, well, Kevin, the question is really, well, why put out that kind of $3 billion to $4 billion in terms of a range? And why not look more aggressively in terms of consolidating in the space?

So what I'm going to start out with first is not going to directly answer to your question because he's going to answer it here. What I'm first going to say is we have -- not so long ago, just a couple of years ago, we had fabulous Phase III data in Huntington's disease with INGREZZA. Very shortly thereafter, that led to an approval for Huntington's disease. So now Eric and his team are both -- are marketing INGREZZA both for tardive dyskinesia and the chorea associated with Huntington's. So -- and as you said, that's a -- that is a very important drug, and it's selling well. We just came out in the last 3 months, just in the last quarter, 2 Phase III trials in congenital adrenal hyperplasia in orphan disease that we had high hopes and expectations, far exceeded it. I mean we knew we had a great drug there. We didn't realize how great a drug we had because no one has developed a drug for CAH since glucocorticoids in 1964 when they were approved. This will change how these patients are treated, and it is a disease that suffer from birth all throughout your life. So we have just some fabulous drugs here. And that is going to be a great one for, again, knock on wood, we're going to be filing the NDAs next year. NDAs meaning one for pediatric and one for adults. And we did a worldwide development program. So we're going to be filing here in Europe, and we're going to be marketing it ourselves, both in the U.S. and Europe. And we have a wonderful pipeline that's going to grow every year. You're going to see several compounds from our own internal research efforts, both more small molecules, large molecules, gene therapies that are going to be coming out of Neurocrine. So you're going to see all that. So we have a great internal engine, but that is not to say that BD will still remain a high priority.

Yes. I think I'll just add a little bit to that. We work with great urgency within our team, and we cover the universe across our therapeutic areas, which neurology, neuropsychiatry, neuro-endocrinology are the ones that we focus on. I think that building off what Kevin said, what we really see over the next near to midterm are growth opportunities, revenue legs of the company being in crinecerfont and CAH and then looking at all the investments we're making now in the muscarinics as a validated target, that's something that could be a new product for us by the end of the decade. So you can see an evolution of new products coming to market. We spent the past couple of years working with our new CSO, Jude Onyia, to help him accelerate some of the programs and interest from his team, and you're going to start seeing that paying off here this year, in the next year, and that would only accumulate over time. So as we see the future then, a lot of the programs that will fill the pipeline would be coming internal. And business development, while we work with great urgency, we don't feel like there is a great need to do something right now. We look for the right deal to make sense. We have the opportunity to do a license or something that's more on the acquisition at a fairly significant scale, but it really has to be the right deal for us and has to fit into what we're doing here as a company. So I think I would probably stop there and see if there's anything else.

But I'm not just going to disagree with your thesis. There's a lot of companies out there. And actually, many of them were well capitalized. There is a lot of money. Three years ago, 4 years ago when many of these companies were formed, science, obviously, most of the time doesn't work. So many of those companies are struggling, it doesn't necessarily mean they're out of cash, but a lot of them are trading less than their cash value. That seems to be a shampoo, rinse, repeat in our industry. That happens. We see that cycle over and over again. We also see that the discussion, it would really make sense if there were more of a consolidation. Why doesn't the big oncology companies roll up the smaller or call it, why doesn't the big neuroscience companies and Biogen should have owned the world by now by that logic. It's -- but it rarely happens. You don't see those -- that whole roll-up thing happen. And there's a lot of reasons for that. One of which I would say that investors do a real good job. Those companies that are public are valued where they are because you do a real good job. The companies that you really like, they're doing well. The companies that you don't like, they're not doing real well. We like the same ones you like. So it's not like there are abundant deals out there where you missed it, all right? Those don't come along that often. You do a good job of figuring out where you're going to put your money.

So just to comment on the financial front. I think we had mentioned a few years ago, I did, $3 billion to $4 billion type of range. I would say that I would describe our capacity as very flexible. We can go up or down from there. I mean, we are generating a significant amount of cash, as you mentioned earlier. But as Kevin said and Kyle said, we're going to be patient.

Understood. Makes sense. Okay. So going on crinecerfont, which Kevin, you're absolutely right, the data in both populations is very impressive. If we back out the p values, I'm waiting for the full [indiscernible]. But I think the question I get most often from investors is like, okay, pediatric seems like there's the highest unmet need. It's a smaller population, but maybe there's a bigger ramp up. And then at the same time, you have very impressive data in adults where I think we're backing out like 30% reduction in steroid doses, and then you're getting a lot of these patients much more importantly to that kind of responder end point where they're getting more normalized levels of steroid use on a background. Now that you have both data sets, right, how do you think about the size of the pediatric population versus the adult population? And if you were to think about the cadence of uptake, right, it's more of a '25 launch, but the cadence of uptake in both of those populations, which one could we perhaps get a bolus out of the gate in terms of demand?

I'll answer your question. I'm going to take 1 quick step back for those of you who aren't as familiar with what we're talking about here. So congenital adrenal hyperplasia, which is CAH, it is a situation where the child is born with a genetic lesion such that it cannot make hydrocortisone or cortisol, I should say, cannot make cortisol. In the pathway, then if you can't make cortisol, you're shunted down those precursors that would have gone on to cortisol, would have gone on to the sex steroids, particularly androgens. Now it all goes dumping into the androgens. In addition, the feedback loop that cortisol would have to tampon down the accelerated to keep making -- try to make more cortisol. That -- there's no break on that any longer. So it's one, can't make cortisol, all of those babies died until about 1964 when hydrocortisone was invented. For inflammation, mainly, it was immediately used by the endocrinologists to give these children that -- so that they would live. You give replacement doses, so that they would have a synthetic cortisol, like we have in this room. That's great. You live, but you have a problem. You have done nothing to this massive shunting into making huge amounts of the androgens. Because hydrocortisone isn't nearly as effective as natural cortisol to go back up to the hypothalamus and at the pituitary and tone the system down. So now you have to give massive doses of the hydrocortisone in order to do that. Endocrinologists, for the last 60 years, have had 2 really bad choices on their hands. Mind you, we're talking about from birth, your entire life. They have a teeter totter here and they constantly shift between it. I'll let the androgens fly out of control, so I don't have to give such high doses of hydrocortisone. Androgens, high levels of antigens cause all sorts of problems, especially for kids because it leads to rapid bone maturation, shorten stature and all of the problems that -- and then later in life, they're suffering from bone loss and being osteopenic and osteoporotic at 30 years old. They also have testicular tumors because of having it. Well, then what they try to do is they try to, at times, okay, they're not tolerating these high levels of androgens, now I'm going to hit them with, from months at a time or years with high levels of cortisol, hydrocortisone. Now they have all the problems with that. As anyone in this room knows, when your doctor puts you on a -- usually, it's like an 8-day course and they want you to hell off of steroids because of all the metabolic problems. Again, all the bone problems, cardiovascular problems that come with that. Eye problems that come with that. They are just in this hormone seesaw throughout a patient's life, very difficult to try to deal with. What does our drug do? Our drug takes care of that basic aspect of the system. We bring the androgens down to normal levels. You no longer need the hydrocortisone or prednisone, whatever the synthetic glucocorticoid is being used. You no longer have to give it in high, high doses. You can bring it down to that normal level, replacement level, and you fundamentally now change the entire course of the disease. No more excessive androgens, no more excessive glucocorticoids. The data that we reported out only gives a glimpse of how good it is, and that was outstanding. It is even better than that. Now you ask, where is it most important? Where is the low-hanging fruit? Pediatrics, you're right. It's about 1/3 of the population. Parents want this disease arrested as early in their child's life, cease the damage as early as you can. So there's the first that you would go into. Second, when you're talking about an adult population, who is harmed more by having high, high levels of testosterone that is really obvious. Well, it's women. It affects fertility. It affects appearance, with hair growth, but the mistake is saying, men, adult men are not going to take this up, not as rapidly as the first 2, but gives them the same benefit because amongst all of them, the problem with high levels of androgens and/or high levels of glucocorticoids is the same. The metabolic disease, the cardiovascular disease, everything else, the bone disease that they go through is exactly the same. So it actually is important for all 3 groups, if you will, uptake, I would say, is first in peds, second in women, third in males.

That is an awesome answer. I know we're out of time. Thank you so much. This is a great discussion. I really appreciate it.

Thank you.

Thanks.