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

Good morning, everyone. I'm Sean Laaman, Head of U.S. MidCap Biotech Equity Research here at Morgan Stanley. Before we commence, to make you aware of some important disclosures, see those disclosures at the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. And if you do have any questions, please reach out and ask all Morgan Stanley sales representative. With that said, we have the pleasure of welcoming from Neurocrine Biosciences, their CEO, Kyle Gano, and from IR Todd Tushla. Welcome, gentlemen and thank you both for your time today.

Thank you.

Maybe just to kick off proceedings before we get into the heart of Neurocrine. Just a question, just a few general questions on the macro side of the equation for biotech. How is the rise of China originated innovation changing, if at all, your competitive outlook? And does it influence your BD and R&D playbook.

It's a great question, very timely at Neurocrine I know industry-wide. My view of China is that they are a competitive force, but at the same time, they represent an important source of innovation. And I think that those views, I think, at a high level, seem to be diametrically approved. But a lot of us, I think, would share that same sentiment. And even on the competitive side of the equation, competition can be a good thing and bring up the best in all countries, parties involved. I've seen that at Neurocrine over the years, in particular when it comes to things that we're developing in competitive spaces or commercially and I'm confident that the United States will do well to compete in this area. But coming back to China, what I've seen over the course of the past decade, a lot of changes in the region. The speed, the quality, the breadth of the science has really improved. And I think that's something that we appreciate the competitive bar has been risen in particular in areas of validated biology. And for us, that really expands the universe of innovation that NEC and in other companies can access. And we have done that in the years -- past couple of years. We have been in China and been successful in bringing in mainly earlier-stage assets. that are not material for the organization at a high level. But we have used some of the work that they've done to help us accelerate some of our interest in research. But how does that change things at Neurocrine they, I'd say fundamentally doesn't change our view on the mix of internal R&D versus business development. It does change in 1 important way and that is the importance of speed and selectivity selectivity, I mean by that, what you choose to invest in. For validated biology, being right about the science is no longer the most important thing. It's really developing a compelling and efficient drug development plan that allows you to be first to market or nearly so and also having that same plan be one that shines a light on all your points of differentiation throughout each point of development. And that's something that you have to keep in mind now as China opens up access to a new source of assets and technologies for companies in the sector. The other thing I would call out that I think we'll see more and more of, perhaps even at Neurocrine is leaning into the Chinese ecosystem to help accelerate development. And this can occur in 1 of 2 ways, either directly through more 0 type of relationship or from what I'm seeing out there company striking collaborations on the same assets and technologies that I just referred to, but allowing their Chinese partner to develop the asset that comes from that cloudoration, say, through the end of Phase and then the company here in the U.S. catches that program as it comes over the ocean and finishes the development plan here in the U.S. and then commercialize it. The benefits, again, speed allows the company to look at that as a multiplier in terms of programs that they can bring into the portfolio per unit of time. It usually comes at a less of a cost, which is a benefit as well, so they can do more with their R&D dollars. And I think it goes back to an earlier remark, it's also a remark. It's also done with very high quality. So for Neurocrine, that doesn't mean we're moving our R&D to China, but it does put China squarely in the global community of what we want to access to make Neurocrine better and faster for drug development.

Great answer. And the next question on AI. So are you implementing AI across your business? And can you give an example where it might have changed the decision, a cost outcome or even...

Yes. No, I think it's another great question for AI and machine learning technologies, it's been something that we've been very deliberate and intentional incorporating to our organizations, actually in our corporate goals now, there's an element of that last year and this year as well. We have brought in over a year ago, I should say, in 2025, open AI, and that's certainly a tool that's used broadly across the organization. Now we also have Anthropic through Claude that we're using across the organization now. So both of those are available for our employees. I would separate productivity gains from claims about AI, suddenly changing or transforming research and development. And I would like to touch on the productivity games piece first, and I'll come back to R&D. But on the productivity gain side of the equation, there's a lot of near-term opportunity I see for Neurocrine. The employees have adopted it in several different ways, but I can see it accelerating some of their workflow. I've seen it being used in areas of the company that interrogate large data sets, they're able to move through that more quickly. There's a lot of redundant tasks that are just very tedious in nature that have been minimized. And just generally, information and knowledge that individual groups might have has been made much more accessible across the organization, that's benefited us as well. So I've seen it in the dismal chemistry, chemical development, chemistry broadly, translational science, clinical development, clinical trial execution. And I would expect that to continue as we look at the next year or so. The challenge, I think, where most of us run into problems is how do you monetize or see if you're making improvements across your organization with the technology. And for us, it's all about outcomes and KPI standards that we can attach to specific problems. And in every organization, there are just repetitive decisions that come up. And for us using AI, can we make those decisions faster when it comes to repetitive tasks or activities, can we get through those more quickly or in a more cost-effective manner. When it comes to clinical trials. Can we enroll our tiers more quickly, trials more quickly with AI tools. Ultimately, what it's going to come down to when we think about an organization in its entirety, can you move through more science without having to proportionally increase the size of your organization. So we often talk about increases in head count or decreases in head count for AI. I think in the near term, the opportunity is can you minimize your growth using AI based on some of the outcomes I just described. So those are the areas that we'll look for improvements and how we'll look to measure them over the next couple of years. I do want to come back to the R&D side of the equation. I think right now, it's still early days. and how we think about improving probabilities of technical success across the R&D portfolio. And the reason for that is the whole idea of machine learning AI is that you need to have data, populate your project in order for it to get reasonable outputs. But if you're working in novel areas of biology, it's very unreasonable to expect what you get from that project or from that programming, if you will, it's going to be helpful in improving your probability of technical success. So that's a more mid- to longer-term view. Right now, I think there's a lot of near-term opportunities for us.

Wonderful. And last question before we dig into the specifics of Neurocrine. But policy variable FDA Medicare negotiations, MFN tariffs or global pricing matters most to your economics? And what have you changed, if anything, because of it?

Well, we just had our first one-on-one here before this meeting, and I can tell you it all goes back to INGREZZA and our Medicare negotiation. So this is our version of the inflation Reduction Act. For INGREZZA, we're exposed in a couple of different ways, to specifically directly, we have our IRA moment where MFP, our maximum fair price is implemented in 2029. But indirectly, we're in a 2 product category and our competitor in the space has their IRA moment 2 years before our own. So there's an unintended consequence, if you will, for MFP and NFP adjacent products that we work through. So I think that's something that is tangible to Neurocrine unique to NEC, and we spend a lot of time talking to you all about that. And it's probably worth maybe another question on how that looks for us. But for me, when I think about policy, I'd like to separate policy on a singular product like INGREZZA and policy and how it might affect our long-term strategy. And at Neurocrine, we're not building the company to predict what comes out of Washington, that's a slippery slope. But we are trying to make the company as strong and as resilient and each and every day and make it better across those 2 metrics. And for us, that means diversifying the source of our growth and the durability of our growth opportunities. So INGREZZA is a great medicine. We've guided a $2.825 billion to $2.875 billion this year. The market continues to grow double digit each year. we have patent life out to 2038, but it's not just the growth opportunity through INGREZZA. We have now cronesity in medicine for congenital geno hyperplasia that's on an annual run rate of $750 million now. So that's another piece of our growth story. And more recently, we acquired iCAD XR, which were about a little more than a year into launch, and we're about a $400 million run rate right now. So lot of growth across our commercial portfolio and when it comes to the of course, messaging the data generation that we've had over time, we've shown good data on quality of life with our validated instrument. We've shown good remission data 60% of patients on INGREZZA are symptom-free. And we've also shown recently bid pet data, which shows target occupancy that's superior to our competitor in the space. All that gets to get pushed through that sales force. And that's a very compelling story for us out there.

Also I've got a couple of INGREZZA pricing questions. So net price ably was expected to decline 4 to 5 this year. Is that still the right framework heading into 2027.

So for us, the headwinds on the 4% to 5% price delta this year really comes from the contracting that we did last year. So the 4% to 5% is relative to last year. This year, our price per script, our revenue per script has been relatively consistent throughout the year, and we expect that to be the case as we think about the remainder of this year. Of course, in 2027, our competitor in this space is going through the first year of where their MFP is implemented. And we do expect some price concessions with the plans, the payers that we're currently on contract with to maintain that same level of access for that will be pretty nominal. But I would also point out that we do have an increase in the statutory rebate that we pay for sales that go through Medicare Part D, in particular, in the catastrophic phase. That phase in the all companies that have the same exemption of us specified small manufacturer exemption. That statutory rebate will go from 2% this year to 5% next year, and that's on the whack.

Sure. Speaking longer term, so you just answered my next 2 pricing questions. But how do you maintain a stable growth on the top and bottom line through 2019 implementation year? And how much does that and to depend on Chinese continuing to outperform.

Well, in terms of INGREZZA, it's worth repeating that we continuously see double-digit volume growth out there each year. market is incredibly robust. We've got about 10% of the 800,000 patients or so under the care of a VMAT2 inhibitor. So there's plenty of room to go in this marketplace still. And even despite the price concessions that we pay next year, 27, '20 are going to be revenue growth years as well as volume growth years for us, of course. So 2029, we do have our IRA moment there. our MFP, our maximum fare prices be implemented. We start those negotiations next year. And recall because we had the small biotech exemption, we know that's going to be within a band of about $25 percent discount off of this non-FMP number. This is the federal average manufacturing price. It's a little bit nuanced on this, but ultimately, it's a number that you're discounting from a 2026 value that comes into our negotiations. We would expect revenue to dip in 2029. So what it means for overall enterprise-wide revenue is going to be a function of how well [indiscernible] XR grows, and certainly happy and glad that we had these 2 medicines in our portfolio because they will be growing over this time frame. We also have the opportunity to potentially see [indiscernible] and directly denepay off over this time frame and be commercial products in that 2029 time frame as well. it probably will offset coming out of the launch necessarily the revenue that we'd want to see for 2 blockbuster medicines like those 2, which we believe they will be. But we have a lot of financial capacity to continue looking externally as well if we need to.

Sure. Thank you. Thank you. Moving on to CRENESSITY, very strong Q2 numbers, more than triple what you did in revenue like a year ago. I think you're now 15%. So 6 quarters in, what do you need to see before we'll be able to get some revenue guidance.

Yes, this comes up now and again an investor one-on-ones. What I would say is, like you said, we're only 6 quarters in. The launch has been great, but we're still learning a lot about the marketplace, learning a lot about the endocrinology community, the patients, where, when and who they seek treatment from. So it took us 4 years before we gave INGREZZA guidance. I expect we're going to end this year with some strong momentum with Cronecity, and that's something we're going to have to revisit ahead of the Q4 call next year. But I understand you probably wanted it.

Yes. We do. We want everything. Still on CRENESSITY, is the next leg of growth like adding prescribers? Or is it deepening the number of patients per prescriber?

Yes, I would say it's a little bit of both as a reference point. there's really 3 sources of where patients seek treatment. There's the centers of excellence. There's about 20 of those. That covers about 15% of the 20,000 or so patients who have classic congenital adrenal hypoplasia there's pediatric endocrinologists, there's about 1,000 of those, and then you have the community-based endocrinologists, which is about 8,000. And 1 of the nice things about the launch that was surprising to us in a good way as we're seeing utilization across all 3 sources of that business. And so as you would expect, the centers of excellence, although we're not fully penetrated there by a long shot, have more prescriptions on a per MD basis. Whereas on the community endocrinology, they may have 1 or 2 patients. And so I think what's going to happen over time as CRENESSITY becomes the standard of care, there's going to be a network effect that's going to help those community endocrinologists who aren't yet treating a patient to treat their 1 or 2 patients and for the folks that are treating to go deeper. So I think the answer is a little bit of both is where growth is going to come from.

Sure. Thank you, Todd. And you also initiated a Phase I in children from 3 months from to 4 years, like commercially meaningful is that youngest cohort.

Yes, it's super meaningful. There's about 1/3 of the patient population is pediatric and we're approved for age 4 and up right now. The Phase II that you referenced is 3 months to 4 years old. And what we know is that with Koneti, we have a chance to interdict and change the trajectory of especially pediatric patients life because you know steroids are bad for the brain, bad for the blood, bad for the bone. We can have an overall impact on changing the course of overall height for these pediatric kids. And so treating earlier has a more profound impact over time. And so we'll get that data sometime in the 2028 time frame.