Neuren Pharmaceuticals (NEU.AX) - my valuation says over 150% upside

Neuren Pharmaceuticals (NEU.AX) is a small Australian/NZ bio-pharmaceutical company with excellent upside potential.

Below is my valuation model with assumptions –

 

Up-coming catalysts:

·       Results expected for 3 x Phase2 clinical trials.

o   Fragile X Syndrome – December 2015

o   Traumatic Brain Injury (moderate to severe) – Q1 2016

o   Traumatic Brain Injury (mild - concussion) – Q1 2016

From 30th July 2015 -

NEU’s lead drug candidate is called Trofinetide - an analog of a molecule which is derived from IGF-1 and occurs naturally in the brain. According to NEU, IFG-1 in the brain is critical both for normal development and for responding to injury and disease. This drug candidate aims to treat patients with neurodevelopmental and neurodegenerative disorders as well as patients with brain injuries.

Trofinetide is in clinical testing for 4 separate disorders all at Phase2. They are Rett Syndrome, Fragile X Syndrome (FXS), Traumatic Brain Injury (TBI) - moderate to severe, and TBI – mild or concussion.

Currently there are no FDA approved drugs to treat these conditions. Some drugs that are approved for other indications are used to treat selected symptoms, but they are only modestly effective and none are disease-modifying. NEU will receive favorable FDA treatment because their drug is thought to be disease modifying for patients without other effective treatment options. NEU have already received Orphan Drug and Fast Track designations for Rett Syndrome and FXS. TBI (concussion) has also been given Fast Track designation. However the FDA denied a Breakthrough Therapy Designation for Rett Syndrome.

NEU presented positive Phase2 results for Rett Syndrome in late 2014. Trofinetide showed clinical benefit with excellent safety and tolerability attributes. At the higher dose of 70mg/kg, their drug showed significant clinical effectiveness compared to a placebo.

NEU believes their Phase2 trial also showed their drug’s effectiveness may be improved upon by increasing its dosage level and lengthening the treatment duration.

Just announced, NEU has agreed with the FDA to conduct a new small tolerability clinical trial in children and adolescents to test higher doses of Trofinetide in a younger population and to confirm dose levels for their up-coming Phase3 trial. This new small trial will de-risk Trofinetide in Rett Syndrome but unfortunately it will add time and cost money.

The positive Phase2 results of Trofinetide in Rett Syndrome bode well for its chances of success in FXS. These two diseases are similar in that they are both caused by a mutation of the X chromosome. FXS Phase2 results are expected in December 2015.

FXS is the more lucrative indication. Its potential patient population in the US and EU is around 160,000. Rett Syndrome has a smaller patient population of around 33,000. Should NEU get positive Phase2 results for FXS its share price could instantly double. Results are expected this December.

Other important catalysts for NEU this Q4 are expected results for their two TBI Phase2 trials. Positive results for these indications would be transformational for this small company.

I have not placed a value on NEU’s two TBI indications. It is too early to make a call about their efficiency. These TBI indications are very lucrative should NEU's drug prove to be effective here. The global TBI market is estimated at more than $4 billion.

I think Trofinetide will be priced around $15-$20k per year which would place it at the high end of the price range for single molecular drugs. But given their targeted indications do not have FDA approved treatments they should be justified charging the high premiums. NEU say on their website, they estimate current direct costs for medical services of Rett patients at more than $20k per year. Which leads me to think they intend pricing their drug near the $20k per year mark. For my valuation model I have used a lower price of $15k per year.

NEU’s share price fell sharply and suddenly in March this year on bad news. The FDA denied Trofinetide Breakthrough Therapy designation for Rett Syndrome. The FDA did not consider Trofinetide showed strong enough efficiency to grant the lucrative designation (NEU's efficiency was measured at p=0.023). NEU’s share price was trading near $AU0.18 before the fall now NEU is trading at much lower levels near $AU0.09. I consider the 50% price fall a market over-reaction. 

NEU has cash reserves of $17.7 million as of 30^th June 2015. This reserve should be enough to allow them to complete their on-going Phase2 trials. However they will require additional funds to progress their drug's development to Phase3. I suspect NEU will do a capital raising in December this year following their FXS Phase2 results. They may not need to take this action should they be successful in finding a partner to fund their Phase3 trials.

NEU’s drug candidate is showing promise in treating serious neuro disorders, an unmet need that affects people and their careers around the world. The market looks to have heavily under-valued this company. With important catalysts due later this year I expect NEU's valuation to increase to a fairer value around $0.22.

Disclosure – NEU.AX is a very small AU biopharma company that carries substantial risk. While its potential returns may be high its losses may also be high.
I am long NEU.AX.
I do not short stocks.