ASX-listed biotech Neuren awaiting lucrative FDA approval

In December last year the share price of ASX-listed biotechnology company Neuren Pharmaceuticals (ASX: NEU), rocketed from about $1.80 to $4.00 on the announcement that the treatment to address Rett Syndrome, Trofinetide, had successfully completed a phase 3 trial.

With a market capitalisation over $460 million Neuren is now the sixth-largest biotech company on the ASX. Globally biotech companies have been hit hard over the last year with the Nasdaq Biotechnology index down 30% from its highs last August, but Neuren's share price has largely held steady.

Neuren is developing therapies for neurodevelopmental disorders. They have two drugs in the pipeline. The most advanced is Trofinotide which looks to address Rett Syndrome and Fragile X, two developmental disorders that both stem from a mutation in the X Chromosome.

The second compound, known as NNZ-2591, is for the treatment of Phelan-McDermid, Angelman, Pitt Hopkins and Prader Willi syndromes. At present, there are no approved treatments available for any of these conditions.

Following the successful phase 3 trial, the next milestone for Neuren is to achieve US Food and Drug Administration (FDA) approval for Trofinetide for Rett Syndrome. The plan is to file a New Drug Application within the next few months with the hope of a response in the first quarter of 2023.

Historical studies have shown that drugs for neurological disorders are approved about 83% of the time. If approved, Neuren will be one of only a handful of ASX-listed companies with an FDA approved pharmaceutical product.

Approval would trigger the transition from a clinical development company to a company generating substantial revenues and cash flows. At this point, Neuren's compound Trofinetide is well ahead of any of the competing solutions that are under development.

Should the treatment receive marketing approval and prove effective, this head start, along with patents and exclusivity periods should see it able to benefit from a monopoly position for a number of years. Neuren have patents in most major jurisdictions out to 2032.

Rett Syndrome is a debilitating neurological disease that almost exclusively affects girls. It leads to symptoms such as loss of speech and motor control, cognitive and intellectual disability and can even affect their ability to eat and breathe. It can be life-threatening.

Fragile X causes intellectual disability, behavioural and learning challenges. It is the most common, known cause of autism. Whilst Fragile X is an inherited genetic condition, Rett Syndrome is not. Both are classified as rare diseases.

Trofinetide also produced positive results for Fragile X patients in a small scale Phase 2 clinical trial. The next stage for this indication will be to conduct a larger Phase 2 trial.

In 2018 Neuren partnered with ACADIA Pharmaceuticals to complete clinical testing and commercialise Trofinetide in North America. ACADIA is responsible for clinical trials, FDA approvals and then commercialisation.

Neuren will receive milestone payments of up to $US455 million if certain goals are achieved. (The actual goals have not been fully disclosed.) They will also receive royalties on a sliding scale, 10% or higher, on total sales from the North American region.

An additional source of potential revenue is from the Rare Paediatric Priority Review Voucher that will be received if Trofinetide receives marketing approval for Rett Syndrome. These vouchers can be sold in the secondary market and an expectation of $US100 million is not unrealistic. Neuren is entitled to one-third of the proceeds.

Drugs developed to treat rare diseases, known as orphan drugs, are able to access incentive schemes in the USA, as well as many other jurisdictions. They are granted exclusive periods from the time of marketing approval for seven years in the US and 10 years in Europe and Japan.

While the patient populations that Neuren is looking to treat are small, orphan drugs can still be lucrative due to the incentive structures as well as the ability to charge high prices. All of Neuren's programs have been designated as orphan drugs.

There are three elements to Neuren's potential future success and therefore its valuation. First is the partnership with ACADIA and the success of Trofinetide in North America. Second, Neuren has the global rights for Trofinetide outside North America. And third is the development of NNZ-2591.

Neuren has retained all rights for Trofinetide to regions outside North America and also has the right to use the clinical trial and FDA submission data when applying for approvals in other regions. They are currently exploring options for the best way to capitalise on those markets and evaluating potential partnerships.

Neuren has received approval for phase 2 clinical trials of NNZ-2591 for Phelan-McDermid, Angelman, and Pitt Hopkins syndromes which are scheduled to commence soon. They are planning for a trial of Prader Willi syndrome. The number of people impacted by these disorders is five times higher than Rett Syndrome. Neuren retains global rights for the compound.

Valuing a biotech company of this nature comes down to working out the potential revenue they could earn if the treatment is successful, and then estimating the probability of that success. Neuren's current share price can largely be justified based on the likelihood of approval of Trofinetide in North America for Rett syndrome.

Therefore, the probability of further success from Trofinetide for Fragile X or outside North America, as well as NNZ-2591, are effectively free options that come with the investment.

Disclaimer: The author's related parties have holdings in NEU.

Get stories like this in our newsletters.