Here Are Some Discounts In Biotech: Neurocrine Biosciences, Inc. (NASDAQ:NBIX) and Cerus Corporation (NASDAQ: CERS)

Stock Market Roller Coaster Freakout

Every so often in the biotech space, we get a sharp downside move that is almost certain to recover near to medium term. These moves are driven by market overresponse to soundbite headlines and can be a nice opportunity to pick up exposure to the companies in question at a discount ahead of a market rebalancing on the revaluation. This week, we’ve had two of this type of move. Here is a look at the companies in question, what’s driving the action and why we think each is set to recover near term.

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The two companies we are looking at are Neurocrine Biosciences, Inc. (NASDAQ:NBIX) and Cerus Corporation (NASDAQ: CERS).

First up, then, Neurocrine.

After hours on Tuesday, this company put out data from a phase II trial of one of its lead assets, a drug called Ingrezza. It is currently under investigation as part of a pretty extensive program designed to assess the safety and efficacy of the asset in a Tourette’s indication, and early-stage data (preclinical, phase I, etc.) looked pretty good. As per the latest release, however, the drug failed to meet its primary endpoint in the just announced phase II investigation.

For those not familiar with Tourette’s, it is a condition characterized by what are called tics – basically, involuntary movements or sounds of varying severity dependent on the underlying severity of the condition, variable between sufferers. The primary endpoint of the study was the change-from-baseline between a placebo and an active arm in what’s called the Yale Global Tic Severity Scale (YGTSS) – the industry gold standard severity scale in this condition – at week 6 in the intent-to-treat (ITT) population.

So, on aggregate, across the entire ITT population, the change in baseline was not a statistically significant difference from placebo, meaning that – technically – the trial failed. Look a little deeper, however, and all is not as bad as it seems.

To put it simply, the company underestimated the dose required to induce a therapeutic effect in the patient population. This is a pediatric population, so a dose underestimation isn’t that much of a surprise – a company will generally err on the side of caution when it comes to treating children. When you look at the range of doses, however, it turns out that there is a therapeutic benefit threshold beyond which the drug does seem to work.

As per the latest data release, and in line with the above statement, for the subset of patients with pharmaceutical exposure (read: dose) in the appropriate range, there was a substantial reduction in tics (-11.3 to -13.7 points on the YGTSS). However, for subjects with sub-therapeutic exposure, tic reduction was comparable to placebo (-4.7 to -8.3 points on the YGTSS).

So, while the trial technically failed against its primary endpoint, the takeaway from the study is almost as good as a primary endpoint hit. Why? Because the company knows that the drug works, and now has a dose with which to carry forward into a pivotal investigation and with which it can be pretty confident of a decent outcome.

So, while Neurocrine is down somewhere in the region of 10% premarket on Wednesday, we expect this decline to quickly recover once markets correctly interpret the data.

Moving on to Cerus, this one is a little different, but the implications are pretty similar.

The company announced yesterday that we’re likely going to see a shortage of its platelet additive solution (PAS), which is manufactured and sold by an entity called Fresenius Kabi. Basically, what happened is that Fresenius Kabi sources a part of the PAS, and specifically a plastic component of the container, from a third party. Said third-party just discontinued its production of the part and Fresenius Kabi needs to find an alternative source and get it approved by the FDA. According to reports, the source is located, but the part is yet to be green lighted by the regulatory agency. Exactly how long of a delay we are going to see is unclear, but chances are it’s not going to be considerable (we are probably talking a few months at most). However, the uncertainty is causing a selloff in Cerus, and a pretty severe one at that.

During the session on Tuesday, the company lost more than 25% of its market capitalization, and a further 2% after hours.

Again, based on the fact that we expect this missing piece issue to be resolved relatively soon, chances are this one will recover the entirety of its lost value in the not-too-distant future.

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