On October 19, 2015, Neos Therapeutics, Inc. (NASDAQ:NEOS) reported that it had received a notification from the FDA regarding its lead pipeline candidate Cotempla. The FDA said it had identified what it referred to as “deficiencies” in the Cotempla news drug application (NDA). We didn’t get any specifics as to the deficiencies (reportedly neither did Neos) but we did learn that the deficiencies precluded labelling and post marketing discussion; basically meaning they need to be resolved before the FDA will consider approving the treatment. As the announcement hit, Neos collapsed from a little over $18 a share to $12 a share – losing a third of its market capitalization in a single session. Its stock has recovered slightly since, closing out the last session just shy of $14, but it is still trading at a discount as investors price in the potential for a delayed review date.
The question now is, does this discount represent an opportunity to pick up an exposure to Neos at a discount? Let’s take a deeper look.
First, what’s Cotempla? The drug is one of two XR-ODT (extended release, orally disintegrating) candidates for which Neos currently has a filed NDA with the FDA. Both treatments are targeting an indication of ADHD. As far as the active ingredient for Cotempla is concerned, there is no difference between it and some of the current standard of care therapies, Methylphenidate and Amphetamine. Cotempla contains the former, Neos’s second candidate contains the latter. What differentiates the two treatments from standard of care is the delivery system. As mentioned, both are XR-ODT. ADHD is primarily a pediatric condition, and there are a large number of the child patient population that have trouble swallowing pills – reportedly about 56%. Neos’s candidates are designed to disintegrate on the tongue, without the usual prohibitive taste and absorption issues that would come with applying a crushed pill to the tongue. This makes them far easier to administer and take.
So what might the FDA be concerned about? The active ingredients are already approved in the US, so the questions surrounding Cotempla become can the drug maintain equivalent levels of efficacy, safety and tolerability when compared to its counterpart delivery methods?
In a phase III, Neos’s Cotempla demonstrated a statistically significant improvement in ADHD symptom control across what the trial referred to as a “classroom day”, suggesting that efficacy should be no issue. This leaves safety and tolerability. This is a pediatric treatment, and the FDA often looks more harshly upon adverse events in Children than it does in adults – but in the same phase III discussed above the vast majority of adverse events were reportedly mild, and nothing out of the ordinary as far as the side effects from this sort of treatment go (nausea, decreased appetite, irritability etc.).
So what’s the issue? Well, of course, we don’t know exactly. What we do know, however, is that the drug is simply a redeveloped version of a formulation that has been standard of care for decades, and it has demonstrated efficacy with minimal adverse events in wide scale trials.
So does this mean there is an opportunity here? There is every chance it does – the initial market reaction looks to have translated to an oversell, and a 33% decline seems harsh for what essentially amounts to a delay. Of course, there may be deeper issues associated with Cotempla that we are not yet aware of, but the tone of the FDA notation suggests these are not issues that cannot be resolved. Even if Cotempla is thrown out, the company has its second XR-ODT candidate filed, with a PDUFA date of January 27. If either get approval, the revenues Neos stands to generate from either candidate greatly outweighs its current market cap (circa $220 million) – Shire plc (NASDAQ:SHPG) generates $1.3 billion annually from Vyvanse and Johnson & Johnson (NYSE:JNJ) $600 million from Concerta. Of course, all this becomes irrelevant if neither get approval – but that’s the nature of speculation.
All said, given the circumstances surrounding the FDA delay are not yet clear, it looks as though markets are erring on the side of caution. A time to be greedy when others are fearful? Perhaps, but tread carefully.