Paul McDougall/iStock via Getty Images
Investment Thesis
Cerevel Therapeutics (NASDAQ:CERE) is a $4.44bn market cap biotech based in Cambridge, Massachusetts. The company IPO’d in July 2020, after a merger with Arya Sciences Acquisition Corp II – a Special Purpose Acquisition Company (“SPAC”).
SPAC’s are essentially shell, or “blank check” companies “formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses”, according to Cerevel’s 2021 annual report.
Arya Sciences acquired Cerevel Therapeutics and changed its name to Cerevel Therapeutics Holdings, allowing Cerevel management to access the public markets without the onerous listing requirements usually associated with an Initial Public Offering.
Arya was able to equip Cerevel’s experienced management team with $320m of funding raised from the likes of Bain Capital, Perceptive Advisors, Fidelity and RA Capital, whilst Cerevel itself raised $150m in a private round. Despite making a net loss of $68m in Q122 alone, Cerevel expects its funding to last until 2024, meaning shareholders should not face any near-term dilution.
Cerevel is a drug developer focused on diseases of the Central Nervous System (“CNS”), which was spun out of the Pharma giant Pfizer’s neuroscience division. Pfizer continues to hold a 25% stake, which may help to explain the ease with which Cerevel has been able to raise money and maintain such a high market valuation.
The lead assets handed over to Cerevel by Pfizer include Emraclidine – an M4-selective positive allosteric modulator (“PAM”) in development for schizophrenia as a once-daily medication without the need for titration, Darigabat – an α2/3/5-selective GABAA receptor PAM currently under development for anxiety and epilepsy – and Tavapadon – a D1/D5 partial agonist currently in Phase 3 trials for the treatment of Parkinson’s disease.
The investment opportunity here is based around a number of key data readouts upcoming across the next 12 months that could help Cerevel move ever closer to becoming a commercial stage company targeting some lucrative CNS markets. Data readouts from Tavapadon’s Phase 3 study in PD ought to be available in early 2023, with Phase 2 epilepsy data due in 1H23. A little later, in 1H24, data from the Phase 2 study of Emraclidine in Schizophrenia will be due. Another candidate, CVL-871, will read out data from a Phase 2a dementia related apathy study in early 2023.
There is a fair amount of skepticism around the role that SPAC’s play within the stock market – often they are seen as enabling companies to list that would have struggled to make it on their own, due to an inadequate business model, or suspect management, and post merger / acquisition SPAC’s have generally performed poorly – according to a Bloomberg post from March, “the De-SPAC Index, which tracks 25 such companies, is down more than 60% in the past 12 months”
In Cerevel’s case, however, shareholders have been rewarded handsomely, with Cerevel stock +30% across the past 12 months, and +190% since its November 2020 listing. The company’s share price peaked at a value of $45 in November 2021, and shares presently trade at a 35% discount to that price – $29.5 at the time of writing.
In this post I will take a closer look at each of Cerevel’s pipeline opportunities and try to weigh up if Cerevel deserves a loftier valuation or if the final data may underwhelm and lead to a sell-off, as well as evaluating the commercial opportunities and competitive threats.
Emraclidine – A Next-Generation Antipsychotic
Schizophrenia is a 20m patient, $7bn market growing at a CAGR of 3.5%, according to a Cerevel investor presentation.
It is not exactly underserved with medicines – Drugs.com provides a list of no fewer than 51 medications indicated to treat the condition – but because it is a complex and subjective condition, drugs are typically ineffective, with high discontinuation rates, negative side-effects, and high relapse rates after treatment.
The data that triggered a lengthy bull run on Cerevel stock was released over 1 year ago, from a Phase 1b trial. Patients using a 30mg dose of Emraclidine showed clinically meaningful improvements in Positive and Negative Syndrome Scale (“PANSS”) scores, that were statistically significant when compared to placebo.
Emraclidine is thought to be potentially superior to current standards of care in terms of reducing psychotic side-effects – the scientific rationale is discussed by Cerevel in its latest annual report as follows:
Presynaptic expression of the M4 receptor subtypes balances acetylcholine and dopamine in the striatum, which is the region of the brain primarily responsible for psychotic symptoms. The imbalance of acetylcholine and dopamine is hypothesized to contribute to psychosis in schizophrenia.
Unlike other muscarinic receptors, M4 receptor subtypes are differentially expressed in the striatum. Activation of muscarinic receptors prevents acetylcholine release, which has been shown to indirectly modulate levels of dopamine without the direct D2/D3 receptor blockade that has been theorized to cause some of the unwanted motor symptoms of current antipsychotics.
Karuna Therapeutics’ (KRTX) Xanomeline has a similar mechanism of action to Emraclidine and both companies will be hoping to disrupt the atypical antipsychotic market, although Karuna’s therapy has already completed a Phase 2 trial, whilst Cerevel’s Phase 2 will not complete until early 2024, handing Karuna the first-mover advantage (if its product is approved).
I discussed this market in terms of sales revenues in an old note on Karuna from January 2021.
Olanzapine, for example – marketed and sold by Eli Lilly as Zyprexa, made only $308m of sales in the first nine months of 2020, while Quetiapine – marketed and sold by AstraZeneca (AZN) as Seroquel – made $191m of sales in FY19. Aripiprazole – marketed and sold by Otsuka as Abilify – is still a blockbuster seller, making $2.3bn of sales in 2018, as is Lurasidone – marketed and sold by Japanese Pharma Sumitomo as Lutuda – which made $1.7bn of sales in FY19, as the company launched yet another treatment – Rexulti.
Meanwhile, Intra-Cellular’s (ITCI) Caplyta, approved for Schizophrenia in 2019, and bi-polar disorder at the end of last year, generated $82m of revenue in FY21, up 267% year-on-year, whilst Vanda Pharmaceuticals’ (VNDA) Fanapt, an atypical antipsychotic approved in 2009 for Schizophrenia generated $95m of revenues in FY21.
Given its valuation of $4.4bn, investors are presumably backing Cerevel to one day generate “blockbuster” (>$1bn per annum) sales, but looking at the Schizophrenia market, it is fragmented, with most products making sales in the low triple-digit millions.
Granted, Emraclidine may boast superior trial results, generating a 19-point reduction in PANSS in its Phase 1b, which is superior even to Xanomeline, but the Phase 2 trial will be a different sort of proving ground, with 2 arms of 372 patients, and a primary endpoint of change from baseline in PANSS Total Score at Week 6.
In all honesty, if I am paying $29 per share for Cerevel stock, I am not sure the Emraclidine opportunity offers enough on its own to justify such a high price, given the wait for Phase 2 results and the crowded market. A label expansion into dementia related psychosis can open up an additional revenue stream, although this is a smaller market (~2.4m patients) with the same barriers to entry and just as fiercely contested as Schizophrenia.
Darigabat – A Potential 1st Line Therapy In Epilepsy & Anxiety
The Epilepsy Foundation lists 8 “Narrow Spectrum” antiepileptic drugs (“AEDs”), and 7 “Broad Spectrum”, so as with Schizophrenia, this is both a crowded market, yet an area of high unmet need give the complexity of treating the condition effectively. The market is estimated by Cerevel management to be a 65m patient one, worth >$6bn,
Cerevel management is pinning its hopes on Darigabat’s ability to match traditional benzodiazepines e.g. Valium (lorazepam) Ativan (clorazepate) Tranxene (alprazolam) and Xanax, on efficacy, whilst presenting fewer side-effects. A Phase 1 trial appeared to confirm the latter, with 80% receptor occupancy achieved without somnolence, compared to the 10-15% receptor occupancy with significant somnolence this Cerevel management states is common with benzodiazepines.
Nevertheless, it will take a Phase 2 trial to confirm that these results are repeatable in larger patient sets, and that data will be available early next year. There will be 150 patients enrolled in total, with a 2-week titration period followed by an 8-week maintenance phase using both 25mg and 7.5mg BID dosing, followed by a 3-week taper period, with patients invited to join a 57-week open label extension.
Outside of epilepsy, Darigabat delivered positive Phase 1 results from a study in acute anxiety in healthy volunteers. According to the Q122 earnings press release:
both the 7.5 mg and 25 mg twice-daily doses of darigabat demonstrated a clinically meaningful and statistically significant improvement of 3.9 points (p=0.036) and 4.5 points (p=0.008), respectively, in the Panic Symptoms List (PSL-IV) total score compared with placebo.
Once again it is solid early data – perhaps you would expect candidates chosen by Pfizer to ace their early stage trials – that needs to be confirmed in larger studies, and when you factor in the time frames involved in completing later stage studies, although the odds of an eventual approval are perhaps as high as 50/50 (using the positive early data as our guide), the peak sales potential is probably again in the low-triple or high single digit millions, which makes the investment picture feel a little unattractive.
Tavapadon In Parkinson’s – Tackling The Toughest Of Markets
Tavapadon’s development is based on the same noble ambitions that characterize the development of Emraclidine and Darigabat. A similar mechanism of action to numerous drugs already approved, with slight tweaks – targeting the D1/D5 receptor in the case of Tavapadon – intended to improve the side-effect profile as well as the overall efficacy.
Once again, there are a wide-range of medicines approved to treat Parkinson’s but no stand out or disease modifying therapy. That is the holy-grail for a plethora of biotechs developing drugs to treat the disease, and Tavapadon is designed with treatment of all stages of PD – early, mid and late stage patients – in mind.
The drug met its primary endpoint in an early stage trial, achieving a 4.8 point difference vs placebo by Movement Disorder Society-Sponsored Revision of the Unified Parkinson’s Disease Rating Scale (“MDS-UPDRS”) scoring, with only 14% of patients experiencing somnolence, albeit a higher 31% experienced some form of nausea.
There are 3 global, registrational studies ongoing – TEMPO 1,2 and 3, with data from 1 and 2 due early in 2023. The key is to demonstrate superior motor control in early stage patients – TEMPO 1 is fixed dose whilst TEMPO 2 is flexible dose (5 – 15mg) whilst in later PD the goal is to also demonstrate superior control of dyskinesias that drugs driven by L-Dopa – it is hoped that Tavapadon has a longer half-life compared to this drug class.
Some analysts have suggested that Tavapadon is a blockbuster in waiting, with a >60% chance of approval, but it should be noted that Pfizer terminated development of the drug due to a lack of efficacy in a study in moderate / advanced Parkinson’s, and although Cerevel has had the opportunity to design its registrational trials with that past failure in mind, it still feels a little like a VC backed biotech gambling that another Pharma’s drug will make the grade, rather than a rigorous process of scientific development.
Conclusion – I Think Cerevel Is A Little Overvalued But We Will Know Much More In 12 Months’ Time
Cerevel has 3 considerable opportunities in play – 4 if you consider CVL-871 in dementia-related apathy, and there are 3 preclinical programs adding some additional ballast to the current company valuation, however I still think it is a little too high.
If we imagine that our criteria is to see Cerevel drive >$1bn in annual sales within 5 years, then I can’t see how that can happen personally. Establishing best-in-class credentials in a disease such as Schizophrenia, where treatments are typically tailored to the individual, or even epilepsy, may simply be too challenging to achieve even in a late stage trial with hundreds of patients, and that limits the market opportunity to <$500m in my view.
I feel similarly about both Darigabat in Epilepsy / anxiety, and Tavapadon in PD. Much work still to complete, with the door to approval only slightly ajar, some strong competition, and a market opportunity in the triple-digit millions, not the billions required to support a $4.4bn market cap.
Across the next 12-18 months, the catalysts will arrive thick and fast, but to justify the high share price and valuation, Cerevel would really need to make the grade with all 3 of its lead drugs, and I suspect that may be wishful thinking when we consider the difficulty of getting results in late stage CNS trials.
A final point is that companies with approved CNS drugs, such as Vanda Pharmaceuticals and Intra-Cellular are struggling to make it work financially. Intra-Cellular, whose market cap is >$1bn larger than Cerevel’s, earned revenues of only $83.8m, and made a net loss of $284m last year.
For all of these reasons I am not optimistic that Cerevel will drive share price growth for investors in 2022, or even in 2023 and 2024 by which time the company could have 3 approved CNS products on the market. That would be an impressive achievement, but the next challenge would be to make a profit from these drugs.
The CNS drugs landscape just looks a little too challenging at the present time for Cerevel stock to keep growing, but nevertheless I will still be paying very close attention to the late stage trial results, to see if any of the 3 drugs hints at best-in-class performance from both a safety and efficacy perspective. I would not give up hope on that yet, although Pfizer did.
Be the first to comment