Sandstone Insights: Neuren's FDA-approved Rett syndrome treatment driving growth

ASX code: NEU

Suggestion: Buy

Need to know

• Neuren boasts the only FDA approved treatment for Rett syndrome, sales are unopposed
• Recent positive trial results for new treatments in similar indications open significant addressable markets
• With high margins, strong operating leverage and a solid pipeline of opportunities, we initiate with a Buy rating.

Neuren Pharmaceuticals: a biopharmaceutical pioneer

Neuren Pharmaceuticals (NEU) is an Australia-based biopharmaceutical company focused on developing therapies for neurodevelopmental disorders and neurodegenerative diseases. The company's key areas of research and development include treatments for conditions such as Rett syndrome, Fragile X syndrome, and other related disorders with high unmet medical needs.

The company is recognised for its pioneering work in addressing rare and severe conditions that have limited treatment options, positioning it as a significant player in the biotech industry.

Key commercial drug: Trofinetide (NNZ-2566)

Neuren's key commercial drug, Trofinetide (NNZ-2566), is currently in the market and approved to treat Rett syndrome. It is distributed through a partnership with ACADIA Pharmaceuticals (ACAD.US - not covered) and sold under the brand name DAYBUE. Sales have been ongoing since April 2023 and have grown significantly. The latest forecasts and guidance predict DAYBUE sales of approximately US$378 million in CY2024, growing to approximately US$572 million in CY2028, with a growth rate of approximately 11% per annum.

The current partnership arrangement is predominantly on a royalty income stream with associated milestone payments for meeting sales targets. This allows NEU to focus on developing new treatments, rather than spending on marketing and distribution, leading to strong margins with significant operating leverage.

Next-generation compound: NNZ-2591

The next-generation compound, NNZ-2591, is planned to be taken all the way through to Phase 3 trials in-house, with hopes of completing all four proposed trials within the next three years. While the cost of trials could run between US$50 million and US$100 million each (depending on patient numbers), if successful, NEU aspires to almost 'double' the royalty and milestone metrics it achieved for the US licensing of DAYBUE, where Acadia had funded the Phase 3 trials. The prize here is significant, and we believe management has the execution capability to deliver.

We provide a more detailed look at the indications that NEU is aiming to treat, including the large addressable market opportunities below.

Neuren pharmaceuticals' market leadership

Neuren Pharmaceuticals' focus on addressing significant unmet medical needs in neurodevelopmental and neurodegenerative disorders has established it as a leader in a niche but crucial segment of the market. The company has achieved a major milestone with the FDA approval and successful commercialisation of DAYBUE (trofinetide) for Rett syndrome in partnership with Acadia Pharmaceuticals. This drug is not only the first FDA-approved treatment for this rare condition but also has demonstrated strong sales growth, providing a steady revenue stream through royalties and milestone payments.

Robust pipeline and strategic partnerships

Additionally, Neuren’s robust pipeline, including NNZ-2591, targets other rare neurodevelopmental disorders like Phelan-McDermid syndrome, Angelman syndrome, and Pitt Hopkins syndrome, all of which have high unmet needs and limited treatment options. The company’s strategy of leveraging strategic partnerships for drug development and commercialisation maximises resource efficiency and market reach, positioning it for sustained growth. In-housing the Phase 3 trials can also provide meaningful royalty upside, with Neuren aspiring to almost double the metrics it achieved with DAYBUE.

Revenue growth and market opportunities

Acadia's revenue from trofinetide is forecast to grow approximately 11% per annum over the next 4-5 years, driven by underlying demand, with sales essentially unopposed by competing products. Neuren will collect meaningful milestone payments as sales continue to ramp up. With NNZ-2591 potentially moving to commercialisation over the coming years, we anticipate similar potential arrangements and revenue opportunities for Neuren, noting that additional indications being explored continue to open up further market opportunities.

The addressable market remains significant given the lack of alternative treatment options for patients. With Rett syndrome impacting as many as 6,000-9,000 patients in the US (we assume a more conservative number for our valuation) and being prevalent in up to 1 in 10,000 girls, there is continued room for growth. New opportunities in similar indications also have similar market sizes and incidence rates. With several Phase 2 and 3 trials underway and with promising results, we believe there is a strong pathway to commercialisation. With significant upside on future positive trial results, we commence coverage on Neuren with a Buy rating.

Business overview

Neuren Pharmaceuticals, founded in 1993 and headquartered in Melbourne, Australia, is a biopharmaceutical company dedicated to developing therapies for neurodevelopmental and neurodegenerative disorders. The company's primary focus is on conditions with high unmet medical needs, such as Rett syndrome, Fragile X syndrome, and other related disorders. Neuren's most advanced product, DAYBUE (trofinetide), addresses the core symptoms of Rett syndrome and was the first FDA-approved treatment for this condition, launched commercially in April 2023. This achievement was a significant milestone, reflecting years of rigorous research and development, along with strategic partnerships, notably with Acadia Pharmaceuticals for the U.S. market.

Over the years, Neuren has built a robust pipeline of innovative treatments, including NNZ-2591, which targets conditions such as Phelan-McDermid syndrome, Angelman syndrome, and Pitt Hopkins syndrome. By focusing on rare and severe disorders, Neuren has positioned itself as a leader in the neurotherapeutics field. The company employs a business model that emphasises strategic collaborations, licensing agreements, and leveraging external expertise and resources to advance its drug candidates through clinical trials and regulatory approvals. This approach has enabled Neuren to progress its pipeline efficiently and maximise the potential impact of its therapeutic developments.

Royalty arrangement

The current arrangement for sales in the US has a tiered structure embedded where additional sales see higher royalty rates. Additionally, there are large potential one-off milestone payments if Acadia reaches significant net sales within a calendar year. Royalties in the rest of the world (ROW) are also tiered, ranging from mid-teens to low 20% of Acadia's net sales.

Figure 1: Tiered royalty rates for Trofinetide in US operations

Figure 2: Potential one time milestone payments for Trofinetide in US operations

Neuren’s Trofinetide - two potential neurological indications:

Rett syndrome (marketed as DAYBUE)

• A progressive X-linked chromosomal disorder associated with severe neurological disability
• Primarily affects girls with an incidence of between 1 in 10,000 and 1 in 15,000 female births worldwide; significantly rarer in males
• Symptoms begin appearing between 6-12 months and include motor or movement impairment, loss of acquired language, intellectual disability, seizures, and anxiety.

Fragile X syndrome

• An inherited mutation of the X chromosome causing developmental problems, including learning disabilities and cognitive impairment
• More common and more severe in males with an incidence of 1 in 4,000 to 1 in 7,000; in girls, the incidence is 1 in 6,000 to 1 in 11,000, with about half suffering from symptoms
• The most common inherited cause of intellectual disabilities and the highest cause of autism. Other symptoms include anxiety, mood instability, seizures, intellectual disability with delayed speech, and language development.

Neuren’s NNZ-2591 targets six neurological indications including Rett and Fragile X syndrome:

Phelan-McDermid Syndrome (PMS)

• Prevalence estimated between 1 in 8,000 and 1 in 15,000, affecting both males and females equally
• Symptoms usually appear in early childhood, including developmental delay, intellectual disability, and severely delayed or absent speech
• Common symptoms: autism, low muscle tone, breathing difficulties, poor motor control, seizures, epilepsy, and sometimes heart or kidney defects.

Angelman syndrome

• Estimated to affect between 1 in 12,000 and 1 in 24,000 people
• A complex genetic disorder primarily affecting the nervous system, causing delayed development, intellectual impairment, speech, and balance problems, seizures, and ataxic movement
• Common physical characteristics: a small head.

Pitt Hopkins Syndrome (PTHS)

• Prevalence estimated between 1 in 11,000 and 1 in 41,000
• Characterised by severe intellectual disability, developmental delay with little or no speech, and distinctive facial features including a small head
• Common symptoms: breathing problems, epilepsy, autism, and issues with cell differentiation.

Prader-Willi Syndrome

• A genetic disease causing neurological impacts in both males and females of all racial backgrounds
• Prevalence estimated between 1 in 10,000 and 1 in 30,000
• Symptoms include intellectual disability and a constant craving for food, leading to obesity, diabetes, and heart disease.

Risks to investment view

Clinical trial risks: NNZ-2591 has received Orphan Drug designation and Investigational New Drug (IND) approval for Angelman, Phelan-McDermid, Pitt-Hopkins, and Prader-Willi syndromes. Phase 2 trials are ongoing or completed, following positive Phase 1 safety results. However, potential delays, patient dropout, and study design modifications could impact forecasts and valuation.

Regulatory risk: the FDA approval of trofinetide in March 2023 reduces regulatory risk. However, new safety information could lead to re-evaluation. Failure to secure approvals in other regions may also affect forecasts.

Competitor risks: currently, no other therapies are approved for Rett syndrome. Early-stage gene therapies are in development but pose a minor risk to DAYBUE, which could potentially be used in combination with new treatments.

Reliance on Acadia: Acadia's focus on trofinetide for Rett syndrome is critical. However, exploring additional indications like Fragile X syndrome could influence forecasts based on the timing and choice of these indications.

Figure 3: Summary of Neuren target indications and addressable market/patient sizes and current trial progress

Figure 4: With Phase 2 trials looking more promising, future opportunites are becoming priced in. NEU can deliver significant operating leverage given its business model.

• ^{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}