Neurocrine Biosciences: Profiting from the fall in the share price

Neurocrine Biosciences (NBIX) has been a watchlist item for several years, but the valuation and charts have never lined up for me to pull the trigger. I admired the clinical prowess of the company and the prospects of their flagship product, INGREZZA. The company’s continued growth has kept the ticker on my watchlist and the 2021 selloff has brought the valuation back to a more acceptable level. I suspect INGREZZA’s projected growth as well as potential growth drivers in the company’s pipeline will drive earnings and share price. Accordingly, I am looking to add NBIX to my growth “bioreactor portfolio” in anticipation of the market recognizing the opportunity.

I intend to provide a brief history of the company and highlight some growth opportunities. Using a rudimentary valuation method, I illustrate how Neurocrine’s projected growth is expected to generate impressive returns for shareholders. Additionally, I determine my NBIX purchase goals for 2022. Finally, I discuss how I plan to find a place for NBIX in my “bioreactor portfolio”.

Business background

Neurocrine Biosciences focuses on products for the treatment of neurological, endocrine and psychiatric disorders. Its main asset is INGREZZA, a VMAT2 inhibitor for tardive dyskinesia, as well as several other potential indications. The Company’s other commercial products include ONGENTYS, an adjunct treatment for Parkinson’s disease; ORILISSA for moderate to severe endometriotic pain; and ORIAHNN, for heavy menstrual bleeding related to uterine fibroids in premenopausal women.

Neurocrine’s pipeline includes NBI-827104 for rare pediatric epilepsy and essential tremor as well as NBI-921352 for the treatment of focal epilepsy indications. The company also has an endocrinology candidate, crinecerfont, for the treatment of congenital adrenal hyperplasia. Additionally, the company has NBI-1065844, for schizophrenia; NBI-1065845 for resistant depression; NBI-1065846 for anhedonia in depression; and NBI-1117568 for schizophrenia.

Growth Opportunities

Neurocrine has been an excellent growth stock for several years with a compound annual EPS growth rate of 371.45% year-over-year and a five-year average revenue growth of 423.28%. INGREZZA’s momentum continues with the company’s third-quarter sales of $287 million, signifying 13% year-over-year growth and their estimated fourth quarter of around 301 millions of dollars. The company said it left 2021 with a record number of patients on therapy. As a result, INGREZZA is set to cross the $1 billion blockbuster threshold in just 3.5 years.

To accelerate INGREZZA’s growth, the company will invest an additional $100 million to expand its field sales team and continue its DTC campaign, which will help the company reach the ~500,000 US patients with TD untreated or undiagnosed and prepare for Additional indications for INGREZZA.

Looking ahead, the company plans to submit INGREZZA’s sNDA for chorea in Huntington’s disease this year. I believe INGREZZA has prospects for approval due to Teva (TEVA) Austedo and Lundbeck’s (OTCPK: HLUYY) xenazine in Huntington’s disease due to INGREZZA meeting its primary endpoint, reducing the Unified Huntington’s Disease Rating Scale – Total Maximum Chorea score by 3.2 points compared to placebo, while Austedo achieved 2.5 points and Xenazine recorded 3.5 points. Additionally, INGREZZA is expected to have a superior safety profile and is administered once daily compared to Austedo and Xenazine. Admittedly, this specific market is not huge but could bring a nice increase in sales in the years to come.

In 2023, the company plans to release key registration data for the dyskinetic cerebral palsy and schizophrenia adjunctive treatment programs. These additional indications are expected to accelerate growth, while substantially increasing INGREZZA’s peak sales.

Behind INGREZZA, Neurocrine has been extremely aggressive in initiating a number of Phase II and Phase III clinical trials with the goal of creating one of the most robust neuroscience pipelines in the industry.

This pipeline has grown to 13 clinical programs with many compelling clinical data readouts pending over the next two years.

Clearly, the potential expansion of INGREZZA and the possibility of additional approved products will not only help maintain the company’s growth trajectory, but will also solidify it as a leader in neurological, endocrine and psychiatric disorders.

A simple assessment

The NBIX is overvalued relative to the industry median in several valuations, including price-to-sales ratio, price-to-book ratio, price-to-earnings ratio, and price-to-cash flow ratio. However, NBIX is incredibly overvalued and its projected growth should improve those valuation metrics in the years to come.

To determine a ballpark valuation, I’ll use the company’s 2022 revenue estimate of $1.39 billion with the industry standard of 5x the price at sales discounted for time, and we get 73 $ per share. Thus, NBIX is fairly priced at $72 to $75 per share. Looking long term, it looks like Street expects Neurocrine to grow for the rest of this decade and top around $3.14 billion in 2029. Using Street’s 2029 revenue estimate of 3, $14 billion and the previous valuation method, we get about $165.50 per share.

Indeed, there are many other methods that might yield a much higher or lower valuation, or might be more appropriate for a growing company that generates FCF. However, the price-to-sales method is easy to follow and does a great job of illustrating how valuation might increase with projected revenue growth.

Find purchase targets

If I were to use the price vs. sales valuation method to determine a buy target, I would add a discount for time to the price vs. sells, which would give us a target of $66 per share for 2022. If I’m looking for a buy discount target, I’d add an error discount and get about $50 per share for 2022.

Admittedly, it’s hard to believe that NBIX would ever hit my 2022 buy targets, but you have to remember that NBIX was trading around $120 per share just a year ago… so it’s not impossible for the market to lower NBIX an additional $15-$30 if the overall market wants to reverse.

Downside risks

Despite my bullish outlook, Neurocrine does have a few downside risks that I think investors should be aware of when managing their position. First, the company has several upcoming data readings that could negatively impact the stock price if results fall below expectations. Second, the pandemic doesn’t seem to be stopping any time soon, which could continue to negatively impact office visits and dampen sales growth. Granted, these risks probably wouldn’t crush the stock price, but they could derail the growth narrative and create some volatility.

Addition of NBIX in the bioreactor

The Bioreactor portfolio contains healthcare companies that are profitable and expected to experience strong growth over the next five years. These companies are of higher conviction and are rapidly emerging as major players in their respected industries. These tickers are traded with a combination of technical analysis and fundamental valuation with the aim of developing a position for long term investment. Normally these are mid to large capitalization companies with tickers that frequently follow typical market cycles, but still offer recurring trading opportunities to generate considerable profits while building a substantial position over a longer trading period. time to fully maximize the fundamental momentum of the company.

Typically I’d be too eager to hit the buy button for a ticker with NBIX’s outlook, but the ticker has fallen so far with little to no justification, so it’s possible the market will take NBIX to new lows. Therefore, I will wait to see if the ticker can break its current downtrend before committing.

Once I have established a position, I will make regular investments as long as the stock price is trading below $75 per share. However, I will not be aggressive with the size of my stocks unless they are trading below my buy target of $66 per share for 2022, and “back the truck” just above $50 per share. .

Long term, I plan to keep NBIX in the growth portfolio for at least five years in anticipation of the company’s ability to maximize INGREZZA’s potential and secure at least one more candidate through the FDA. . That is, if the company is not acquired at a higher valuation.

Thank you for reading my research on Neurocrine Biosciences. If you would like to know more about my method and how I discover these investment opportunities, please wait as I am launching On the pulse Analytics, a subscription marketplace service on Seeking Alpha, in the near future and the first wave of subscribers will be offered a lifetime discount. Further details are around the corner, so keep an eye out and read my research.