Biotech stocks have rebounded a little since the start of the summer, but it has been difficult for riskier clinical-stage companies, and the ability to raise funds without overwhelming dilution has all but disappeared for many smaller companies. With that came the expectation of increased M&A activity in the sector, and investors have seen many deals over the past few weeks and months, ranging from larger deals like GlaxoSmithKline (GSK) and Sierra, Pfizer (DFP) and Havre Bio (BHVN) and Global Blood Therapeutics (GBT) to smaller deals for companies like F-star (FSTX).
Neurocrine Biosciences (NASDAQ:NBIX) entered the game on the smaller end of the spectrum, announcing on Tuesday that it would acquire British group Diurnal (DNL.L). This agreement brings certain pipeline assets that may prove useful to Neurocrine, but the agreement also advances the company’s clinical and commercial capabilities in Europe at a reasonable price. This transaction does not materially change my fair value for Neurocrine at this time, but it does represent modest positive progress in business development.
A little business in endocrinology
Neurocrine announced Tuesday (August 30) that it has reached an agreement to acquire British biotech company Diurnal Group for $57 million in cash. This deal represents a 144% premium to the share price before the deal, but the £0.275 deal price is less than half of what the company’s shares were trading a year ago. year and well below the prices in effect in 2016 and 2017.
Diurnal Group is a small biotech focused on hormone therapy for a range of diseases, and the company has two products on the market – Alkindi and Efmody – which treat adrenal insufficiency and congenital adrenal hyperplasia (or CAH).
It has taken over from the company’s work in CNS diseases in recent years, but Neurocrine has a history in endocrinology, including its elagolix program which was not at all commercially successful and which has AbbVie (ABBV) as a commercial partner, and its pivotal phase crinecerfont program (a CRF-1 receptor agonist for classical CAH).
Diurnal’s Efmody is approved in the EU and UK for adrenal insufficiency and HCS, and generated approximately £1 million in sales in the first six months of 2022, while Alkindi generated £3.7 million in sales. Efmody has been approved by European regulators despite equivocal efficacy (a 0.403 reduction in 17-OHP versus a 0.172 reduction in the control group), and the company is considering a continuation study and pivotal Phase III study for markets American and Japanese (“CONnECT”) to further strengthen the clinical profile of the drug.
Beyond that, Diurnal has clinical programs in classic hypogonadism (DNL-0300, an oral native testosterone), hypothyroidism (DNL-0400, a modified-release T3), and Cushing’s disease (DNL-0500 ). While there are legitimate commercial opportunities in all of these programs, the last two are still preclinical and DNL-0300 has not yet entered Phase II studies.
How will Neurocrine take advantage of the daytime?
Diurne has certainly faced some challenges in 2022. In March this year, the Scottish Medicines Consortium declined to recommend Efmody for automatic reimbursement through NHS Scotland for patients aged 12 or over with CAH on the basis of ‘insufficient differentiation from standard of care in terms of efficacy – while the drug showed some improvement in morning and afternoon biochemical control, the phase III study did not achieve its primary efficacy endpoint. About a month later, the CEO stepped down after 14 years on the job, and the company only reported about $19 million in cash at the last financial report (end of June 2022).
This isn’t a particularly big deal for Neurocrine, and the company has only made limited disclosures about it so far. In the 8-K filing with the SEC, Neurocrine primarily talked about an “opportunity to accelerate the establishment of clinical development and commercial capabilities in the UK” as the motivation for the deal. With Neurocrine looking to become a more international CNS player and maximize the long-term value of its pipeline, this makes sense.
With that, I would therefore consider any future contributions from Diurnal’s pipeline as a “bonus,” with the main attraction being the clinical and commercial infrastructure the company is acquiring. I would expect Neurocrine to reconsider whether the potential of the CONnECT study is sufficient to warrant continued expense, and I would also expect a similar assessment on whether the rest of Diurnal’s pipeline is worth further investment.
I already expected Neurocrine to build its international development and marketing capabilities over time, so while this deal will speed up that process (at least somewhat), I wouldn’t call it a significant change in model or fundamental perspectives. Diurnal’s pipeline might add some value to the company over time, but it now strikes me as more of a “block and fight” deal aimed at building the company’s long-term operational capabilities.
I loved Neurocrine before, and this deal doesn’t change that. I expect some investors to question whether this was the most cost-effective way to bolster the company’s ex-US presence, but I don’t think the price was unreasonable, and again, it There is longer term upside potential in the pipeline. All in all, I think there’s no reason this deal should significantly change an investor’s view of Neurocrine’s long-term outlook, and the stock remains a bit below my estimate of fair value over 12 months, with several potentially value-creating steps underway. over the next year.