Seeking Alpha • Jul 08
Cerevel: The Next Big Thing In CNS Disease? Maybe If The Market Wasn't So Crowded
Cerevel is a CNS specialist drug developer formed as a result of a spinout of former Pfizer neuroscience assets.
The company listed via a merger with a SPAC, which gave it ~$350m in funding, together with $150m raised privately.
There are 3 lead assets - Emraclidine in schizophrenia, Darigabat in Epilepsy/anxiety, and Tavapadon in Parkinson's.
There will be a slew of mid-stage trial readouts to look forward to over the next 12 months, but the investment case lacks certainty.
At the current price and market cap valuation, Cerevel stock looks a little unattractive to me, although I would urge investors to keep an eye on the data.
Investment Thesis
Cerevel Therapeutics (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.
