Revisiting SAGE, climbing up the MOUNTAIN

“There is always a disposition in people’s minds to think that existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When the prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which make it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change”

Charles H. Dow

Summary

• We expect 50%+ upside (+ve readout, 2–3 difference vs placebo on HAM-D scale ), 40% downside (<1.5 difference vs placebo on HAM-D & non-statistically significant difference) on SAGE
• Assumptions based on positive data from 50mg arm in SHORELINE, positive post hoc analysis in MOUNTAIN where patients had HAM-D>24 as opposed to 22) and a greater effect when removing 9% of patients who didn’t comply. WATERFALL inclusion criteria also uses HAM-D>24 (worse depression) which should allow Zuranolone to demonstrate greater benefit.
• Strong cash position (~2bn current assets) with Zuranolone commercialisation de risked based on Biogen/Shionogi commercial partnerships yielding 1.6bn in milestones and additional payments of $450m

Intro

Sage Therapeutics is a biopharmaceutical company developing and commercialising therapies to treat central nervous system (CNS) disorders. Currently trading at a ~$4bn market cap, down 60% from it’s all-time highs of around 190$/share prior to its failure to demonstrate statistically significant difference vs placebo in the MOUNTAIN Phase 3 Depression trial. We revisit the stock in the lead up to its Phase 3 Depression trial (WATERFALL) readout in the coming weeks, which if positive, could produce drastic upside.

Company Overview

Sage Therapeutics, Inc., a biopharmaceutical company, develops and commercializes novel medicines to treat central nervous system (CNS) disorders. Its lead product candidate is ZULRESSO, a proprietary intravenous formulation of brexanolone for the treatment of postpartum depression (PPD). The company’s product pipeline also includes SAGE-217, a novel neuroactive steroid, which is in Phase III clinical trials for treating PPD, major depressive disorders, bipolar depression, and generalized anxiety disorders; and SAGE-324, a novel compound that is in Phase II clinical trial to treat essential tremors, as well as completing Phase I clinical trial for epileptiform disorders and Parkinson’s diseases. In addition, its product pipeline comprises SAGE-718, an oxysterol-based positive allosteric modulator of the NMDA receptor, which has completed Phase I clinical trial for the treatment of depression, Huntington’s disease, Alzheimer’s disease, attention deficit hyperactivity disorder, schizophrenia, and neuropathic pain. Further, the company is developing SAGE-904, an oral therapy that is in Phase I clinical trial for disorders associated with NMDA hypofunction; and SAGE-689 for intramuscular administration. Sage Therapeutics, Inc. has a strategic collaboration with Shionogi & Co., Ltd. for the development and commercialization of SAGE-217; Biogen Inc. to develop and commercialize zuranolone (SAGE-217) for various depressive disorders, postpartum depression, and other psychiatric disorders, as well as SAGE-324 for essential tremor and other neurological disorders; and Biogen MA Inc. and Biogen International GmbH for the development, manufacture, and commercialization of products containing SAGE-217 molecule and products containing the SAGE-324 molecule. The company was formerly known as Sterogen Biopharma, Inc. and changed its name to Sage Therapeutics, Inc. in September 2011. Sage Therapeutics, Inc. was founded in 2010 and is headquartered in Cambridge, Massachusetts.

Today we will mainly focus on the upcoming WATERFALL Phase 3 Depression trial data readout coming in the next few weeks, with a lesser focus on the pipeline.

Market Dynamics

Depression has a huge reach with between 264 million sufferers (WHO) to around ~350 million, with a suggested total addressable market of ~18bn by 2027. The current standard of care used includes SSRI’s, SNRI’s which are only 50% efficacious, with up to 70% responding on use of alternative/ additional therapies. Interestingly CBT is also around 50–70% efficacious, with a similar rate to current antidepressants but is expensive and typically costs around $9000-$20000 per disability adjusted life year (DALY). Current therapies also represent tolerability issues resulting in ~43% of patients discontinuing their therapies within the first 3 months and 27% within the following 3 months. This presents a market opportunity for new entrants with fast onset of action and better efficacy, such as zuranolone. Part of the issue with the current therapies is that they were based on flawed science, reviewing suicide patients brain stems and their neurochemistry. This tarnished findings particularly because of the change in neurochemistry upon death. Depression is now thought to be linked to Brain Derived Neurotrophic Factor (BDNF), which is the reason behind why the current therapies take 4–6 weeks to produce results despite serotonin levels being elevated from the first dose. Zuranolone on the other hand has a rapid onset of action with efficacy noted from Day 3 onward.

Interestingly, despite the lack of efficacy for previous antidepressants they produced multiple blockbuster sales for example, Zoloft ($3.3 bn — 2005), Cymbalta ( 5.01 billion — 2012) , Effexor XR (2.75 billion — 2010) despite an increasingly competitive generic landscape for the former two therapies. The economic burden of MDD is $326bn of which $35.8bn is equal to direct costs, demonstrating how large the market is. This is only set to grow following the pandemic with the CDC estimating prevalence at 27%, for some context, note that previous prevalence was estimated to be at ~5%.

Pipeline

SAGE-217 (Zuranolone)

Zuranolone is an orally active GABAA positive allosteric modulator (PAM) which has demonstrated efficacy in Phase 2 — and to date — some mixed results in Phase 3. The drug is being studied in PPD (Postpartum Depression), TRD (Treatment Resistant Depression), GAD, BPD and Major Depressive Disorder with a total addressable market of ~ $24bn in 2027.

The Play

The Phase 3 Depression trial (WATERFALL) data is due to read out H1 2021 and we are expecting a positive readout based on positive SHORELINE and MOUNTAIN post-hoc analyses. The asset initially failed to meet the primary endpoint — statistically significant difference between placebo and treatment at day 15 — in Phase 3 (MOUNTAIN) trial however given the post hoc analysis, it was found that 9% of patients didn’t comply (i.e. stopped taking the drug) and so they had reduced drug concentrations (not enough for it to work). When accounting for patients that did comply, the study produced statistically significant results vs placebo. This was repeated in the open-label SHORELINE study where ~80% of patients achieved response in the 50mg arm and ~44% achieved remission (i.e. no depression).

Share price impact

Upon positive data readout with ~ >2–3 difference between placebo and treatment we expect 50%+ increase in share price, >1–2 30% share price and if a negative readout occurs ~40% reduction in price as the stock has $2bn in current assets (i.e. cash and cash equivalents).

Assumptions

Considering a likelihood of approval (LOA) of 57.4 percent based on Phase III drugs in neurology, positive results here will likely move up the LOA by around 45% relatively, thus increasing the inherent value of the company by a similar mark, this is a conservative approach given that the stock is trading at almost half of the previous trading position at $190/share pre MOUNTAIN trial data readout. The previous success of antidepressants (Cymbalta, Effexor XR) even with the presence of generics demonstrates the unmet need in the market. Zuranolone also benefits from the lack of tolerability (43% drop off rate within 3 months) seen with its counterparts achieving multibillion dollar sales prior to loss of exclusivity, given its 2-week dosing schedule as opposed to a continuous dosing schedule. The company has a commercial agreement with Biogen/Shionogi who will take charge of commercialisation de-risking the asset entirely. Based on potential sales we expect the company to receive ~ $800m to $1bn in royalty payments as peak sales are achieved. This seems entirely feasible when comparing Zuranolone to a recently approved drug — vortioxetine (Lundbeck) — which produced ~$500m in total sales in 2021. Given the new modality of Zuranolone, the shorter duration of treatment ( 2 weeks), faster onset of action and the reach of Biogen would enable greater sales and thus high royalties.

Zulresso

Zulresso, an IV infusion based therapy (over 60 hours), was approved for PPD back in May 2019. The therapy has currently failed to impress the market with $1.6m in Q1 21 compared to $2.3m. This demonstrates the lack of uptake though this is expected given the method of delivery as recovery post C-section is ~2–3 days. This presents an issue for the uptake of the drug. Covid headwinds are likely at play with reduced sales conversations and patients wanting to leave hospital sooner rather than later. We expect this to resolve and sales to improve post-lockdown.

Financials and Risk

The company is in a strong cash position with around ~$2bn in cash and cash equivalents, with around $90m cash burn/quarter. They will receive upto $1.6bn throughout and also receive future milestone payments of $475m for regulatory and commercial milestones as well as an additional $300m for specified net sales and an additional tiered royalties based on net sales (from high teens to low twenties), with a patent expiry of 17–04–2034 Zuranolone can expect at least 10 years of sales based on approval timelines. On a conservative level, we forecast ~$2.5bn in sales, though should trial data hit 2–3 (on HAM-D difference vs placebo) mark sales will likely reach ~$4bn assuming a premium annual price of ~$7k-$10k based on superior onset of action, reasonable side effect profile and duration of effect (antidepressant effects noted up to 42 days).

Verdict

We are long SAGE into WATERFALL trial data readout expecting an upside for 50% and if data readouts are negative we expect 40% downside (trading near cash). Based on the post hoc analyses in MOUNTAIN showing that patients who had HAM-D>24 had statistically significant differences vs placebo (p<0.048). SHORELINE also showed that there was a dose dependent effect with 50mg producing higher levels of response (80% -50mg vs 70% — 30mg) and remission levels (44% — 50mg vs 40% — 30mg). Though given the open-label nature of SHORELINE we have to take these results with a critical view. An additional bullish indicator is the inclusion criteria for WATERFALL with HAM-D>24 i.e. patients have worse depression vs those seen in MOUNTAIN (HAM-D>22) and in SHORELINE (HAM-D>20). Commercially, Covid-19 has resulted in an increased prevalence of ~27% — previously ~5% — providing a larger commercial opportunity for Zuranolone. Given the fast onset of action (3 days) vs current standard of care (4–6 weeks) as well as an adverse profile that could benefit those suffering from insomnia alongside their depression (on a nightly dose), we expect this to be a desirable candidate for physicians.

Disclosure: I/we are long $SAGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it from any related parties mentioned in the article, directly or indirectly. I have no business relationship with any company whose stock is mentioned in this article.