Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear. – Phillip Fisher

When you invest in biotech, be sure to focus on the company’s life cycle. For instance, a young biotech company usually spends many years of its life in the developmental stage. After launching a lead drug, it’ll transition into a commercialization stage company. As you can see, most of your investing profits usually come in the months leading to approval. Soon after approval, the stock typically underperforms as investors unload some of their shares. As you know, that’s simply the profit-taking in biotech. And, this profit-taking won’t last forever. With a stellar drug and other pipeline catalysts, the share price usually rebounds.

The stock that epitomizes the aforesaid phenomenon is Intra-Cellular Therapies (NASDAQ:ITCI). With Caplyta’s approval in late 2019, the shares depreciated for a couple of months. Since then, this stock has rallied in cyclical spurts. Signaled by signs of strong sales growth, I believe Intra-Cellular will trade much higher in the coming quarters. There are also a number of label expansion programs for Caplyta and other pipeline assets. Altogether, I believe they will galvanize the share price in the coming years. In this research, I’ll revisit Intra-Cellular and provide my expectations of this Phillip Fisher growth equity.

Figure 1: Intra-Cellular chart (Source: StockCharts)

About The company

As usual, I’ll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the subsequent section. Headquartered in New York, Intra-Cellular harnesses the power of innovation to commercialize stellar medicines for managing various central nervous system disorders.

Looking at the pipeline below, you can see that Intra-Cellular is advancing an intriguing portfolio of three novel medicines, including ITI-007 (i.e. lumateperone or Caplyta), ITI-214, and ITI-333.

Figure 2: Therapeutic pipeline (Source: Intra-Cellular)

Caplyta As The Crown Jewel

To help you better assess a pipeline, I developed the M4 Criteria. Using the M4 Criteria, you should place emphasis on Caplyta, i.e., a first-in-class medicine approved to treat schizophrenia. In assessing the first M, i.e., Medicine, you should pay attention to its mechanism of action.

Here, you can see that Caplyta regulates the essential chemical messengers in your brain coined neurotransmitters. The most crucial messengers are serotonin, dopamine, and glutamate. Working in synchrony, they’re modulating behavior, mood, and mental balance.

Given the messengers’ importance, you can see why Intra-Cellular is assessing Caplyta’s use to alleviate the suffering in schizophrenia, bipolar depression (BPD), major depressive disorder (“MDD”), sleep, and behavioral disturbances as shown above.

Caplyta Is Superb For Treating Negative Symptoms

You probably kept hearing me hammering the message that Caplyta is such a great medicine because it can manage schizophrenia far better than other drugs. Well, that is true. After all, most neuroleptic medicines can easily subdue the positive symptoms of schizophrenia. They include delusion, hallucination, disorganized speech, difficulty concentrating, and disordered movement.

And yet, the biggest challenge is to treat negative symptoms such as flat affect, poverty of speech, a lack of motivation, diminished sex drive (i.e., anhedonia), and lack of social interest. Like rays of hope shining on patients and their families, Caplyta demonstrated excellent efficacy in treating these dreaded negative symptoms.

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That aside, most conventional neuroleptics have reduced utility because of their adverse effects like weird bodily movement. On this front, Caplyta also knocks out other drugs because of its favorable side effects profiles. Riding tremendous advantages, you can see that Caplyta is a stellar medicine with much-unlocked value. Shifting gears, you should check Caplyta’s sales results.

Caplyta Commercialization Progress

As you know, we’re approximately nine months into the coronavirus pandemic. Despite the rampaging effects of COVID-19, Intra-Cellular delivered impressive Caplyta quarterly sales. Specifically, there were $7.3M in product revenues. As such, this represents a 280% sales growth compared to the previous quarter.

You might not think that this is significant. But for a company “going at it alone” in commercialization, this is an impressive feat. Hence, it signifies that Caplyta has excellent sales prospects, to be realized in the coming years.

Though Caplyta is a great drug, it would still take several years to ramp up sales into a blockbuster. You can imagine that time is required for professional sales reps to build a stronger relationship with hospitals and clinics. You can get a glimpse into the tremendous sales opportunity for Caplyta based on the patient’s positive experience.

In addition, Caplyta’s market access continues to be stronger with over 95% of covered lives in both Medicare Part D and State Medicaid. As she encapsulates recent developments in an uncanny pill like Caplyta, the Chairman and CEO (Dr. Sharon Mates) remarked,

Our Company is in a strong position. Caplyta is approved for the treatment of schizophrenia in adults and I am pleased with the prescription growth of Caplyta as we continue to provide this important medicine to patients. In addition, we have a broad development plan for lumateperone in other major neuropsychiatric conditions. We are soon submitting an sNDA for lumateperone for a second major indication, bipolar depression and initiating late stage studies in adjunctive MDD and in major depressive episodes with mixed features in patients with either bipolar disorder or MDD. Our robust pipeline including our LAI formulation of lumateperone, ITI-214 and ITI-333 continue to advance and we are well capitalized to fund our commercial activities and development programs.

Caplyta Label Expansion For Bipolar Depression

From the Chief’s statement, you can see that Intra-Cellular is poised to submit an sNDA for Caplyta’s label expansion. That is to say, Caplyta will be used as an add-on drug with a mood stabilizer (i.e., lithium or valproate) for BPD. Back in September, the company revealed strong topline results for the Phase 3 (Study 402) trial for major depressive episodes associated with BPD.

In that study, Caplyta 42 mg cleared its primary endpoint for improvement in depression as measured by MADRS (with the p-value of 0.02). Caplyta also achieved the key secondary endpoint (CGI-BP-S) Depression Score with the 0.008 p-values. Since the p-values are less than 0.05, you can tell that Caplyta’s efficacy is real rather than random occurrences.

Leveraging positive data for both Study 402 and Study 404, you can expect approval of Caplyta for BPD. The projected time frame is 1Q2021 for the sNDA submission. Using my forecasting system and experience, I ascribed a 65% (i.e., more than favorable) chance of approval for BPD.

Assuming no significant setbacks for COVID-19, I expect Caplyta to be approved in 2H next year. The anticipated market for Caplyta would be sizeable due to 11 million adults having BPD. And Caplyta is positioned to become the first approved adjunctive treatment for these patients.

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Caplyta Label Expansion for Major Depressive Disorder

Asides from BPD, Intra-Cellular is expanding Caplyta’s third indication for MDD. Of note, the company recently amended Study 403 (i.e., the ongoing monotherapy BPD study) This investigation assessed patients suffering from either MDD or BPD with clinically mixed features.

I like this move because Study 404 subgroup analysis showed that BPD patients with mixed features had a statistically significant improvement in the depression rating, i.e., MADRS. In my view, the more specific the study is designed for patients with a particular characteristic, the better the chances of getting positive data. That aside, the Phase 3 study of Caplyta as an add-on therapy for MDD is set to commence in 2021.

As you can see, Intra-Cellular is eager to reap the most value from Caplyta through various label expansions. The more the better. It’s just like a tree growing by adding additional branches.

Regarding other pipeline expansions, Intra-Cellular is studying the long-acting injectable formulation of Caplyta and ITI-214. I like companies having multiple assets in development. That way, there’s a stacking of catalysts like another company Axsome Therapeutics (AXSM) to power additional growth.

Financial Assessment

Just as you would get an annual physical for your well-being, it’s important to check the financial health of your stock. For instance, your health is affected by “blood flow” as your stock’s viability is dependent on the “cash flow.” With that in mind, I’ll analyze the 3Q2020 earnings report for the period that ended on September 30.

As follows, Intra-Cellular procured $7.3M in revenues compared to no sales for the same period a year prior. That asides, the research and development (R&D) spending came in at $10.2M and $21.3M, respectively. It looks like the R&D is cut in half. I like to see increasing R&D. In this situation, the company recently finished Phase 3 trials for various indications. Hence, it makes sense that R&D is lower.

Additionally, there was a $55.1M ($0.79 per share) net loss compares to a $4.8M ($0.63 per share) decline for the same comparison. As the company is launching Caplyta itself, that explains the higher investment in its commercialization infrastructure. Therefore, the losses widened.

Now, I expect that net income to substantially improve in the coming years as the company gains additional label expansion. Even without the label expansion, sales growth should continue to increase by multiple folds.

Figure 3: Key financial metrics (Source: Intra-Cellular)

About the balance sheet, there were $723.3M in cash, equivalents, and investments. With the $358M public offering executed in September, the total cash position improved to $1.0B. Based on the $63.3M quarterly OpEx, there should be adequate capital to fund operations into 3Q2024. You can see that the balance sheet is quite strong regardless of the high OpEx.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are “growth-cycle dependent.” At this point in its life cycle, the main concern for Intra-Cellular is if Caplyta will continue to gain strong sales traction.

Moreover, there is the risk that Caplyta will not gain approval for BPD and MDD. Furthermore, the long-acting version of Caplyta might not gain marketing authorization. Of note, there is a 30% risk that Caplyta won’t pass its clinical study (Study 403) as monotherapy for BPD in 2H2021. In case of negative data or non-approval, you can expect your stock to tumble by 50% and vice versa.

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Final Remarks

In all, I maintain my buy recommendation on Intra-Cellular Therapies with the five out of five stars rating. After years of drug development, Intra-Cellular transitioned into a commercialization stage biotech. Because the company is going at it alone, it’ll be more difficult to quickly ramp up Caplyta sales. Be that as it may, I believe a stellar medicine will ultimately reach blockbuster status. As you saw in the latest earnings report, sales are ramping up multiple folds in the thick of the coronavirus environment.

Interestingly, sales growth is achieved with only a small internal sales team. In the coming years, I expect annual sales to quickly reach beyond $100M. Due to various label expansions for MDD, BPD and the LAI formulation, I expect Caplyta to become a blockbuster three years from now.

As an investor, your task is to keep tabs on Caplyta’s development for BPD and MDD. You can expect approval for the BPD franchise sometime next year. That aside, make sure you see that the long-acting injectable version of Caplyta will be advanced. And remember to check up on ITI-214 and ITI-333’s development. Though they are early in their development, positive data can quickly rally the stock.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As a medical doctor/market expert, I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I am also NOT responsible for the actions of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized.

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