Investment Thesis

Intra-Cellular Therapies (ITCI) stock lost 10% of its value last week, but the company’s shares are up 43% in the past month, and 233% in the past year.

This developer of small molecule treatments for neuropsychiatric and neurological disorders has a market cap of just $2.0bn and a share count of 79m, but in terms of bringing treatments to market in a notoriously tricky sector for winning FDA approvals, Intra-Cellular is punching above its weight, in my view.

The company scored an approval for its lead candidate Lumateperone (branded as Caplyta) for the treatment of schizophrenia in adults in December 2019 and began its marketing campaign in March of this year. For a small company, Intra-Cellular is thinking big, hiring a 240-strong sales team, and launching a national TV ad and digital marketing campaign via social media sites including Facebook and Instagram, and a leading tele-psychiatry platform.

The company is also closing in on a second approval for Lumateperone, this time in bipolar disorder. Intra-Cellular expects to file a supplemental New Drug Application (“s-NDA”) either later this year or in early 2021 to treat bipolar 1 and bipolar 2 disorders based on results from 2 phase 3 trials – one evaluating Lumateperone as a mono-therapy, and the other as an adjunctive therapy to lithium or valproate – after both trials met their primary endpoint of change from baseline to day-43 in Montgomery-Asberg Depression Rating Scale (“MADRS”) – a key metric for evaluating depressive disorders in adults.

If approved, Lumateperone would become available to treat a broader range of bipolar patients than any drug currently on the market – an eventuality that has impressed analysts, who have set a consensus target price for Intra-Cellular stock of $58.5, with a high of $80 and low of $40. One analyst at RBC Capital Markets has even suggested that peak Caplyta sales could exceed $1bn, moving it into blockbuster territory.

With last week’s pullback having reduced the price of Intra-Cellular’s shares to $26.3 at the time of writing, from $31.2 on September 18th, I make the company a strong buy opportunity. There are risks associated with an investment – notably a very high cash burn ($111m in H120), unproven sales performance, and the tendency of promising Central Nervous System (“CNS”) treatments to run into problems. I will go over these further in this article, as well as taking a deeper dive look at the company and its products, history, strategy and consider a target price.

Company Overview

Intra-Cellular’s success has not happened overnight. The company was founded in 2002 by Sharon Mates, Ph.D., who has served as President, Chief Executive Officer and Chairman of the Board throughout the company’s existence.

The company’s technology platform CNSProfile is derived from the Nobel-Prize-winning work of Mates’ late co-founder Dr. Paul Greengard, in intracellular signaling pathways and intracellular targets. The platform monitors how psychotropic drugs create phosphoprotein changes in vivo, leading to the creation of unique molecular signatures for new drug compounds.

Lumateperone can be mediated via antagonistic activity at the 5-HT2A central serotonin receptors, for which it has a high binding affinity, or via central dopamine D2 and other receptors, including glutamate, for which it has moderate affinity, making the drug a versatile solution that can potentially address a range of CNS conditions – from schizophrenia and bipolar, to other types of major depressive disorders, including Alzheimer’s.

Intra-Cellular – current pipeline. Source: corporate presentation.

Besides Lumateperone, Intra-Cellular has a second major program, based around a portfolio of selective inhibitors of the enzyme phosphodiesterase type 1, or PDE1. The company intends to use this program to treat both CNS and non-CNS disorders where excessive PDE1 activity – which often leads to inflammation – is detected, including heart failure, diseases of the immune system, and neurodegenerative diseases including Parkinson’s, with candidate ITI-214 showing promise in early stage clinical trials. The company has a third asset, ITI-333, targeting substance use disorders, pain-management, opioid addiction and depression and anxiety, at the preclinical stage.

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The company is in-licensing patents for its assets – which includes a Crystal Form Patent covering ITI-007 (Lumateperone) until 2029 – from Bristol Myers Squibb (NYSE:BMY), in exchange for milestone payments totaling ~$10m to date, with a further $14.75m potentially due, plus single-digit royalties (between 5-9%) on commercial sales of its assets.

Intra-Cellular is ~65% institutionally owned, with Fidelity Investments (FMR LLC) (11.5% stake), Alafi Capital (10.5%), Vanguard Group (7.6%) and BlackRock (7.1%) amongst its largest shareholders. Dr. Christopher Alafi, General Partner at Alafi Capital is also a board member, as is Royalty Pharma (RPRX) co-founder Rory Riggs, and Richard Lerner, ex-President of the Scripps Research Institute and Director of Kraft Foods, and a decorated chemist.

Caplyta’s Rocky Road To Approval

Caplyta finally secured approval for a 42 mg, once daily non-titrated dose in tablet form to treat Schizophrenia in December 2019, based on the compound’s performance in two 4-6 week, phase 3 trials, in which Caplyta showed a statistically significant improvement in Positive and Negative Syndrome (“PANSS”) score over placebo.

Promisingly, weight gain, total cholesterol and triglyceride levels – common problems associated with antidepressant use – were similar to placebo – with the most common adverse events being somnolence and dry mouth. In a 1-year open-label trial, weight gain at day 350 was ~3.2kg, whilst 91% and 83% of patients with normal baseline fasting glucose and insulin levels respectively remained normal at day 300.

In a third trial, however, involving ~700 patients, Caplyta failed to beat placebo, which led to the FDA delaying its approval decision, in order to study non-clinical and preclinical data in more detail. Eventually, however, after the FDA delayed its final decision by 3 months in August 2019, Caplyta was given the green light.

Interestingly, Intra-Cellular’s efforts to secure approval for Lumateperone have followed a similar pattern. Out of 2 monotherapy trials, Study 404 met its primary and secondary endpoints, but Study 401 – conducted in the US only – did not, either at a dose level of 42mg, or 28mg.

This was put down to an unusually high placebo response by the company, and the positive data from the 529-patient Study 402 (evaluating Lumateperone as an adjunct to lithium or Valproate) released in September, which met both primary and secondary endpoints, ought to be enough to tip the balance in favor of a further approval in bipolar.

A third monotherapy Phase 3 study, 403, evaluating treatment of major depressive episodes associated with bipolar, will publish results in the second half of 2021.

Market and Competition

Despite the high barriers to entry created by the unpredictable nature of CNS trials – only oncological treatments (3.4%) have a smaller chance of making it through the clinical trial process than CNS treatments (15%) – or making it through a phase 3 trial (35% in oncology, 51% in CNS) with high profile recent failures including Allergan’s (AGN) Rapastinel and Sage Therapeutics (SAGE) SAGE-217 – Caplyta is competing in a fairly crowded field – albeit with a strong and versatile efficacy and safety profile.

The Schizophrenia treatment market was estimated to be worth $6.75bn in 2018 and is forecast to reach $9.5bn by 2026. At one end of the scale, Abilify – prescribed for Schizophrenia and other depressive disorders and marketed and sold by Otsuka – was America’s best-selling drug in 2015, making $7bn in revenues. At the other, Vanda Pharmaceuticals’ (NASDAQ:VNDA) Fanapt – approved as a second-line Schizophrenia treatment – made sales of $84.2m in FY19, despite an expensive televised ad-campaign.

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Bipolar Disorder affects ~6m adults in the US, roughly equally split between types I and II, and the treatment market size was estimated to be $4.9bn in 2016 and growing at a CAGR of 2.1%.

Intra-Cellular considers its competitors to be the likes of Sunovion’s Latuda – a ~$1.5bn-selling anti-depressant that goes off-patent in 2023 – Rexulti (marketed by Otsuka), which is expected to make $1.4bn in sales in 2020, and AbbVie’s (NYSE:ABBV) VRAYLAR – another drug forecast for blockbuster sales, as well as generics – of which there are many, including aripiprazole, olanzapine and clozapine – with more likely to be developed as branded treatments’ patents expire.

Still, both Schizophrenia and Bipolar are without question attractive markets for Intra-Cellular, and analysts’ forecast sales of $60m for the drug in 2020, and $400m in peak sales – although as mentioned, others believe that Caplyta has blockbuster potential – and I would concur that $400m seems a low bar, given that most anti-psychotics make >$450m in sales in the US, and there is no reason why Intra-Cellular cannot expand internationally.

Recent Performance & Strategy

It seems highly unlikely that Caplyta will achieve $60m of sales in FY20, since net product revenues in H120 have amounted to just $1.9m. This is due to pandemic headwinds – sales agents have not been able to get out into the field and to date the launch of Caplyta has been a mostly virtual campaign.

Management have reported weekly growth in new and refilled prescriptions, however, and say that Caplyta has achieved formulary coverage for 95% of covered lives in Medicare Part D and state Medicare – thought to be the company’s biggest sales channels.

In the first half of 2020 Intra-Cellular’s SG&A costs increased to $76m – from $27m in H119, and despite R&D costs falling from $49m in H119 to $41m in H120, the company posted a loss of $111m, compared to a loss of $72m in H119.

With $418m of near-term, cash available, however, Intra-Cellular has few near-term financial concerns, and it will be very interesting to see what volumes of sales the company was able to generate in Q3. I would consider this to be a key price catalyst, given the expensive marketing campaigns launched and sales personnel hired. A stellar sales quarter will excite analysts and investors alike, but another miss on revenues may lead to questions over where and how the drug will capture market share.

Fair Value

I have heard numerous investors say that Intra-Cellular is an under-hyped company, considering its significant achievements gaining access to a lucrative market, and potentially following up with a bipolar win that would make Caplyta one of the most broadly available treatments for management of depressive disorders.

Lumateperone broad applications in bipolar. Source: Intra-Cellular corporate presentation

Not only that, a bipolar approval would represent a strong endorsement of Intra-Cellular’s underlying science, potentially opening the door for its pipeline assets and certainly opening up the possibility of triple or even quadruple-digit million sales.

In truth, however, it’s hard to assign a fair value to a company that has scarcely begun to market its first approved drug and could make a >$200m loss in FY20, but here goes.

Using a very basic DCF analysis I would set an optimistic fair value price for Intra-Cellular stock of $60, based on the company achieving peak sales of $850m by 2025, and reducing OPEX as a percentage of revenues to ~82% (~$700m) over the same period (assuming the company earns $60m in FY20, OPEX of ~$200m would represent 333% of revenues), and earning a net income of ~$150m (18% net profit margin) by 2025.

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I am using a WACC of 7.7% based on an expected market return of 9%, RFR of 1.6% and beta of 0.83 (pandemic pressures have been forecast to cause a mental health epidemic hence the company may outperform under the current harsh COVID-19 environment). Sticking to a more conservative peak sales estimate of $400m, however, I get a FVP of $26 – more or less the exact price at which Intra-Cellular currently trades.

Conclusion

On balance, I favor the bull case. Objectively speaking, a drug with Caplyta / Lumateperone’s efficacy and safety profile ought to be capable of generating sales >$500m, in my view, based on market analysis. With a well-funded national marketing campaign, >100 sales staff and formulary approvals behind it, the tailwinds look very attractive indeed and in my view, long term, investors can think upwards in terms of >$1bn of sales rather than downwards at <$100m.

Nothing is certain in the CNS space and a failure to win approval in bipolar would deal a huge blow to the company’s prospects – damaging its reputation and potentially turning off prescribers within the Schizophrenia market.

Then there are the 2 trial failures to consider, where Lumateperone just plain failed to outperform placebo – this is not unusual for anti-depressive treatments, a subjective field – although these misses are outweighed by the trial wins.

Intra-Cellular’s upside case is not a done deal – there are still hurdles to be overcome and questions to be answered, and many short-term price catalysts to consider – the bipolar approval, the early Caplyta sales figures, whether the company may raise funding again after raising $350m in September, and how an inexperienced management team will fare in a commercialized environment.

But, the company’s growth story has the potential to pick up significant momentum if the short-term catalysts go its way, and suddenly you have a situation where Intra-Cellular becomes a significant player in anti-depressives with a massive market opportunity, validated science and technology, and a promising pipeline. At this point, the company also has an attractive exit-strategy as it ought to become an acquisition target, perhaps for BMY, its licensor, or for the likes of AbbVie, or another big pharma concern.

Even if things don’t go Intra-Cellular’s way in the short term, it is hard to see the share price retreating much below the mid-twenties, unless Caplyta simply fails to deliver in a real-world setting, or struggles for recognition in a crowded marketplace.

When a second-line Schizophrenia treatment like Vanda’s Fanapt is making sales >$80m per annum, that seems an unlikely scenario, however, and as such, I think Intra-Cellular stock ought to provide decent value and plenty of catalysts for growth over the next 12-18 months.

Although I would consider $60 a target, rather than a fair value price, if the company presents solid sales data in Q3, I can see its share price trading close to $35 by the end of the year, and continuing to grow throughout 2021.

Gain access to all of the market research and financial analytics used in the preparation of this article plus exclusive content and pharma, healthcare and biotech investment recommendations and research / analytics by subscribing to my channel, Haggerston BioHealth.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ITCI over 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.



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