Sage Therapeutics Looks A Buy At Current Price – Seeking Alpha

Thesis

In my view, Sage Therapeutics (SAGE) shares are undervalued, but are unlikely to be so for much longer. The company has already brought Zulresso to market and is likely to gain approval for SAGE-217 in the near future. Zulresso is already revenue generating with a targetable market potentially higher than $1bn, whilst SAGE-217's potential sales have been estimated at over $4bn. As such, this makes Sage an attractive growth stock, as well as a likely acquisition target for a big pharma firm.

I note, however, that Sage's share price has been drifting downward recently, from a high of $190 in July to less than $140 at the time of writing. Analysts have set a target price of over $200 for the stock (Nasdaq).

I believe that the market has not factored the recent company developments into the stock price. It can be tricky to determine future cash flows for a biotech stock given the complex regulatory environment and lengthy nature of clinical trials, but I believe Sage can become profitable within the next 3-5 years despite escalating R&D and SG&A costs, given that its drug portfolio targets multiple use cases for treating different forms of depression.

I expect Q3 results due shortly to be positive which will cause to the stock price to rise, therefore I am advising investors to take advantage of the current low price, making a small, short-term gain and a larger one in the medium to long term.

Sage share price vs S&P, S&P 500 Healthcare Index. Source: TradingView

I like biotech stocks that punch above their weight because it's often a sign of a visionary founder with the ability to bend matters to their will, and that is an essential quality to look for when a company has not yet delivered revenues or profits.

Another handy quality for an emerging biotech to possess is good fortune, and Sage Therapeutics (SAGE) appears to have luck on its side, achieving success with its very first compound. Over to founder and CEO Jeff Jonas:

Eight years ago, Sage laid the foundation to become the leading brain health company during a time when there was tremendous skepticism about the ability to develop novel medicines.

Today, our first compound is now our first commercially launched drug and our track record of success is a direct result of our unique approach to R&D and clinical development programs. Sage's deliberate decision-making approach around pipeline management has allowed us to build what I think is a leading multi-franchise company focused on getting patients better, sooner.

Source: Sage Therapeutics Q219 Financial Results Press Release

Developing your first compound into an FDA approved, commercially available drug is an impressive achievement for any biotech. Zulresso, designed to treat postpartum depression in post-natal women, was approved by the FDA after successful clinical trials, which showed that the brexanolone-based drug, administered as an intravenous infusion over 2.5 days and requiring hospitalisation or use of a specially certified healthcare facility, outperformed a placebo drug by a significant margin.

According to Medical News Today:

The studies used a depression severity scale with a maximum score of 52 points. According to the studies, moderate PPD is diagnosed with a score of 20 to 25 points. Severe PPD is diagnosed with a score of 26 points or higher. One study included women with severe PPD. After the 60-hour Zulresso infusion, depression scores for these women were improved by 3.7 to 5.5 more points than the scores of women taking a placebo.

FDA approval for the drug was announced in March this year, albeit through a restricted program known as REMS (Risk Evaluation and Mitigation Strategy), reflecting the dangers associated with administering the drug and restricting patient access to specified medical centres.

Now Sage is getting things ready for a full commercial launch, an area in which it admittedly has no experience to date. Sage Chief Business Officer Mike Cloonan revealed during the Q219 earnings call that:

Given that ZULRESSO is the first product specifically approved for PPD and the paradigm shift required, we estimate that fully activating the site to become treatment-ready can take 6 to 9 months or more from launch, and will vary by site. Therefore, we expect to start seeing momentum in the fourth quarter of this year or into 2020. With that said, I'm very pleased to announce that patients start being treated in July and exciting to see women with PPD starting to gain access to ZULRESSO.

Zulresso will not come cheap, with Sage reportedly looking at a list price point of $7,450 per vial. Given that the company considers 4.5 vials the correct level of treatment, patients will be looking at an overall cost of $34,000.

During Sage's Q3 earnings call, CEO Jonas commented:

As of August 1st, plans representing greater than 65% of all covered lives have committed to what we consider favourable coverage, meaning either low restrictions or light restrictions. The 65% represents progress across both commercial and Medicaid plans.

These numbers are certainly encouraging. Zulresso is a comparatively radical treatment for PPD given that patients are not required to complete a course of medication, just one intensive programme of regular intravenous infusions over 2.5 days. This may also explain the high cost since Sage will not be expecting recurring revenue streams from Zulresso, just a one-off payment.

Sage will have to work hard on its commercial go-to market strategy, educating both patients and physicians about the benefits. The company has opened a patient support centre at its headquarters in Raleigh, North Carolina, and plans to take a family-focused approach to treatment, providing access to support networks and personalised care. From a commercial perspective, Sage is also looking into providing financing to families that may struggle to afford the treatment.

Estimates for the sales potential of Zulresso vary. Sage says it believes PPD is the most common medical complication of childbirth, estimating that it affects some 400,000 women in the US every year. Analysts at RBC have estimated potential sales of Zulresso to be in the region of $375m. Leerink's analysis, however, estimates closer to $100m, whilst a figure as high as $600m has been mooted. If Zulresso reaches just one third of its available US population (120,000 PPD sufferers failed by currently available solutions), sales could touch $1bn, according to some sources.

Obviously there are still significant hurdles to be overcome if Zulresso is to become a safe and accepted mode of treatment. The drug has been given a "boxed" treatment status by the FDA, the most severe warning it can give, about the potential impact and side effects of taking the drug.

From a personal perspective, Zulresso strikes me as a treatment with a "shock and awe" quality about it, with its intensive treatment cycle that threatens negative side-effects in the short term. On the other hand, this seems preferable to a longer course of anti-depressants that may not take full effect until after the depressive condition has taken its worst toll.

Zulresso and the rest of Sage's portfolio of development drugs work by targeting the GABA and NMDA receptor systems, which is a novel approach but also one that has proven to be successful in clinical trials. I am not the expert, but you can find more information in this Seeking Alpha article.

If it were just down to Zulresso, Sage's portfolio, to my mind, would look thin and the current share price unjustifiably high, but much of the company's value derives from expectations about the company's other drugs in development, most notably SAGE-217.

Sage shares jumped more than 40% on Jan 9th this year when the company announced positive results from a trial of Sage 217 as a treatment for postpartum depression. The advantage that SAGE-217 has over Zulresso is that the drug can be administered orally, rather than intravenously, which means it can work as an out-of-hospital treatment and may be able to treat a variety of depression-related illness besides PPD.

SAGE-217's development has been complex and the treatment has been subject to a number of clinical trials, some ongoing, such as ARCHWAY (bipolar disorder, anxiety), MOUNTAIN (Major Depressive Disorder), REDWOOD (monotherapy maintenance treatment without traditional antidepressants), SHORELINE (evaluating SAGE-217 in treatment-free intervals) and RAINFOREST (MDD and comorbid insomnia).

The versatility of SAGE-217 means that its sales potential is thought to be considerably higher than Zulresso's. According to Evaluate Pharma:

Sage Therapeutics' oral depression treatment SAGE-217 also has a wide spread. While the 2024 consensus stands at $2.2bn, several analysts reckon the project will significantly outperform this - by up to 131% in the case of the most bullish forecast.

Source: Evaluate Pharma

During the Q3 earnings call, Sage's management made reference to having multiple filing strategies at its disposal when it comes to marketing SAGE-217. Nothing has been approved yet, but test results are proving positive. For example, the Phase III Robin Trial in January showed that:

14 days' treatment yielded a statistically significant effect on the primary endpoint, the HAMD-17 score, with a p value of 0.0029, despite placebo recipients doing better than expected.

Of all Sage's product pipeline, SAGE-217 is chiefly responsible for the company's current $7.2bn market cap, with the prospect of an acquisition by a major pharma doubtless factored into the price.

In fact, last year Sage received a one-off payment of $90m from Shionogi, in exchange for allowing the South Korean based firm the right to develop and sell the drug in the South East Asian market. According to Biopharma Dive:

If all goes well, Sage stands to earn as much as $485 million in milestone payments, as well as royalties averaging in a range higher than 20% on any potential sales.

Other drugs under development at Sage include:

Source: Sage Therapeutics Annual Report 2018

Developing and testing a pipeline of novel molecules and drugs is an expensive business, and if I had to identify a chink in Sage's armour, it would be the eye-watering current and future costs of R&D and SG&A.

Source: Sage Therapeutics 8-K Submission 2019

As we can see from Sage's recent 8-K Form submission, the company burnt through $177.3m in the three months ended June 30, 2019, alone and $348m in the first six months of 2019.

We can also see that Sage has a hefty cash position of $1.2bn, but at the current burn rate, that would run out in the next couple of years, with only an estimated $19m of Zulresso sales in the remainder of 2019 and realistically not much more than $100m from the same source available as income in 2020.

Should this concern investors? Quite possibly. Management stated during the Q219 earnings call that costs will almost certainly increase. CFO Kimi Iguchi commented:

We expect that our operating expenses will continue to increase year-over-year to support the ongoing investment in our multi-franchise portfolio and continue progress in our pipeline development.

That said, the wave of optimism surrounding Sage's portfolio should mean that if the company needs to raise further funds it may not find it too much of a struggle. Or, the company could make itself a target for acquisition. Or, it could sign more deals like the one it has signed with Shionogi.

Another important question to consider is how quickly Sage may face competition from generic versions of the drugs it is developing and commercialising. I have not been able to find too much detail around patents Sage may hold for Zulresso and SAGE-217, other than this from the most recent form 10-Q submitted to the SEC:

One issued U.S. patent covering the method of treating PPD using brexanolone i.v. which is exclusively licensed to Sage by The Regents of the University of California, and will expire in 2033. Recently a U.S. patent covering the formulation of brexanolone i.v. issued, which will also expire in 2033. We currently have one issued U.S. patent covering the composition of matter of SAGE-217, one issued U.S. patent covering methods of using SAGE-217

If this means that Zulresso is patent protected until 2033, then that would be good news for Sage. But there seem to be question marks around SAGE-217's exclusivity.

There are of course multiple alternatives to treating anxiety, depression, bipolar and all manner of depressive conditions available on the marketplace that do not focus on GABA and NMDA.

As mentioned previously, the onus is on Sage to persuade physicians, patients and their families, and insurers to embrace this new treatment. Will they? The treatment facilities are expensive to set up and maintain, the treatment may be considered too extreme for many, and although SAGE-217 is a likely more palatable and easily administered treatment, it is by no means the only anti-depressant treatment in its field.

Based on my research, favourable media coverage, addressable markets for its drugs and the strength of the management team, I like Sage at its current price of $140. Back in July, shares hit an all-time peak of $189. Since then, the price appears to have drifted downwards, perhaps due to a lack of positive newsflow, concerns about commercialisation or the complex nature of drug trials.

These are all legitimate concerns, but Sage has so far proved it knows how to deliver when it counts. By placing complete faith in its research, notably around Brexanolone, Sage has potentially opened up lucrative new product franchises across neuropsychiatry, depression and neurology industries, that would justify analysts setting a consensus target price of above $200 (Source: Nasdaq). The challenge now is to develop an effective sales & marketing strategy to promote Zulresso and to get SAGE-217 approved for commercialisation. I believe the company can do both these things.

As such, since I cannot find a good reason for the drop in price, and given its future prospects, and despite the caveat around evaporating funding, I intend to buy Sage before Q3 earnings are released.

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.

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Sage Therapeutics Looks A Buy At Current Price - Seeking Alpha