May 2020 Update – Sage Therapeutics Takes A Hit From Covid-19: Still A Good Opportunity?
In December, 2019 we published our “Sick Pick” for 2020. This was a biotech demonstrating outstanding clinical promise, while still available for purchase at a modest price. We chose $SAGE based on the strength of it’s blossoming depression franchise. At the time, the share price had fallen precipitously related to a clinical setback,a setback that we thought was merely a misunderstanding on the part of the Market. Thus, we saw value.
The Covid-19 crisis has not been kind to Sage. The fledgling depression buster has seen it’s share price drop an additional 40% as the Coronavirus pandemic has forced a substantial salesforce layoff.
Does this mean that $SAGE is just another victim of the pandemic, to be sold at a loss? Does this mean that our original investment thesis was wrong to begin with?
Let’s take a look.
What Went Wrong?
On April 7th, 2020, Sage announced a dramatic corporate restructuring in response to the Covid-19 crisis. They were “pulling the plug” on their entire commercial operation related to Zulresso, dismissing approximately half of their entire staff, all at once. This kind of amputation by chainsaw is never a pleasant surprise for anyone, least of all shareholders.
As we noted in our original analysis of the company, Zulresso meets an important need in the market (postpartum depression) but is very resource intensive to administer. Far from a simple pill, Zulresso was actually a process. In the best of times this meant substantial investment of time and money for both the company and clinicians.
But April of 2020 was far from the best of times. In fact, almost no one could ever have predicted that most OBGYN offices and Psychiatrist offices would be shut down for a prolonged, or even indefinite, period of time. This lack of physical contact made it almost impossible to administer the drug (an infusion given in a controlled medical office) and certainly impossible to continue actively growing the necessary infrastructure.
The result was massive cash burn, with barely a glimmer of light at the end of a long tunnel. While Zulresso still had long term potential, Sage had a variety of other more important agents that also needed investment to progress to commercialization. Cash spent on promotion of the slow growing Zulresso could starve other programs of much needed investment. Faced with a “worst case” scenario, the captains of Sage’s ship did the one thing they could do to keep their ship afloat in the storm: they threw the dead weight overboard.
With the money losing Zulresso amputated, Sage stopped the bleeding almost immediately. Management estimates that the cost reductions will conserve about $150 million in cash annually. This cost reduction left Sage with $870 million in cash at the end of March, 2020 and $0 in debt.
Faced with this kind of violent cost reduction and a plummeting share price, many investors flee. But we actually still like the company’s long term prospects. The company is still rapidly developing intellectual property targeting huge unmet medical needs. In addition to continuing to advance it’s flagship depression product (Zuranolone), the company has made substantial progress in advancing a molecule to treat essential tremor. More than six million Americans suffer from essential tremor, with few efficacious treatments currently available. As of today, the company could continue to advance these programs through 2022 without raising a dime in additional capital. The company currently has a market value of $1.9 Billion. Success with just one major new neurological agent, launched in a medical community thirsty for new brain treatments, could easily bring in $1.9 billion in revenue PER YEAR. We believe that Sage’s management has made some tough choices to survive the Covid-19 crisis and thrive in the not too distant future. Sage lost a hard fought battle, but can still win the war.
Original Post From December 2019:
It takes more than just a strong clinical program for a biotech to become a Sick Pick. Our investment dollars are devoted to biotech companies with nice pipelines, at the nice price. Going into 2020, with think Sage Therapeutics is ready to make us some healthy profits…
The last decade has been a miraculous time for both biotech investors and patients. The Biotech Industry of America has cured Hepatitis C, spawned novel treatments for heart disease, and taken its first few steps to cure genetic disease. Along the way, the IBB index, representing a basket of widely held biotech stocks, returned 342% in just ten years.
All of this success has left today’s biotech investor with two problems. First, biotech has done so well cranking out treatments, that many common disease spaces are now, “crowded.” With many treatments available for, say..high cholesterol, the bar set for new therapies is quite high. Second, many biotech firms with nascent franchises and obviously promising research are trading at record high share prices. The best innovation in the world won’t pan out for an investor who pays too much for that innovation.
So the clever investor would need to find a company with novel molecules in a field of medicine that still has great unmet need; additionally the company would have to be overlooked or misunderstood, so that our clever investor could snap up shares on the cheap. Not an easy gem to find amongst the coals!
For 2020, our pick is SAGE THERAPEUTICS ($SAGE).
The Clinical Space
For starters, Sage is authoring promising research in a clinical field that desperately needs new advances. Sage specializes in the human brain. Until now, clinical advances have been modest at best; any company that can successfully address Depression, Parkinson’s, or other neurodegenerative diseases won’t have much competition.
Specifically, Sage’s most advanced molecules are in the Depression category. Anyone who has seen a loved one attempt to navigate the maze that is Major Depression knows that our current clinical situation leaves much to be desired. The primary drug class used to treat depression today is the SSRI. Although there are dozens of different kinds of SSRIs on the market, they all share two major defects.
First, SSRIs take at least three weeks to kick in, sometimes much longer. Second, research consistently shows that SSRI’s just don’t work for everyone. According to the Harvard Medical School, 30% of depression patients never find relief from SSRI based treatments. Even for the 70% of patients who do achieve remission with current medication, it can be an agonizing “trial and error” process that takes many months, if not years.
Into this weak clinical environment charges Sage Therapeutics, introducing a host of novel molecules that aim to treat depression with an entirely new method of action. The hallmark of Sage’s drug candidates is speed …Sage’s drug candidates work in three days instead of three weeks. For some deeply depressed and frustrated patients, this could literally mean the difference between life and death….
Sage’s two most advanced candidates are Zulresso and SAGE 217. Zulresso was actually recently approved by the FDA for the specific treatment of PostPartum Depression, while SAGE 217 is in advanced, phase 3 trials for general depression. Both of these molecules function in the brain through modulation of the GABA and NMDA receptors, a previously unexplored approach to psychiatry.
Both treatments have been shown to provide almost immediate relief to a cross section of depressed patients. This is a big deal for a number of reasons. First, rapid efficacy greatly reduces the risk of patient self harm. Many patients decide that they just can’t wait three or four weeks for SSRIs to kick in, and hurt themselves in the meantime. Second, given that many patients need to try multiple SSRIs before they find relief, SAGE 217 could act as a “bridge” that keeps people hanging on until they finally find the right SSRI.
It might surprise you, but Major Depression is actually the leading cause for disability worldwide. Any drug that provides a new path to remission would have mind boggling commercial potential.
The Challenge is the Opportunity, Part 1
Sage has faced two headwinds that have created a mismatch between the stock price and the potential.
The first headwind has been the slow commercial start for Zulresso. Even with millions upon millions of American women suffering from PostPartum Depression, Sage sold just $1.5 million worth of the stuff in the third quarter of this year. In pharma terms, that is a rounding error.
But these figures could well be misleading. Zulresso is an injection with just enough demonstrated side effects to complicate administration. In clinical studies, a small but meaningful percentage of women became drowsy or sedated for sixty minutes following the injection of the drug. The sedation effect has been temporary and minor, but just enough such that Zulresso must be administered in a clinical setting under the supervision of clinical personnel.
This safety requirement has meant that Sage has had to invest time and money into building a clinical infrastructure to support Zulresso’s growth. Interested medical practices must become certified in the medication; certain protocols must be learned and followed to receive certification. Additionally, Zulresso is a “buy and bill” product, meaning that medical practices must buy the product up front, and then bill the insurance company after its administration. While this is a common business model across the medical spectrum, it would be a new way of doing business for most OBGYN and Psychiatry practices. Sage has made steady progress in “priming the pump” to enable more doctors to prescribe Zulresso, but gaining momentum with this drug is not an overnight process.
That being said, there are actually two great opportunities associated with these temporary barriers. First, for the practices that do invest the time and effort to become Zulresso certified, this means that they are firmly committed to using the product. Practitioners must devote resources upfront to gain the capacity to prescribe the medicine; this means that, once they clear the initial bar of certification, they will be committed to writing this drug.
The second opportunity is more psychological. One thing regarding psychiatric drugs that would surprise most casual observers is how well the placebo (fake) drugs do in clinical trials. In order for a psychiatric drug to be approved, the molecule must consistently perform better than a placebo. However, you might be amazed at how many people are “cured” by placebo drugs.
The fact that Zulresso is not just a simple pill, while a big challenge at first, could actually make the whole process more effective in the long run. While the new drug has been proven to be better than placebo, the extensive attention that patients will be receiving in a clinical setting will probably add a powerful psychological boost to women in need of a postpartum cure. Zulresso isn’t just a pill; it’s a process. That process could be very healing for many patients.
The Challenge is the Opportunity, Part 2
The second opportunity has come about in much more dramatic fashion. The recent “failure” of Sage 217 in a phase III trial opens up a huge opportunity for the astute biotech investor.
Sage 217 is a simple pill aimed at the entire spectrum of patients suffering from Major Depression. As such, this molecule has been a Wall Street darling, because it is aimed at a much broader potential population than Zulresso.
Throughout a series of ever more advanced studies released over the years, Sage 217 has demonstrated very rapid onset, providing significantly more relief to patients than placebo. These benefits typically reached full efficacy in just three days, and lasted longer than 15 days.
A new phase III study, the MOUNTAIN STUDY, was supposed to be the cherry on top, the largest study yet to confirm the powerful and durable efficacy of Sage 217.
But the results surprised many, leading to a surge of disappointment amongst analysts. While the drug demonstrate the same rapid onset and powerful efficacy it has become known for, the clinical benefits did not last the full 15 days. Sage 217 demonstrated statistically significant benefit over placebo for days 3, 8, and 12. But the effect had petered out by day 15.
The result was a massive, and instant crash in share price. The stock dropped by about 50%. Almost $4,000,000,000 of shareholder value vaporized instantly.
Is this a big enough clinical setback to justify such punishment from Wall Street? After many successful trials of Sage 217, is one disappointing trial enough to abandon ship?
The company maintains that the study results were flawed for two reasons. First, they claim that a significant portion of patients never took the medicine to begin with, thus they showed up the same as placebo (very depressed patients are notorious for noncompliance with all medication regimes). Second, they claim that this particular group of patients was not as depressed as the very sick subgroup of patients where Sage 217 has demonstrated rock star success in the past.
Are these arguments valid? Were there flaws in the design of the study that lead to outlier underperformance, or does Sage now belong in the “discount” bin?
The answer is: it doesn’t matter. Anyone who dwells on the debate around long term efficacy of the drug doesn’t understand anything about Major Depression. Most patients only arrive at a psychiatrist after a prolonged period of intense suffering. After suffering chronic depression for a long time, the patient typically has experienced an acute episode that has gotten so bad that someone in their life is now forcing them to take action. Such desperate and sick patients do not want to hear, “take this and maybe it will work in a month,” and physicians certainly hate to say that. Even if Sage 217 is proven to be merely a short term boost for desperate patients, the market could be huge. If you find someone drowning, the very first thing you do is to throw them a life vest to keep them afloat temporarily. You worry about fishing them out of the water after the situation has been stabilized.
The powerful short term effects of Sage 217 have been proven again and again in several well regarded clinical studies. The method of action is unlike anything else on the market. And now you can buy the company at half off. Now there is an opportunity that should cheer you up!
To top it all off, Sage is in a strong financial position with about $1 Billion in cash, and zero debt. The company also has a variety of earlier stage molecules for a potpourri of brain diseases …all of which suffer from large, unmet clinical needs. 2020 could be a breakout year as Sage rebounds from this December’s bad publicity hit. Why not go along for the ride?
DISCLOSURE: The Sick Economist owns stock in $SAGE