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Supernus Pharmaceuticals: Migraines, Epilepsy and ADHD

03/01/2019 5:00 am EST

Focus: HEALTHCARE

Douglas Gerlach

President, ICLUBcentral, Inc.

Supernus Pharmaceuticals (SUPN) potentially offers a rare combination of traditional value, backed by sales of its approved drugs, and upside excitement thanks to its high-potential pipeline assets, asserts growth stock expert Doug Gerlach, editor of Investor Advisory Service.

The company has grown nicely and earned some achievements since we first wrote about it a year ago — withstanding competitive launches from larger companies and also defending its intellectual property against generic competition.

Despite those successes, shares have not advanced in the last year. The reason is that the market does not seem to value the company’s pipeline at all right now. We view this as an opportunity for enterprising growth investors. Supernus currently sells two drugs for epilepsy and migraine prevention, Oxtellar XR and Trokendi XR.

The company’s estimated combined peak sales for these drugs is $500 million annually, compared to trailing 12-month revenue of $381 million. It also has a pipeline headlined by two late-stage drugs targeting the psychiatric indications of impulsive aggression and ADHD.

Pivotal trials for both drugs will read out in the first half of 2019. Another pivotal trial addressing bipolar disorder will read out in the second half of the year. This trial is testing the same compound found in Oxtellar XR, but any commercial success would be incremental to the $500 million revenue opportunity.

Drug development is always a risky endeavor. In December, investors reacted negatively to Phase III ADHD data which was perceived as too similar to old data from a competing drug which has since gone generic.

The ADHD market is complex and fragmented, and Supernus believes its new drug can compete favorably against both the generic and branded treatments currently available. Winning just a single digit share of the enormous ADHD market should be worth at least a doubling of the firm's current share price, but the market seems to think the new drug is almost certain to be a complete flop.

The next pipeline asset to read out will be SPN-810, an extended-release, low-dose formulation of an antipsychotic called molindone hydrochloride. The target indication is impulsive aggression (IA), for which there are no approved therapies. Supernus is currently testing SPN-810 in juvenile ADHD.

If successful, it will test the drug in other pathologies where IA is prevalent, and quite likely in adult ADHD. Investors were annoyed in November when the company pushed back the timetable for reporting data on this drug. The trial had already been amended once in 2017, and investors seem to be running out of patience with the company’s changing timetable.

We sympathize with that frustration, but as with the ADHD drug above, the market’s disbelieving cynicism seems a little out of hand at this point. The high price of prescription drugs is in the news on a seemingly constantly basis. Supernus’ development strategy has some controversial elements.

Oxtellar XR and Trokendi XR are extended release formulations of oxcarbazepine and topiramate — XR stands for extended release. The underlying compounds are already marketed as generic drugs, but by creating once-daily formulations and testing them in clinical trials, Supernus is able to get pricing more like a branded drug.

Payors have not always been willing to pay the approximately $10k per year for reformulated versions of generic drugs. There is almost zero foreign demand for the company’s existing drugs. Its lead pipeline assets are more novel.

While their underlying compounds are not novel either, both are being tested in new indications and are therefore more like truly “new” drugs. There is more ingenuity going into the company’s pipeline than it has demonstrated in the past, and Supernus needs to prove that it can do more than tinker around with already-successful drugs. We think it will succeed.

We would characterize the 14% pop in Supernus  following its just-released earnings report as a “relief rally.” Shares were weak heading into the quarter’s financial report, but results remained robust. Q4 revenue growth of 31% at SUPN handily beat estimates, although the company noted that the outperformance can be attributed to inventory building within the supply channel.

Q4 EPS of $0.48 was held back by approximately $0.17 of acquisition-related charges but still increased 85% compared to a tax-affected Q4 2017. For the full year, Supernus earned $2.05 per share, almost double 2017’s figure. 2019 guidance contemplates revenue growth of 9% to 14% with operating income growth of 11% to 25%.

The company’s final Phase III trial in ADHD will report data by the end of March. Management seemed to push back the timeline slightly once again for its impulsive aggression trial, which will now report data in the second half of the year, rather than “mid-year.”

We model the downside as $20, but this should prove extremely conservative. The company’s approved drugs justify a higher price. We model the upside for shares as $144, the product of a high P/E of 25.7 and five years of 25% compound EPS growth. The upside/downside ratio is 6.1 to 1. That may seem high, but we think the pipeline justifies it.

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