Sage Therapeutics (SAGE) is a commercial stage biotechnology company specializing in creating drugs that treat brain health disorders. Its currently commercial drug, Zulresso, is used to treat postpartum depression. Following a negative Phase 3 results with SAGE-217 for major depressive disorder in early December 2019, the stock plunged from over $150 per share to about $60, sank further to hit a 52 week low of $25.95, and since then has recovered somewhat to $69.19 at the close on December 9. On November 27, 2020, a collaboration deal was announced between Sage and Biogen (BIIB).
I do not believe the trial failure for SAGE-217 implies a general failure of the Sage platform, especially given positive results within the same trial and in other trials. This article will cover the basics of the Sage deal with Biogen and Sage’s Q3 2020 results. I will then look at the currently approved drug, Zulresso, and the platform. The keys to value going forward appear to be the clinical stage drugs Zuranolone (was SAGE-217) , SAGE-324, and SAGE-718. Given their potential value, I believe Sage has good prospects and the partnership and investment by Biogen are wise. However, this optimism should be weighted by the possibility that any or all of Sage’s current pipeline candidates could fail to get data sufficient for regulatory approval or might see little acceptance in the marketplace even if approved. Considerable optimism is built into the current stock price, as Sage Therapeutics has a market capitalization of about $3.6 billion at $69.00 per share.
Sage Q3 2020 Results
The first thing to note from the Sage Therapeutics Q3 2020 results is the tiny amount of revenue provided by its initial commercial asset, Zulresso, which was just $1.6 million. That was up from $1.5 million in Q3 2019. It does not seem likely that Zulresso will ever generate product revenue sufficient to justify Sage’s current stock price. I will discuss Zulresso further below. Revenue declined from $3.6 million in Q3 2019 because in that quarter there was $2.0 million in collaboration revenue.
Between research and development expenses of about $74 million and administrative expenses of $35 million, Sage managed a loss of near $106 million, or $2.03 per dilutes share. This is not unusual for what has essentially reverted to being a clinical-stage pharmaceutical company. The cash and equivalents balance ended at $671 million, which Sage believed would be sufficient to fund the company into 2022. A key question would be whether the clinical-stage assets could start generating significant revenue by 2022. However, the Biogen deal has removed that concern.
Sage and Biogen Collaboration Basics
On November 27, 2020, the Biogen and Sage collaboration agreement was announced. Two clinical stage assets were chosen for co-development: Zuranolone and SAGE-324. Japan, Taiwan and Korea were excluded because Sage already had a collaboration agreement in place with Shionogi in those regions. The companies will jointly develop and commercialize the assets in the U.S., while Biogen will have all rights outside the U.S. An upfront payment of $875 million will be made by Biogen to Sage. In addition, Biogen will invest $650 million in Sage, with 6.2 million shares purchased at $104.14, a significant premium. In addition, if successful, milestone payments could go up to $1.6 billion. In the U.S. the companies will split profits. Outside the U.S. Biogen will pay royalties tiered between the high teens and low twenties.
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The deal is clearly great for Sage, which now should have over $2 billion in cash. In turn Sage is giving up significant potential revenue and profits should the assets get commercial approval and generate significant sales. With 6.2 million Sage shares Biogen will be about a 10% owner, so even the Sage retention of partial rights in the U.S. should help Biogen, again assuming success. Clearly the deal will appear to be bad to shareholders of both companies should Zuranolone and SAGE-324 both bomb either in clinical trials or, if approved, in the marketplace. An evaluation of those assets and the Sage platform are keys to good decision making by investors.
Zulresso and the Sage Platform
Zulresso (brexanolone) was approved by the FDA to treat postpartum depression on March 19, 2019. It is a relatively fast acting steroid that modulates GABA receptors, which are inhibitors of neural activity. It has some drawbacks which caused the FDA to restrict its availability to an REMS (risk evaluation and mitigation strategies) program. It has a relatively long administration time, requiring 60 hours by injection. Sedation and even loss of consciousness can be a side effects. On the positive side, depression symptoms were reduced as early as 24 hours after initiation, there was a statistically significant reduction in symptoms after 60 hours, and the reduction remained effective during a thirty day follow-up period.
Image source: Zulresso.com
Given the extremely low rate of uptake, I do not see Zulresso as financially significant to the future of Sage. I see it as validating the platform and showing that Sage is capable of getting a new medicine through clinical trials to regulatory agency approval. It sets the stage for Zuranolone and other pipeline assets.
Source: Sage Therapeutics
The human brain is astonishingly complicated. One problem in treating its disorders is that there are many types of neural synapses that control the transmission rates of neuron signaling. Sage Therapeutics is focused on two synaptic components: GABA (discussed above) and NMDA. Their biochemistry is beyond the scope of this article, but NMDA is a key regulator of certain neural activity including memory formation and stabilizing neural circuits. There are several drugs that affect it, including alcohol and a generic Alzheimer’s treatment, memantine. Improved GABA and NMDA modulators could have positive effects in a variety of disorders where the current standards of care are clearly inadequate.
Zuranolone (was SAGE-217)
Zuranolone for major depressive disorder Phase 3 (Shoreline) interim results released in October 2020 showed good tolerance and safety. Response and remission were measured with the Hamilton Rating Scale for Depression. Patients who had a clinical response at the 30 mg does used just 1.9 treatments per year on average. About 70% of patients only needed one or two treatment courses. About 20% of patients did not achieve a response, 71.6% achieved a response, and 39.8% had a remission. Another cohort received a 50 mg dose, which also reported good safety and tolerance. Sage plans to report comprehensive data for the 30 mg dose in the first half of 2021 and topline 50 mg data by the end of 2021.
In contrast, when it was still called SAGE-217, the drug failed to meet its primary endpoint in the Phase 3 (Mountain) study, as announced on December 5, 2019. That study was also on adults with major depressive disorder. The primary endpoint was the Hamilton Rating Scale for Depression at day 15. There was a greater reduction in the score than for patients receiving placebo, but it did not reach statistical significance, as p=0.115, and it needed to be under p=0.05. However, the improvements did reach statistical significance at days 3, 8, and 12. At that time two other pivotal trials of the drug had been completed, and three were ongoing. While failure to meet a primary endpoint typically kills a drug’s chances with the FDA, because of the overall data Sage decided to continue with the other trials.
Zuranolone is an orally administered modulator of GABA-A receptors. The FDA has granted it Breakthrough Therapy Designation. It is also being studied for postpartum depression, with Phase 3 topline data expected in 2021, and for treatment resistant depression. The set of trials for Zuranolone is extensive, including three completed, two halted, and four currently enrolling. In addition to the Shoreline trial covered in this section’s first paragraph, the Waterfall study is testing the 50 mg dose with topline data expected in 1H 2021.
If approved by the FDA and other global regulators the value to investors of this drug could be high. It is oral, it acts quickly, and it often gets patients out of their depression, so little repeat dosing is needed. It can be administered as a monotherapy or as an add-on to current antidepressant therapies. There are well over 100 million potential patients worldwide.
Source: Sage Therapeutics Q3 2020 slide show
SAGE-324 is in an ongoing Phase 2 study for essential tremor, with topline data expected in Q1 2021. There are plans to test it for epilepsy and Parkinson’s disease. About 6 million people have essential tremor in the U.S., and current medications are effective in only about half of those who seek treatment. In the Phase 1 study SAGE-324 showed decreased tremor after receiving a single 60 mg dose.
Source: Sage Therapeutics Q3 2020 slide show
SAGE-718 is in a Phase 2 open-label study for Parkinson’s Disease cognitive dysfunction with topline data expected in Q1 2020. A second Phase 2 study for Alzheimer’s cognitive dysfunction and mild dementia is expected to start before year-end 2020. It is an NMDA modulator. It was not included in the Biogen deal.
Conclusion for Sage
Sage now has over $2 billion in cash. In 2021 it will have complete data for Zuranolone. Of course, it is possible the data will not be sufficient for FDA approval, particularly in the light of the miss of the primary endpoint in the Mountain study. However, the preponderance of evidence favors the drug. Biogen would have taken a deep look at the available data before paying so much for the collaboration. Even if Zuranolone fails, Sage has the capital now to pursue its earlier-stage assets. There is also the question of what pricing Zuranolone will get and how broadly accepted it will be by doctors and payers. All that should be weighed against a current market capitalization of near $3.6 billion. I think the risk/reward benefit is good at the current stock price. The number of patients who could benefit from Zuranolone is so high that, even priced moderately, it could produce a very high revenue stream.
Conclusion for Biogen
Biogen management will doubtless be judged in retrospective. If Zuranolone gets FDA approval and sells well, we will look back and say this was a brilliant deal. If it does not get FDA approval, or does not sell well in the marketplace, we will speak of poor management that wastes investor cash on stupid acquisitions. I think the former is more likely than the later, but there are no guarantees. For Biogen the acquisition is nowhere near as significant as for Sage Therapeutics. Biogen had revenue of $3.38 billion in Q3 2020 and $1.18 billion cash flow from operations. Call the deal a bit more than one quarter’s worth of cash flow (not counting future milestones and royalties). Although Biogen has its own problems, including a likely refusal by the FDA to approve Aducanumab for Alzheimer’s, and some of its best-selling drugs are facing generic competition, I believe Biogen is very undervalued. Biogen has a high level of expertise in developing and selling therapies for the nervous system. I believe Biogen’s judgement in making this acquisition is most likely a sound one that will benefit its stockholders.
Disclosure: I am/we are long BIIB. 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 an owner of BIIB, I am now an owner of SAGE