Updated: Sep 23
Intra-cellular Therapeutics (NASDAQ - $ITCI) is a financially-sound company with demonstrated success in the CNS space as shown by the recently-approved lumateperone in schizophrenia. Lumateperone is also being studied in bipolar depression; however, results from two Phase 3 bipolar trials were released late last year with very mixed outcomes. This casts doubt on whether this therapy can be approved in bipolar depression, which represents a significantly larger market than schizophrenia.
We are currently projecting a risk-adjusted value of ~$30/share, which represents a ~20% premium on current valuation. However the results of the bipolar readout may drive the stock price in either direction. If the data comes back favorable, we project the stock price to climb to ~$42/share, while negative data is estimated to lower valuation to ~$21/share. Therefore, this is a high-risk, high-reward stock that will likely see major movements one way or another by the end of 2020. Given the upside, we have decided to take a stake in this company.
WX Capital Position: BUY at ~$23 (current price)
12-month Price Target: ~$30 per share
WX Capital Portfolio Allocation: 3% at the current price
WX Capital Anticipated Investment Timeline: Short-term (~3 months)
Qualitative Risk Level: HIGH
Intra-cellular Therapeutics (ITCI) specializes in developing novel antipsychotic therapies as well as therapies that inhibit the phosphodiesterase type 1 (PDE1) enzyme. ITCI's main focus has been on Central Nervous System (CNS) disorders, though they are also exploring non-CNS indications such as heart disease.
Lumateperone: This is being studied primarily in schizophrenia and bipolar depression, and like antipsychotics, impacts the serotonin (HT2A) and dopamine (D2) pathways, which are neurotransmitters implicated in CNS disease. However, lumateperone also affects glutaminergic signaling, which gives it a new spin on existing antipsychotics. It also has lower affinity for off-target pathways that contribute to an improved safety/tolerability profile.
Schizophrenia: ITCI gained approval for its lumateperone (Caplyta) in schizophrenia at the end of 2019, and officially launched the drug in 2Q20. Its key value proposition is achieving similar efficacy with existing antipsychotics, but improving on multiple side effects such as weight gain and tremor. It remains to be seen how Caplyta will be used by physicians. We view the drug as a compelling option for doctors, but perhaps not enough to warrant use as a first treatment of choice.
Bipolar Depression: Lumateperone has a mixed history in this indication. It was being tested in two phase 3 trials as a monotherapy, hitting its primary endpoint in one, but failing in the other, despite nearly identical patient populations. It is also being tested in combination with lithium or valproate, with the readout coming some time this year, potentially within the next few months.
ITI-214: This is a PDE1 inhibitor that is in phase 1/2 trials for Parkinson's and heart failure. While the biological rationale is strong for targeting these indications, efficacy data is sparse, so it is a bit too early to factor this asset into overall evaluation. However, if efficacious, this could be a major driver of higher valuation.
We are projecting risk-adjusted peak world-wide sales for lumateperone of ~$600 M in schizophrenia and ~$800 M in bipolar depression, factoring in probability of success. This results in an estimated risk-adjusted value per share of ~$30, a ~20% premium to current share price of ~$25. However, this stock could swing either way given the results of the bipolar trial readout. If the data is favorable, we project valuation increases to ~$42/share, while disappointing results may drive the stock price down to an estimated ~$21/share.
Key Inflection Points
The biggest inflection point is receiving Phase 3 data for lumateperone adjunctive therapy in combination with lithium or valproate for bipolar depression. We don’t have a specific release date, but it could come any day now (ITCI website claims a “mid-2020 release date”), and at least by the end of 2020. As this indication is larger than schizophrenia, positive data would likely send ITCI stock value skyward.
We are also particularly interested to hear ITCI's 20Q2 earnings call. Considering Caplyta became available in March of this year, this will give us an initial sense of uptake in schizophrenia.
Differentiated Safety/Tolerability Profile: Schizophrenia has been treated by antipsychotics for decades. These are efficacious options, but entail a range of side effects that reduce compliance, exacerbate comorbidities, and negatively impact patient well-being.
Novel Mechanism of Action: As mentioned above, antipsychotics have been the mainstay of treatment, and all affect either the serotonin and/or dopamine pathways. Lumateperone is the first to also target the glutaminergic pathway, which may drive physician excitement to have a therapy with a new mechanism of action.
Strong Cash Position: ITCI has set itself up well cash-wise to launch lumateperone, with a cash runway of ~3 years. Additionally, with a cash burn to market cap ratio of ~10%, ITCI is in a good position to raise more cash if needed. Finally, we anticipate cash burn to decrease as revenue grows from lumateperone 20Q2 launch.
Expansion Opportunities: ITCI has two main expansion routes: 1) nabbing approval of lumateperone in other high-prevalence CNS disorders such as various depressive disorders, and ITI-214 in Parkinson's, and 2) targeting non-CNS indications such as heart failure that may provide a lucrative revenue stream as well as show proof-of-concept that their therapies have broad efficacy across many indications. ITCI is also developing a long-acting injectable version of lumateperone, which will be key to expanding market share in schizophrenia, as ~30% of schizophrenia prescriptions involve these long-acting agents, a proportion that is expected to grow in the future.
Undifferentiated Efficacy in a Mature Schizophrenia Market: There is no difference in efficacy between lumateperone and antipsychotics in schizophrenia. Considering this is a heavily genericized market, lumateperone is likely to be reserved for patients that have failed multiple rounds of generic antipsychotics, which may limit the overall accessible patient population.
Mixed Results for Bipolar Depression: Lumateperone monotherapy met its primary endpoint in the worldwide trial, but missed the mark in the U.S. trial. While the company attributed the failure to a high placebo response (which is common in CNS studies particularly in the U.S.), this may cast doubt on efficacy. As it stands, there is a lack of confidence that lumateperone will be approved in bipolar depression, with stakes hanging on the results of the combination therapy trial.
Substantial Competition: As noted above, schizophrenia is a mature, heavily genericized market, which gives physicians a lot of different treatment options. Moreover, two new branded oral agents (Latuda and Vraylar) with moderate improvements in tolerability were approved for schizophrenia and for bipolar depression. Finally, each of these indications have a substantial number of assets in development that have novel MOAs and potential improvements to safety/tolerability as well as efficacy. Lumateperone's value proposition is contingent on whether these agents are successful.
Unproven Outside of CNS Indications: Expanding outside CNS indications is likely to be a key determinant of overall growth potential. However, we have only seen preliminary phase 1 efficacy data, which hasn't told us much about how this will stack up with other existing therapies. Lack of success in heart failure may incite concerns over the broader non-CNS portfolio.
ITCI cited cash holdings of $449 M during the 1Q20 earnings call. Considering its cash burn of $144 M in 2019, that provides a cash runway of around three years, meaning we don't expect this to be a major issue near-term. ITCI's balance sheet could change as launch of lumateperone in schizophrenia ramps up, and if approved for bipolar disorder, but we anticipate that this would diminish cash burn as revenue grows. ITCI only had revenues of $1.1 M in 2019, but we expect meaningful revenue generation from lumateperone sales.
We own shares of Intra-cellular Therapies. This article expresses our own opinions, not Intra-cellular Therapies' or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the company mentioned in this report.