Is VistaGen The Next Big Winner In CNS?

I’ve been a stock analyst for a pretty long time – going on 16 years now. I’ve picked some big winners and some big losers. One thing I noticed, I seem to have better luck in CNS disorders than say, wound care! Acadia Pharmaceuticals, Auspex Pharma, Neurocrine Bio, and Cynapsus Therapeutics were all small-cap biopharma companies focusing on CNS disorders that I started following well before each made a massive run to significantly higher valuation.

CNS is by no means an easy area to pick winners. In fact, according to market research conducted by BIO, Biomedtracker, and Amplion in June 2016, Phase 1 neurology assets succeed to approval only 8.4% of the time, below the 9.6% average for all drug candidates and well below higher-percentage shots on goal like infectious disease or hematology (1). That being said, if you can find a winner in CNS, the outcome is likely significant wealth creation.

I’ve been doing a deep dive into VistaGen Therapeutics (NASDAQ: VTGN) for the past few months and I like what I see. Research into the NMDA receptor to treat resistant CNS disorders is gaining a lot of steam from both private and public institutions. My article from July 2016 provides investors a good overview of what’s going on in NMDA receptor targeting as it relates to major depression, and highlights the efforts of several players, including large-caps like Johnson & Johnson and Allergan, along with upstarts like VistaGen Therapeutics.

Success in CNS Makes You a Lot of Money
Anyone who has read my work knows Acadia Pharmaceuticals (NASDAQ: ACAD). In January 2012, I noticed that Acadia was trading at $1.25 per share (about $60 million market cap) and almost no one was talking about how the company was going to report Phase 3 data with pimavanserin, a drug that failed a previous Phase 3 trial for Parkinson’s Disease Psychosis (PDP), at the end of the year. Pimavanserin offered a novel mechanism of action to treat PDP, a disease most neurologists and movement disorder specialists begrudgingly treated with anti-schizophrenic drugs. Acadia also believed that pimavanserin held utility in treating Alzheimer’s and other psychotic disorders. Positive Phase 3 data sent Acadia’s stock up 450%; and, by the end of 2013, the stock closed at roughly $25 per share, up 20x from back when no one was paying attention. At one point last year, the stock hit $50.

In June 2014, I published an article on Seeking-Alpha pointing investors to pending data from Auspex Pharma (NASDAQ: ASPX) and Neurocrine BioSciences (NASDAQ: NBIX). These two companies, separately, are developing improved formulations of tetrabenazine for the treatment of movement disorders. Auspex primary focus was on Huntington’s Disease (HD) while Neurocrine pushed forward in Tardive Dyskinesia (TD). Similar to Acadia, I did not see much chatter on the Twittersphere around either Auspex or Neurocrine Bio. Most investors tend to focus on large-cap ideas with plenty of available research. What chatter I did see seemed far too focused on “who” would be the winner between the two companies rather than understanding the size of the market allowed for both Auspex and Neurocrine to skyrocket on positive data.

Auspex was trading around $17 per share when my Seeking-Alpha article came out. Neurocrine was trading only slightly lower at $14 per share. Both companies have since reported positive Phase 3 data. In fact, shortly after Auspex reported positive Phase 3 data in December 2014, the company was acquired by Teva Pharmaceuticals for $101 per share in March 2015. That was a handsome 500% return. Neurcrocine hit a high of $58 per share last year and currently trades at $49 per share today. Another handsome 300% gain.

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Cynapsus Therapeutics (NASDAQ: CYNA) is another example of an under-follow CNS play I initiated coverage on back in June 2013 at $0.30 per share ($4.80 per share split-adjusted). Cynapsus is developing a rescue medication for Parkinson’s patients that experience “off time” due to ineffective response or wearing-off effect in-between Levodopa dosing. No one, and I mean no one, knew anything about Cynapsus back in June 2013 when the market capitalization was $12 million! On August 31, 2016, Cynapsus agreed to be acquired by Sunovion for $624 million, or $40.50 per share. Similar to Acadia and Auspex, I’d call that a home run at 750% return.

The point of this article is not for me to take a victory lap on my past CNS calls. I’ve had some losers as well; Zalicus comes to mind. And as noted above, wound care pretty much annihilated me in 2014 and 2015! The point is to highlight that CNS names like Acadia, Cynapsus, and Auspex tend to fly well under-the-radar until the market realizes the drug works and the potential for outsized returns are enormous. There is a recipe here, and I think I found a name in VistaGen Therapeutics that fits the model.
A Quick Review of VistaGen

VistaGen is developing AV-101 (4-chlorokynurenine or 4-CL-KYN), an oral prodrug of 7-chlorokynurenic acid (7-Cl-KYNA) that has demonstrated impressive antidepressant effects and safety in preclinical and Phase 1 studies. AV-101 is a glycine B (GlyB) receptor antagonist that negatively modulates the N-Methyl-D-aspartic acid (NMDA) receptor and may induce synaptogenesis. It’s a fundamentally different pathway from standard antidepressants and similar to the glutamatergic AMPA-dependent pathway of ketamine; but, without the potential negative side effects of NMDA ion channel blocking.

AV-101 is currently being studied in an NIMH-sponsored Phase 2a clinical trial (NCT02484456) taking place at the U.S. NIH Clinical Center in Bethesda, MD, under the principal investigation of Dr. Carlos A. Zarate, MD. Dr. Zarate is one of the nation’s foremost experts in the field of depression and has authored over 100 papers on the subject, including paradigm-shifting work with ketamine recently published in Nature (2). Target enrollment for this study is 24 to 28 adult subjects with treatment-resistant MDD. Data are expected during the first half of 2017.

VistaGen is currently planning a company-sponsored Phase 2b study with AV-101 separate from the NIMH-sponsored Phase 2a study noted above. The Phase 2b study will be a randomized, double-blind, placebo-controlled study targeting enrollment of 200-300 patients with inadequate response to standard antidepressants. Oral doses of AV-101 will be studied as an adjunctive treatment to background antidepressants in a sequential parallel comparison design (SPCD).

The primary endpoint is efficacy as assessed by the Montgomery-Asberg Depression Rating Scale (MADRS), with secondary endpoints in additional widely-accepted measures of mood, depression, and cognition, including HAM-6, CGI-S, CGI-I, and SDQ. Maurizio Fava, M.D. of the Massachusetts General Hospital and Professor of Psychiatry at Harvard Medical School, is the principal investigator of this study. Dr. Fava was the lead investigator on the NIMH-sponsored STAR*D trial, a landmark clinical study that looked at prolonged response rates to first- and second-generation antidepressants, finding efficacy rates below 50% (3).

Between Dr. Zarate and Dr. Fava, VistaGen has some pretty impressive individuals running its clinical programs with AV-101. The company’s clinical and regulatory advisors are equally impressive thought-leaders in the area of psychiatry (4).

If I’m Right, VistaGen Is Another Potential Big Winner

According to the CDC’s National Center for Health Statistics, 7.6% of the U.S. population over the age of 12 years suffer from depression (5). Based on 2015 Census data, this equates to approximately 21 million individuals. Data from the U.S. National Institute of Mental Health (NIMH) pegs the number slightly lower at 6.7% of all U.S. adults, equating to 16 million individuals (6). Whatever the exact number, it’s clearly a large market. I’m settling on 18 million individuals for my valuation model. Either way, the Anxiety and Depression Association of America (ADAA) pegs the direct costs of the disease at $42 billion per year (7).

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According to NIMH research, about half of U.S. patients with MDD experience major depression and receive treatment (8). Results of the NIMH-sponsored 4,000-patient Sequenced Treatment Alternatives to Relieve Depression (STAR*D) showed remission rates of 36.8%, 30.6%, 13.7%, and 13.0% for the first, second, third, and fourth acute treatment steps, respectively. The overall cumulative remission rate was 67% (9), but it is logical to believe that physicians will start to seek alternative treatment options like ketamine or AV-101 after the second failure. I think 35% is a fair number to use for the treatment-resistant population. The numbers work out to a target of around 3-4 million patients in the U.S. each year.

One of the primary reasons why existing first- and second-generation antidepressants do not work is because of their slow onset of action. For example, results from the STAR*D trial conducted by the NIMH found that the average time to remission was 5.4 to 7.4 weeks. In other words, MDD patients did not begin to see a clinical benefit until over a month after initiation of treatment. This lag time is far too long between initial symptoms such as suicide ideation and clinical efficacy and a major drawback to currently available MDD treatments (10). The initial treatment period for antidepressants is when suicide risk is the highest and slow-acting drugs like SSRIs and SNRIs can increase the risk of suicide upon initiation of therapy (11). Conversely, ketamine, an NMDA-receptor antagonist, has been shown to provide rapid resolution of suicidal ideation after only a single dose (12).

This is the target market for drugs such as AV-101, and I think the race is relatively wide-open. Yes, there are large-cap players targeting NMDA, like J&J and Allergan, but VistaGen’s approach holds merit; and, the drug has important advantages over competing molecules from large-cap pharma, namely oral dosing and a longer half-life.

Nevertheless, only 10% market share equates to around 250,000 patients on AV-101 at peak. If we assume pricing comparable to branded antidepressants / branded atypical antipsychotics, which cost around $25 per day, with 80% compliance, a full year worth of treatment will cost around $7,300 in the U.S. at launch (in 2021). This puts peak sales of AV-101 at over $3.6 billion by 2030. Outside the U.S., the opportunity is likely another $2 billion, putting peak global sales of AV-101 for treatment-resistant MDD at roughly $5-6 billion. This is consistent with drugs like Abilify® today.

What’s VistaGen Worth?

For the valuation exercise, I’m going to focus only on the U.S. market and then extrapolate that opportunity to include sales in Europe. Above I have laid out all the important inputs for the model, including patient population size, estimated market share, and pricing. From a timing standpoint, AV-101 is currently in a Phase 2a study now and expected to be in Phase 2b shortly. A Phase 3 trial is likely to start in 2018, leading to the filing of a New Drug Application (NDA) in 2020 and approval in 2021.

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From a cost standpoint, I’m using the income statement of Acadia Pharmaceuticals as a good forecast for what VistaGen will need to spend over the next few years. Acadia is looking to expand Nuplazid™use into things like Alzheimer’s and schizophrenia. Beyond depression, VistaGen management thinks AV-101 may find utility in other CNS disorders, including bipolar disorder, obsessive compulsive disorder, and pain (read my interview with VistaGen Chief Medical Officer, Dr. Mark A. Smith >> HERE). Although depression is a larger market than Parkinson’s psychosis, Acadia’s income statement still gives us a good roadmap for modeling VistaGen starting in 2021.

I’m using a 20% discount rate on the estimated cash flows and only a 20% probability of success. The probability of success I pulled from the historical database of CNS drug development assets compiled by BIO, Biomedtracker, and Amplion in June 2016. A Phase 2b asset should have a 20% chance to make it to market according to this work. Finally, the basic share count is only 8.0 million, but I’m using the fully diluted number of 19.7 million for my price target to account for all outstanding options and warrants. As witnessed in the Auspex and Cynapsus transactions, these things usually exercise on a premium take-out.

Below is a snap-shot of my U.S. model for AV-101:

I think the U.S. opportunity for AV-101 is worth $22 per share. The opportunity in Europe likely adds another $10 per share in upside. My NPV for VistaGen today is around $440 million. That seems like a lot for a company worth only $29 million today, but there are several examples of why $440 million makes total sense. I cite three examples below:

1) As noted above, Allergan is also a player in this market. In July 2015, Allergan acquired privately-held Naurex for $572 million in upfront cash and the potential for over $1 billion in milestones in July 2015. Naurex lead drug, rapastinel, targets the same receptor as AV-101, although rapastinel is an injection and has a horrible inefficient half-life. Naurex does have an oral backup candidate in Phase 1. At the time of the transaction, rapastinel just completed Phase 2 studies, something VistaGen should accomplish with AV-101 in 2018.

2) In May 2016, Minerva Neurosciences (NASDAQ: NERV) reported positive results from a Phase 2a study with MIN-117, a serotonin and dopamine transporter, in patients with MDD. Minerva added over $360 million in market value shortly after the news.

3) Most recently, Sage Therapeutics (NASDAQ: SAGE) added over $500 million in market value in July 2016 when the company reported positive Phase 2 data with SAGE-547 in only 21 subjects with postpartum depression.

The market seems pretty clear on the valuation inflection potential for VistaGen. Quite simply, report positive Phase 2 data in depression and the company is worth between $400 to $500 million in value. This is in exact agreement with my NPV analysis posted above. VistaGen should report data from the NIMH-sponsored Phase 2a trial during the first half of 2017.

VistaGen’s current market capitalization is only $28 million. The company recently secured $10 million in cash through a public offering in May 2016, so I’d say the stock has all the makings of a potential big winner for investors. I think this could be another Acadia, Auspex, or Cynapsus, and I’ll be watching closely over the next year as the story plays out.