Neurocrine Backers Still Losing Sleep

Investors in Neurocrine Biosciences ( NBIX) are about to find out if there's anything left to say about a company whose most promising product has been stalled by federal regulators, seen its stock vaporized and watched its Big Pharma partner bid farewell.

On Monday, the company will issue its second-quarter financial report after the market closes, but the numbers will be of secondary importance.

Shareholders of Neurocrine, which has no commercial products, will be instead focusing on what executives have to say about the future, because those still around have been left reeling by events that have knocked 80% off the stock since mid-May.

The Food and Drug Administration delayed approving an immediate-release version of the insomnia drug Indiplon and rejected a long-acting version of the drug. Neurocrine says it will need to conduct more clinical trials for the long-acting pill, and that it might need more tests for the immediate-release version.

The FDA ruling also convinced Pfizer ( PFE) to bail out of its marketing partnership with Neurocrine, even though it had already spent more than $400 million.

Analysts bailed, too. Between mid-May and late June, 10 of them downgraded the stock.

"There is an increased likelihood that Indiplon never sees the light of day, either because of the continued poor execution by Neurocrine's management or because the company, Pfizer and the FDA have all seen a serious safety or efficacy limitation that has so far not been disclosed to investors," Geoffrey Porges, a Sanford Bernstein analyst, wrote in a research report after Pfizer cut ties.

That's his worst-case scenario -- and he's the only Neurocrine bull. Another 18 analysts are divided between hold and sell ratings, according to Thomson First Call.

What everyone wants are details from Neurocrine about how fast the company will spend its available cash and what it must do to satisfy the FDA's concerns about Indiplon. "The question is whether current management can effectively avoid the complete disappearance of the company," Porges adds.

As for the second-quarter predictions, the consensus estimates are for a loss of 72 cents a share on revenue of $22.9 million. For the same period last year, Neurocrine lost 15 cents a share and had revenue of $33.2 million, most of which was Indiplon-related payments from Pfizer.

Previously, Neurocrine predicted this year's revenue would be in the range of $165 million to $175 million, excluding Indiplon sales-based royalties from Pfizer. The company said it would break even on a per-share basis, stripping out sales-based royalties. Since mid-May, however, analysts have shredded their economic models, and the company has said it would revise its guidance.

The Wall Street consensus now calls for a loss of $2.95 a share on revenue of $64.8 million this year.

Porges doubts either version of Indiplon will be approved until 2008, but he likes the stock because he doubts the price can go much lower. Also, he says Neurocrine is worth about $13 to $16 a share based primarily on its cash, equity in a plant and the value of other experimental products. He doesn't own shares.

He figures Neurocrine will have $232 million in cash by the end of the second quarter and will burn through about $100 million a year. Biotech companies like to have two years worth of cash in reserve, he says, so he predicts Neurocrine will try to raise as much as $150 million by mid-2007.

The best way to revive Neurocrine would be to install "a new management team with greater regulatory success" in order to restore investor confidence, says Aaron Reames of A.G. Edwards in a June 23 research report.

Reames has a hold rating on Neurocrine. The only reason he isn't issuing a sell rating is the value of the cash, existing facilities and other experimental products, which he values at just under $9 a share.

"Another Big Pharma partnership would cause us to re-evaluate our position," says Reames, who believes immediate-release Indiplon could be approved by mid-2007. However, if this doesn't happen and if Neurocrine spends cash faster than expected, the stock will continue falling, he says. Reames doesn't own shares of Neurocrine.

A gloomier view comes from Annabel Samimy of UBS Securities, who says Neurocrine has "multiple options, but are any viable?" In a late June research report, she kept her reduce rating while maintaining that a partnership "does not make any economic sense."

Although a big company could help sell Indiplon, she doubts Neurocrine would get as good a deal as it got from Pfizer. Assuming Indiplon is eventually approved, it could run into a market filled with generic insomnia drugs as well as new brand-name drugs.

"In this scenario, Neurocrine would receive a lower royalty on a smaller piece of the insomnia pie," says Samimy, who doesn't own shares. Her firm has had an investment banking relationship in the last three years.

Marketing Indiplon by itself lets Neurocrine reap all the profits, but it also forces the company to spend heavily and raise more money. Although she likes the go-it-alone approach better than a partnership, Samimy concludes: "Independent marketing would be a challenge at best."

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