[Request 👋] Intra-Cellular Therapies - NASDAQ:ITCI 💉 💊

Another biotech stock from the NASDAQ. FDA approval on Monday for a treatment for Schizophrenia.

Stock pretty much trebled in value!

Strong buy now:

https://finance.yahoo.com/news/intra-cellular-therapies-nasdaq-itci-173122929.html

Another double bagger pharma company.

  • Like an eagle that surged above the clouds, Intra-Cellular Therapies defied market expectation and thereby published stellar Phase 3 data for the bipolar depression franchise.
  • Going forward, I expect Caplyta to gain FDA approval for bipolar depression in late 2021.
  • Facing the challenging COVID environment, the Caplyta launched for schizophrenia is tempered due to most marketing campaigns being virtual.
  • Despite commercialization challenges, Caplyta’s growth prospect is a mega blockbuster.
  • The overall pipeline is advancing aggressively while valuation is roughly half the stock’s true worth.

Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise. - Peter Lynch

A common theme in biotech investing is that a Phillip Fisher growth bio-stock will continue to grow larger. In his infinite wisdom, Fisher said, “The reason why the growth stocks do so much better is that they seem to show gains in value in the hundreds of percent each decade. In contrast, it is an unusual bargain that is as much as 50 percent undervalued.” I interpreted that as a rallying growth bio-stock will rally multiple folds higher. Now you have to make sure there are powerful catalysts to fuel further growth.

That being said, the stock that epitomized the said phenomenon is Intra-Cellular Therapies(ITCI). As you recall, this stock rallied over 194% in late 2019 following Caplyta approval for schizophrenia. Moreover, Intra-Cellular recently banked another 71% gain in one day as the company published the robust data Caplyta data for bipolar depression. Don’t get me wrong. I’m not sharing the profits to brag. I simply want to show you that, despite the appreciation, there are more upsides. In this research, I’ll feature a fundamental analysis of Intra-Cellular Therapies and provide you with my exception of this growth bio-equity.

Figure 1: Intra-Cellular chart (Source: StockCharts)

About The company

As usual, I’ll present a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the subsequent section. Operating out of New York, Intra-Cellular is poised to innovate and commercialize excellent medicines to manage various central nervous system disorders.

Looking at the pipeline below, you can see that Intra-Cellular is advancing a deep portfolio of three novel medicines, including ITI-007 (i.e. lumateperone or Caplyta), ITI-214, and ITI-333.

Figure 2: Therapeutic pipeline (Source: Intra-Cellular)

As the first-in-class medicine, Caplyta wears the crown jewel of this pipeline in pride. That is to say, Caplyta displayed on its trophy case an FDA approval and strong data release. But there are much more to come. Facing such therapeutic powerless, you might be wondering, how does Caplyta works?

Well, my friend, Caplyta regulates the essential chemical messengers in your brain known as neurotransmitters. And, the most essential of these messengers are serotonin, dopamine, and glutamate. Altogether, they’re involved in controlling behavior, mood, and mental balance.

Given the messengers’ importance, you can see why Intra-Cellular is assessing Caplyta’s use to alleviate the suffering in schizophrenia, bipolar depression (BPD), major depressive disorder (“MDD”), sleep, and behavioral disturbances.

Caplyta As A Neuroleptic

As you know, the FDA granted Caplyta commercialization for the treatment of schizophrenia right before Christmas last year. The approval was special because there was no advisory committee meeting (i.e., ADCOM). Like Games of Thrones characters facing “the Winter,” the market participants didn’t believe Caplyta would be approved. With the element of surprise shocking the marketing into rejuvenation, Intra-Cellular shares rallied vigorously like the annual bull run in Pamplona Spain.

Following approval, Intra-Cellular started marketing activities for Caplyta back in March this year. Then all of a sudden, the world is hit by the Coronavirus pandemic. As such, the launch activities were severely hampered just as your life is also limited by COVID preventative measures. Instead of having traditional doctor office campaigns, the company has to resort to mostly virtual marketing activities. Though it can be effective, I believe that traditional marketing presentations at lunch times in doctor’s offices works best.

Regarding insurance coverage, you can see that Intra-Cellular has been busy working for you. In other words, the company got Caplyta to be covered by 95% formularies. Asides from coverage by mostly Medicare Part D and State Medicaid, the company is aggressively launching coverage expansion.

I know COVID deters your daily activities like how it hinders Caplyta’s sales progress. Nevertheless, Caplyta is a stellar drug. It’s one of the rare psychiatric medicines that can treat the negative symptoms of schizophrenia. Some negative symptoms include flat affect, lack of motivation, and poverty of speech. Now conventional neuroleptics can easily manage the positive symptoms. But when it comes to negative symptoms, most drugs are ineffective.

Facing commercialization challenges, you may ask: Dr. Tran, when can I expect sales to substantially ramp up? In my view, that’ll occur once COVID environment improves (for professional sales reps to hit the doctor’s office “en masse”). Perhaps, that’ll happen in the latter part of next year. Note that I tend to err on the safe side to expand the margin of safety.

Similar to how COVID throws off all variables in forecasting equations, if Intra-Cellular gets bought out by a larger pharma, I expect its sales to be galvanized substantially. And therefore, sales will ramps in a much more rapid fashion.

You may ask, why would a larger company want to acquire Intra-Cellular? A potential reason is that the market for Caplyta is mega-blockbuster. Based on Research And Market, the global psychiatric market is valued at $197B in 2019. Growing at the 6% CAGR, it is expected to reach $256.9B by 2023. Another firm, Grandview Research, estimated the schizophrenia market alone to be worth $7.9B by 2022.

More importantly, you’re now in a highly favorable merger & acquisition (M&A) environment. Aimmune recently got bought out by Nestle for $2.9B (i.e., $34.50 per share). With voracious appetite for growth, Gilead Sciences (GILD) also gobbled up Immunomedics (IMMU) for $22B (i.e., $88 per share).

Caplyta for Bipolar Depression

If you notice Intra-Cellular’s growth strategy, you’ll see that the company executes prudent growth by label expansion. Therefore, this fits with Phillip Fisher’s growth approach. Specifically, Fisher believe that growth is best achieved by shooting additional branches from the tree trunk.

Figure 3: Tree growing branches (Source: Wiki)

As from the main branch (i.e., schizophrenia), Caplyta’s most advanced label expansion is for bipolar depression (BPD). The story here is one of excitement, anticipation, and apprehension. It’s just like the Caplyta approval back in 2019. After months of investors waiting in nervous anticipation, Intra-Cellular Therapies came through to report stellar data for its Phase 3 Study 402 of Caplyta for BDP.

As a global study conducted over five different counties, Study 402 assess 529 patients afflicted by bipolar I and II disorders. The patients were randomized to 1:1:1 (Caplyta 42mg, Caplyta 28mg, and placebo) while being maintained on a mood stabilizer (i.e., either lithium or valproate).

For months leading to the data release, the market did not believe that Caplyta would deliver positive data. In my data forecast, I still gave Caplyta a positive score (i.e., 62.5%). In other words, I wrote inside IBI that Caplyta would pass its Phase 3 trial for BPD. Notwithstanding, the hurdle to success would be higher.

As you know, the market was in a state of complete uncertainty during the time. Traders/investors without forecasting didn’t believe Caplyta would pass. As such, when news of robust data release came on September 9th, market bulls rushed out the gate. As such, the stock is galvanized with a 71% rally in a single trading session. With such appreciation, you want to see exactly how the data turned out. Interestingly, Caplyta cleared both its primary and secondary study endpoints with strong statistical significance!

Of the primary endpoint, Caplyta 42mg exhibited a greater reduction in the Montgomery-Åsberg Depression Rating Scale I (i.e., MADRS) total score compared to placebo. The precise difference was 2.4 points with the p-value of 0.0206. That is to say, patients on Caplyta (plus a mood stabilizer) reported a 16.9 points reduction at Week-6 compared to 14.5 points for patients on the placebo (mood stabilizer alone).

Don’t worry if you’re not familiar with the MADRS score. Simply put, the higher that score, the more severe the BDP. Putting that thinking into action, you can see that more MADRS reduction means the drug works better. In this case, adding Caplyta to the regimen for BDP leads to a better MADRS reduction and thereby indicates therapeutic efficacy.

Regarding the secondary outcome, Caplyta demonstrated significant improvement in the Global Impression Scale for Bipolar for Severity of Illness- Depression sub-scale (i.e., CGI-BP-S) Depression Score (p-value = 0.0082).

If you’re new to biotech investing, keep your eyes on the p-value. You want to see the p-value less than 0.05. That tells you the results are real rather than random occurrences. Additionally, there was a dose-response relationship, which give more evidence that Caplyta truly works.

Riding strong Study 402 and 404 outcomes, Intra-Cellular intends to file a Supplemental New Drug Application (“sNDA”) for BDP by either year-end or early 2021. Based on my forecasting system, I ascribed a 70% (i.e., strongly favorable) chances of approval for Caplyta. As you can see, that is another big catalyst next year to potentially catapult the shares to a new high. Amid a flurry of market-moving catalysts and the potential to capture blockbuster revenues, the Chairman and CEO (Dr. Sharon Mates) enthused,

We have completed our first full quarter of commercial activities, adapting to the unprecedented challenges of the COVID-19 pandemic, and I am encouraged by Caplyta’s week over week prescription growth and increasing prescriber base. I am pleased with our team’s performance in the current environment, the positive physician response to Caplyta and the impact we are making in the lives of patients suffering from schizophrenia. We are also excited about advancements in our pipeline.

Upcoming Catalyst

In biotech, it pays for you to keep tabs on upcoming catalysts, i.e., corporate developments. As I mentioned, the upcoming approval of Caplyta for BPD is a mega catalyst. But that is not all Intra-Cellular is brewing! There’s also the Phase 3 (Study 403) of Caplyta 42mg as monotherapy (i.e., single oral pill) for BDP that is ongoing. And you can expect top-line data in 2H2021.

Figure 4: Study 403 (Source: ClinicalTrial.gov)

Tha aside, Intra-Cellular recently reported positive results of the Phase 1/2 trial of ITI-214 for heart failure. The company intends to publish the results in upcoming medical conferences. Moreover, the firm will advance ITI-333 into early clinical studies. Of note, ITI-333 is a novel oral modulator of mu-opioid and serotonin receptors for the treatment of opioid and other substance use disorders, pain, and mood disorders.

You can be sure that Intra-Cellular is not settled for good. For instance, the company also intends to develop Caplyta for MDD. Of note, depression is more common than you might think. Given the robust outcomes for schizophrenia and BPD, I believe the outcome for MDD would be much better than BPD and schizophrenia. After all, MDD has a much lower hurdle to success than both said franchises.

Another sign of a company seeking aggressive growth is when they try to reformulate approved drugs. Here, you can see that Intra-Cellular is making a long-acting injectable (LAIJ) version of Caplyta. Many patients suffering from psychiatric illness do not take their medications on time or at all. Therefore, their disease worsened. With a LAIJ, it can improve patients’ compliance and thus, disease outcomes. Moreover, it’ll give Intra-Cellular a revenues boost. For this franchise, the company will launch a human trial later this year.

Increasing Insider Ownership

A secret in biotech investing is that you should monitor insider transactions. Before digging deeper into this topic, I want to share with you a quote from Peter Lynch. According to Mr. Lynch, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

Looking at the figure below (i.e., the green lines), you can see that the Director, Christopher Alafi, purchased millions of dollars worth of Intra-Cellular stocks in late 2019. Guess what happened thereafter? Caplyta was FDA approved, hence, the huge rally.

Now if you look at the recent transactions, Director Alafi is at it again. He recently acquired over $2M worth of stocks. Could there be something brewing on the horizon? Your guess is as good as mine.

Figure 5: Heavy insider purchases (Source: OpenInsider)

Financial Assessment

Just as you would get an annual physical for your well-being, it’s important to check the financial health of your stock. For instance, your health is affected by “blood flow” as your stock’s viability is dependent on the “cash flow.” With that in mind, I’ll analyze the 2Q2020 earnings report for the period that ended on June 30.

As follows, Intra-Cellular garnered $1.9M in revenues compared to $0 for the same period a year prior. The new revenues came from Caplyta sales and grant revenues. After COVID, I expect sales to ramp up in the coming years.

That aside, there were $25.2M and $23.7M in research and development (R&D) for the corresponding periods. I view the 6.3% R&D increase positively because the money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.

Figure 6: Key financial metrics (Source: Intra-Cellular)

About the balance sheet, there were $409.21M in cash, equivalent, and investment. On top of the $350M in equity offering, Intra-Cellular is flushed with $759.2M in capital. Against the $66.7M quarterly OpEx, there should be adequate money to fund operations until 2Q2023. Simply put, the company has a very strong balance sheet and cash position.

While on the balance sheet, you should check to see if Intra-Cellular is a “serial diluter.” A company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 55.1M to 66.4M, my math yields a 20.5% annual dilution. At that rate, Intra-Cellular comfortably cleared my 30% cutoff for a profitable investment.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are “growth-cycle dependent.” At this point in its life cycle, the main concern for Intra-Cellular is if Caplyta gains FDA approval for BPD next year. That aside, there is a 30% risk that Caplyta won’t pass its clinical study (Study 403) as monotherapy for BPD in 2H2021. In case of a negative clinical and regulatory binary, you can expect your stock to tumble by 50% and vice versa.

Another concern in the prolonged COVID environment, which can put a lid on Caplyta’s sales. Intra-cellular is also a small company with limited resources that can prevent them from unlocking Caplyta’s full potential. Additionally, the company can also grow too aggressively, thus running into the potential cash flow constraint.

Final Remarks

In all, I maintain my buy recommendation on Intra-Cellular Therapies with the five out of five stars rating. On a two years horizon, I expected the $65 price target to be reached. I also scored the stock with the medium investment risk. And, I ascribed the 70% investment profitability to Intra-Cellular. In a nutshell, you’re going to make a lot of money on Intra-Cellular, provided that you hold the stock for at least two years.

From the trading view, I believe that Intra-Cellular will give up some gains as investors/traders take profit. After a consolation around $30, I expect the stock to continue its rally. Interestingly, the recent acquisition of Aimmune Therapeutics and Immunomedics lit up the market moods. Hence, it can power Intra-Cellular’s short-to-medium terms trading.

Dr. Tran BioSci’s M4 Criteria Stars Rating (Max 5 stars)
Medicine (Caplyta as crown jewel) 5/5
Market (mega-blockbuster) 5/5
Money (highly robust, $759M) 5/5
Management (excellent) 5/5
Overall stars rating 5/5

Figure 7: M4 Criteria (Source: pioneered by Mr. Thierry & Dr. Tran)

Like a young lion growing its maim, Intra-Cellular has transformed from a cub into an adult lion. That is to say, the company successfully transitioned from a developmental-stage biopharma to a commercialization-stage biotech. Despite being slowed down by the Coronavirus environment, the Caplyta launch marked an important stepping-stone for shareholders and patients. It’s a stellar drug for treating the resistant negative-symptoms associated with schizophrenia. I believe that, as COVID eases up, Caplyta sales will rally multiple folds. If a larger company acquires Intra-Cellular, countless patients will rejoice. Though I never base an investment thesis on a buyout, the COVID environment is a highly opportunistic time for larger biopharma to buyout smaller companies. Moreover, the other incentive is that Caplyta is a potential blockbuster.

Asides from the schizophrenia franchise, I mentioned that Caplyta is poised to gain approval for BPD. Better yet, Intra-Cellular pushes for perfection in therapeutic development. Your job is to keep tabs of such developments. Be sure to see if Caplyta will ultimately gain approval for BPD sometimes next year. See if the company will advance the long-acting injectable version of Caplyta. Follow up Caplyta development for MDD. And don’t forget to keep an eye on ITI-214 and ITI-313.