Neurocrine Stock Looks Attractive In the Wake Of A 30% Correction

Neurocrine Biosciences stock (NASDAQ: NBIX), a biotech company that develops treatments for neurological and endocrine-related diseases and disorders, has more room for growth in the near term. NBIX stock is up just 14% off the recent bottom, significantly underperforming the S&P which moved 64% since its March lows, with the resumption of economic activities as lockdowns are gradually lifted. This can be attributed to the company’s lower than expected revenue and earnings in Q3, resulting in a stock price decline from levels of $135 seen in mid-July to $90 currently. We believe the selling in the stock is overdone, and it now appears attractive.

NBIX stock is also up just 16% from levels seen in early 2018, over two years ago. The 16% growth of the last 2 years appears to undermine the fundamentals of the company. For instance, its revenues were up 5x from $162 million in 2017 to $788 million in 2019. Total shares outstanding increased 5% due to share issuances, translating into a large 364% rise in revenue per share (RPS) from $1.84 to $8.52 over the same period. Despite such massive RPS growth, the company’s P/S multiple contracted over the recent years. We believe the stock is likely to see upside after the recent correction and despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 16% Change In Neurocrine Biosciences Stock between 2017 and now?‘, has the underlying numbers.

Neurocrine’s P/S multiple contracted from a very high figure of over 40x in 2017 to 13x in 2019. While the company’s P/S is 11x now (based on trailing RPS), there is a potential upside given the expected growth in RPS over the coming years, as well as comparing the P/S multiple to that over the recent years, P/S of around 14x in 2017 and and 13x in 2018.

So what’s the likely trigger and timing for upside?

Despite the challenging current environment given the pandemic, Neurocrine reported a sales growth of 47% in the first nine months of 2020. Its earnings of $3.21 on a per share and adjusted basis reflect a strong 68% growth from levels of $1.91 seen in the prior year period. That said, the sales were actually below the street estimates in Q3. Ingrezza, a treatment for Tardive Dyskinesia, is facing headwinds due to the current pandemic, which impacted new patient starts. That said, we believe that Ingrezza could see a couple of relatively slow quarters but it is poised to see market share gains in the medium to long run. In fact, Ingrezza’s peak sales are estimated to be over $2.0 billion, compared to sales of $753 million seen in 2019. Note that Ingrezza has already garnered $753 million sales in the first three quarters of 2020, and the full year sales will likely top $1.0 billion in 2020. Other than Ingrezza, Neurocrine’s Ongentys was approved by the U.S. FDA this year for one of the indications associated with Parkinson’s Disease. Ongentys sales in the U.S. are expected to be north of $300 million at its peak.

Given that the overall sales growth thus far in 2020 was below the street estimates, it resulted in a 33% correction in the stock price. After the recent correction, NBIX stock looks attractive going by the valuation. At levels of around $90, NBIX stock is trading at 8x its 2020 expected RPS of $11.50. This compares with P/S of over 14x seen in 2018 and 13x seen in 2019. Note that a high trading multiple is common for smaller pharmaceutical companies with promising drugs, and that appears to be the case with Neurocrine as well. Though the P/S multiple can continue to contract over the coming years, it will be more than offset by growth in RPS, resulting in higher stock price, in our view.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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