Graham Witcomb from II had an article out today, perhaps a little premature as it seems to be missing some of the updated information from the presentation the company released to the ASX today. None the less it makes the good point that Daybue royalties to 2030 are expected to generate ballpark $1b so the current price also includes success in the research pipeline and/or higher than anticipated royalties from Daybue.

I recommend subscribing to II, but this is the passage which covers the less talked about or well know aspects:

Acadia shakes

While there's no reason to doubt the cash pipes will keep gushing in the short term, Neuren's heavy reliance on Acadia for manufacturing and distribution is a potential weak spot.

A new chief executive, Catherine Adams, took Acadia's reins in September and that could shift priorities to other drugs in Acadia's stable or lead to strategy changes. Neuren has practically no influence over sales under the current licence, which was expanded to a global exclusive licence in 2023, multiplying Neuren's reliance on Acadia.

A management transition may complicate what already appears to be a slowing sales outlook. Acadia's most recent guidance is for Daybue sales of US$340m-350m in 2024—a fantastic sum given the drug was only recently approved, but we can't help but notice it's at the low end of Acadia's earlier (reduced) guidance of US$340m-370m.

Some 30% of diagnosed patients have now tried Daybue, and those patients are almost certainly the most in need and easiest to access, due to their proximity to specialist clinics or recruitment during the clinical trial process. Reaching the next 30% will be a tougher slog, so if Acadia is already lowering expectations, that tells us the drug isn't performing as well as expected. On the bright side, as sales grow outside of North America, royalty margins expand to 20% or more, so Neuren takes a larger cut of net sales.

Competitive pressures are also something to watch. Advancing gene therapies—two of which are in clinical trials—could in time challenge Daybue's relevance. With a single-product focus, Neuren is vulnerable to anything that could disrupt Daybue's status, including post-market surveillance which sometimes reveals safety issues that smaller trials failed to uncover. This is more common for rare diseases with tiny patient pools.

Neuren has transformed from a speculative micro-cap to one of Australia's most profitable biotechs, anchored by a leading product in a high-potential market. While its short-term dividend prospects are strong, the stock's 10-40% premium to projected Daybue royalty payments over the next decade means its investment appeal depends on the success of next-generation drugs. The company only has a few products in the research pipeline and all are in Phase 1 or 2 trials, where failure is the norm. Neuren's current share price appears justified given Daybue's cash flow potential, but the clock is ticking on how long the gushers remain open.

Disc: I own SM+RL

This is not a full valuation or a bear case, it’s a base case on the currently commercial part of the business to get a feel for what it is worth. On this basis I now have a full position in NEU, with a simple thesis that the current prices is reasonable for just the royalty income from Daybue (as @mikebrisy concluded with much better analysis) and I expect milestone payments to cover the cost of any further research in NNZ-2591 and assume that research fails to generate any commercial value.

Assumptions:

·        Duybue sales in NA of US$400m growing at the cost of capital, generate US$43m (A$64.2m) in Royalties, which I view as conservative.

·        ROW sales are worth around the same value, so A$64.2m in Royalty revenue.

·        The cost to operate the business and for further NNZ-2591 research is covered by Milestone payments on Duybue (ie they net out) including the US$50 for the current milestone and US$50m for the PPV sale.

·        PE of 12 and Cash as at 30 Sep of $210m.

·        Base Value per share of A$10 per share

Given how rough this is I have bought in at under $13, seeing the downside as minimal. The upside however is significant and I am yet to put any figures on it but each of the following could be worth at least the current value of the company:

·        Daybue commercial success above current expectations.

·        Fragile X royalties and milestones from Acadia.

·        NNZ-2591: multiple opportunities but current Phase 2 candidates for Phelan-McDermid, Pitt Hopkins and Angelman are worth ascribing value too.

I have a lot more work to do on NEU which will take a long time and I had thought I had missed the opportunity when the price spiked, but thanks to RFK’s appointment and the market I am taking this second chance on the basis that this is a very asymmetrical investment in my view.

Disc: I own RL