Neurocrine Biosciences, Inc. (NBIX) has recently completed the entire twelve months of the Petal-602 study, which includes six months of treatment and six months follow-up.

Post-treatment reviews looking to determine the impact of elagolix on bone mineral density (BMD) by dual energy X-ray Absorptiometry (DXA) show consistent results with the six month data, whereas there was no apparent effect from baseline in the elagolix treatment arms. After the twelve months, patients taking 150mg elagolix showed a mean change in BMD of +0.19% for the spine and -0.28% for the femur.

Additionally, analysis of the pain data, collected utilizing the Visual Analog Scale (VAS) and the Composite Pelvic Sign and Symptoms Scale (CPSSS), revealed that the subjects report a sustained improvement of endometriosis symptoms during the six months while off medication.

This is exciting data because it would seem to suggest a disease modification effect of the drug. Management will present data from the Petal-602 study at the Endocrine Society meeting in June 2009.

During the summer, Neurocrine should release the six-month data from the Lilac Petal-702 program. This data should give us a better sense of durability of effect, additional safety information, DXA scan data, and a more detailed analysis of the multiple endpoints.

In October 2009, management should released data from the Tulip-703 program. This trial has a similar design to the Lilac-702 program, only with an active comparator in leuprolide depot (Abbott’s [ABT] Lupron).

In the meantime, management will hold an end-of-phase II meeting with the FDA to take place in the fourth quarter 2009. Management has been meeting with outside consultants to better understand the statistical “floor effect” observed in the Lilac-702 study with the daily assessments of non-menstrual pelvic pain. At that FDA meeting, management and the FDA will outline a pivotal phase III program for elagolix.

We expect that the pivotal phase III program will include two large-scale (n~500) patient programs with some modified NRS / NMPP / DYS endpoint. There will also be a long-term (n~400) safety program, and a head-to-head non-inferiority program vs. Lupron for the European submission. Neurocrine may seek a special protocol assessment (SPA) for the phase III trials.

The company may also conduct one additional phase II program prior to the phase III trials depending on what endpoint is agreed upon for the phase III. Nevertheless, management believes the phase III trials should start during the first half of 2010. In the meantime, management remains in late-stage discussions with potential partners for elagolix.

In a recent discussion with management, we asked if the complexity of the phase II Petal data inhibit, or at the very least slow, partnership discussions. Management responded that the partners they are speaking with are all highly educated on the outcomes and in their understanding of the data. That leads us to believe they are in late-stage talks with serious partners with a clear understanding of the market and the drug.

That being said, we still don’t think they sign a deal until after the -703 data comes out later this year. We think partners will want to see the full six month data from -602 and -702 before the sign. And, the potential exists that partners may want to wait until after the end-of-phase II meeting with the FDA in the fourth quarter 2009 so they have a better idea of what’s in store – in terms of costs and achievability – for the phase III program.

Nevertheless, we believe elagolix is a highly attractive molecule, and a lucrative partnership will eventually be secured prior to the phase III initiations in 2010.

Neurocrine exited the first quarter with $86.0 million in cash and investments. This is $2.20 per share. The stock is currently trading at just above cash levels. Based on DCF analysis, elagolix is worth $3-4 per share.

The rest of the pipeline, including the three CRF agents with Glaxo (GSK), Urocortin-2, and a few early-stage candidates are worth another $2+ in total.

Our sum of parts analysis, including cash, yields a price of $8+ per share. However, Neurocrine will burn an estimated $50 – 60 million in 2009. Therefore, we expect the stock to remain selling at a discount to fair value.

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