Spruce Biosciences, one of Diurnal Group’s peers, has seen its share price double since the $15 per share October IPO (Nasdaq: SPRB). This gives Spruce a market cap. of $675m, and with net cash of approximately $150m, an Enterprise Value (EV) of $525m.
Meanwhile, Diurnal’s share price is 53p - a current market cap. of £73m ($100m), and counting £25m of net cash, an EV of £48m ($65m).
Both companies’ lead candidates aim to be the first specifically approved treatment for Congenital Adrenal Hyperplasia (CAH). Spruce has its single product candidate, tildacerfont, in Phase 2 trials with results not expected until 2022. If the data are positive, Spruce will seek to engage regulators with a view to gaining approval without the need for a Phase 3 study. Even if there is no requirement for a Phase 3, tildacerfont won't be ready for launch until 2023. Diurnal has already completed a European Phase 3 trial for its CAH candidate, Chronocort, and submitted for marketing approval with the EMA. We expect a decision early in 2021 and, assuming a positive decision, should see Chronocort launched shortly thereafter. Also, Diurnal is currently in the process of agreeing a US Phase 3 trial design with the FDA.
Both drug candidates adopt a very different approach to the treatment of CAH and it is important to recognise that they are complementary treatments. They address the same market and can co-exist. Tildacerfont cannot replace cortisol and therefore CAH patients will still need to receive corticosteroids such as Chronocort. Tildacerfont might allow a patient to reduce their corticosteroid dosage, but not forgo it altogether.
Spruce’s tildacerfont is a novel product that addresses the causes of CAH at an early stage of the hypothalamic-pituitary-adrenal (HPA) axis feedback cycle. (There’s a useful description of the HPA axis and the feedback cycle in Spruce’s S-1filing). Tildacerfont works by blocking a key hormone receptor (CRF1), and this inhibition is believed to reduce the overproduction of androgens that cause many of the symptoms associated with CAH. Tildacerfont is a non-steroidal drug and therefore doesn’t carry the side effects associated with under- or over-treatment using traditional steroid-based CAH therapies. Chronocort addresses CAH by replacing the cortisol CAH patients lack. In healthy individuals, cortisol is produced in response to CRF1 activity. Due to a lack of an important enzyme later in the feedback cycle, CAH sufferers cannot convert their high levels of androgens to cortisol, resulting in the symptoms associated with CAH.
Since both drug candidates address the same market, we believe there is no fundamental rationale for such a wide divergence in valuation between the two companies. Admittedly, Diurnal’s European Phase 3 trial failed to meet its primary endpoint, however, the EMA’s advice and willingness to accept a filing for market approval is supportive of a positive decision in Q1 2021. While this event will likely remain the near-term focus for investors, there is much more to Diurnal than the success of Chronocort in Europe. There is the US opportunity where management is currently seeking a partner for Chronocort. Diurnal’s Alkindi is already approved and selling in Europe and the US. Alkindi arguably justifies Diurnal's entire £50m
valuation on its own. Diurnal has a testosterone replacement therapy (DITEST) in development which we believe could be a $1.5bn opportunity (see our recent research). Also, Diurnal will seek approval for Chronocort in the much larger adult adrenal Insufficiency indication, which we believe to be a c.$3bn market.
Using very conservative assumptions our current NPV for Diurnal gives a 99p fair value.
IMPORTANT:
Diurnal Group is a client of Calvine Partners and as such, this publication is not independent and should be considered a marketing communication under FCA Rules. None of the information contained in this publication should be considered as any form of advice.