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Sage Therapeutics, Inc: Overhyped Lead Drug Headed For Failure

Summary

Sage’s drug, touted by management as unique, actually works the same way as many existing treatments.

Since the condition that Sage aims to treat resolves itself spontaneously in about two thirds of cases, Sage’s superficially good results are, in reality, underwhelming.

Sage’s market opportunity may be six-fold smaller than investors believe.

Sage Therapeutics (NASDAQ:SAGE) is a pre-commercial pharma firm whose market value stems almost entirely from a single drug - a member of a class of naturally occurring compounds called neurosteroids - in a single indication, a condition called super-refractory status epilepticus (SRSE). SRSE is characterized by repeated or protracted seizures that defy multiple lines of treatment. Thanks to superficially strong results from a small Phase 1/2 trial that lacked a control group, investors have come to view Sage's drug as "de-risked," complacently expecting a clear-cut victory when the larger, placebo-controlled Phase 3 trial reads out in the second half of this year.

We disagree. Sage's drug, a proprietary formulation of the neurosteroid allopregnanolone that the company calls SAGE-547, is little more than a Band-Aid, achieving, at best, a temporary reduction in brain activity - very similar to many other treatments that doctors already use. But SAGE-547 leaves the underlying causes of SRSE untouched. We believe that, in Phase 3, SAGE-547 will fail to outperform placebo to a statistically significant degree, throwing Sage's future into question. Moreover, a thorough analysis of the scientific literature suggests that Sage's estimates of the size of the SRSE market are inflated by a factor of 6; thus, even if SAGE-547 does manage to produce passable data, its commercial prospects are far murkier than the market appreciates. As a result, Sage is worth little more than its cash balance, 70% below the current stock price.

While Sage touts SAGE-547 as a novel breakthrough, its high-level mechanism of action - tipping the balance of brain activity from excitation toward inhibition - is exactly the same as that of standard drugs like benzodiazepines, anti-epileptics, and anesthetics that already form the standard of care for status epilepticus. Sage argues that its compound is special because it can affect a specific category of receptors (extrasynaptic GABAA receptors) and thereby influence a different form of inhibition (tonic rather than phasic). However, a large body of scientific research clearly shows that many other drugs used in SRSE, including the anesthetics midazolam and propofol, also bind to extrasynaptic GABAA receptors. SAGE-547 is not special.

Sage also contends that its Phase 1/2 results were so strong that they could not be "an artifact of serendipity." Yet our review of the literature shows that the chances that patients recover from even very severe bouts of status epilepticus are actually quite good; one large, ongoing study found that 74% of patients recovered. In light of these results, SAGE-547 appears to contribute very little to standard treatments, paving the way for a Phase 3 failure. The firm may be Sage, but its big bet on an unexceptional drug will likely prove unwise.

I. Investment Highlights

SAGE-547 is more of the same. While Sage management naturally touts its lead drug as a great advance, the truth is far more prosaic. As one group of researchers put it, "Many of the behavioural and physiological effects of allopregnanolone [the active ingredient in SAGE-547] are similar to those of benzodiazepines and other positive modulators of the GABA-A receptor, such as barbiturates and ethanol" (1). All of these drugs act to strengthen the brain's existing inhibitory mechanisms in similar ways, and patients with super-refractory status epilepticus have, by definition, received many of them already. Indeed, as we discuss below, some of Sage's own data demonstrate that SAGE-547 tends to have little physiological impact in such patients: soon after receiving the drug, many patients experienced no change or even an adverse change in their suppression ratios (an electrographic measure of inhibition) and even the positive responses were modest in size.

Sage's story is that its drug is unique because it binds to GABAA receptors not just at synapses but beyond them, in the so-called extrasynaptic region of the neuronal membrane, where such receptors can generate a steady ("tonic") form of inhibition that differs from the better-known spikes of "phasic" inhibition. But, while it's true that most benzodiazepines, which constitute the first line of treatment in SRSE, don't bind to most extrasynaptic GABAA receptors, many other standard drugs for treating SRSE do, especially general anesthetics. In Sage's Phase 1/2 trial, the most common anesthetics used were midazolam, propofol, pentobarbital, and ketamine; every one of these drugs has been shown to bind to extrasynaptic GABAA receptors and strengthen tonic inhibition[1], just like SAGE-547 aims to do. It's just not that special.

SAGE-547 is, at best, a Band-Aid. By the time patients with status epilepticus are classified as super-refractory, their doctors have already tried and failed to suppress their abnormal brain activity in many different ways and when they turn to general anesthetics they typically succeed, putting the patients into comas and ending their overt seizures. But this is just a temporary fix, buying time in the hope that the underlying disturbance in the network - the cause of which could range from a traumatic injury to a tumor to an auto-immune attack - resolves itself. No one believes that general anesthesia is itself a cure.

SAGE-547 is no different - another way to temporarily suppress brain activity and give patients a chance to heal. It can't rewire axons. But why would a new, slightly different Band-Aid help patients who already had access to many others - and why would it fetch a high price, as Sage bulls expect?

SAGE-547's clinical results are less than meets the eye. All of SAGE-547's clinical efficacy data come from studies with no placebo groups; indeed, we suspect that Sage management tried and failed to convince the FDA to allow its ongoing pivotal Phase 3 trial to similarly eschew appropriate controls. Nonetheless, Sage argues that the 77% response rate that its drug achieved in a 25-patient Phase 1/2 trial is too good to attribute to chance. However, that 77% figure reflects the company's own definition of "evaluable" patients, which excludes "[p]atients…[whose] treatment was disrupted or if no weaning attempts from general anesthesia were made." A patient who received a partial infusion of SAGE-547 yet remained too fragile to risk taking off of anesthesia thus wouldn't count against Sage's skewed measure of success, obviously biasing it toward optimism. On a gold-standard "intent to treat" basis, SAGE-547's response rate was only 68%. And even that overstates the apparent long-term success rate: 24% of "responders" went on to experience additional bouts of status epilepticus in the following four weeks; meanwhile, 40% of "non-responders" were ultimately weaned off of general anesthesia, apparently no thanks to SAGE-547, which disappears from a patient's body within a few hours. Overall, four weeks after the treatment period, only 52% of the intent-to-treat population had and sustained positive "responses."

Are these figures impressive? A large 2012 meta-analysis showed that, for patients with refractory status epilepticus - most of whom appear to have progressed to the super-refractory stage - ~65% recovered (2). An ongoing prospective study for which preliminary results were published just last summer - the Global Audit of Treatment of Refractory Status Epilepticus - reported a 74% recovery rate (3).

Against this backdrop, SAGE-547's results look downright ordinary, especially in light of the great discretion doctors have when deciding when and how to try to wean patients off of anesthesia. After all, for heavily sedated patients coming off of such powerful drugs, unusual brain activity is common, and there is no clear definition of a "seizure" or widely accepted guideline for when to give up and restore the anesthesia. Taking a more aggressive approach to weaning - curtailing anesthesia and then holding off on putting patients back on it even if there are some signs of trouble - can inflate short-term "success" measures without truly affecting long-term outcomes. Viewed in this light, SAGE-547's early-stage data line up with its "me too" mechanism of action, showing, at best, modest incremental benefits that will likely prove too small to reach statistical significance in Phase 3.

SAGE-547's addressable market may be dramatically smaller than the market realizes. Sage management contends that there are 25,000 annual cases of SRSE in the US, and the sell side has dutifully accepted this claim at face value. When we attempted to reconcile this figure with the scientific literature, however, we came up with a much lower estimate - just 4,000 cases. Sage's lofty estimate draws primarily on a single epidemiological study of a single small city from 1996 - a study clearly regarded as an unrepresentative outlier by other researchers in the field. Thus, even if SAGE-547 does manage to outperform placebo in Phase 3, its commercial prospects look dim. Making matters worse, Marinus Pharmaceuticals (NASDAQ:MRNS) - a sort of sister company for Sage, whose scientific founder has been heavily involved in Sage's research and whose main drug is a synthetic version of Sage's - plans to enter the status-epilepticus market with its own extremely similar treatment.

Sage's pipeline has little value. For Sage, SRSE and SAGE-547 are the main event; the company's other drugs and targeted indications are all very early-stage. Past research has highlighted the risks posed by the development of tolerance to allopregnanolone (SAGE-547's active ingredient) after chronic use, including increased susceptibility to seizures (1; 4). In fact, highly similar neurosteroids like pregnanolone and minaxolone, intended to serve as anesthetics, have failed to win clinical adoption in part because of convulsive and other excitatory side effects (5; 6; 7). Moreover, because neurosteroids' mechanism of action closely resembles that of existing drugs like benzodiazepines, it won't be enough to outperform placebo; Sage will have to outperform its cheap, reliable, well-understood cousins as well. Thus we believe that, outside of SRSE, SAGE-547 and any "next-generation" versions thereof offer high risk and low reward, leaving little value for Sage's shares.

II. Company Overview

Sage Therapeutics: Capitalization and Financial Results

Sage Therapeutics: Capitalization and Financial Results

Source: company filings, Capital IQ, Kerrisdale analysis
*Pro forma for January 2016 equity raise. Assumes greenshoe wasn't exercised.
†Consensus estimates via Capital IQ.

Sage was founded in 2010 with the mission of treating brain disorders using allosteric receptor modulators - drugs that, rather than directly activate or block receptors, instead alter the strength of their effects. The plan didn't progress quickly; in fact, Sage's current CEO initially turned down the job because, in the words of one press report, it "didn't sound like [Sage] had yet identified promising molecules as potential drugs." In late 2013, however, Sage licensed data and materials pertaining to the compound allopregnanolone from the University of California and entered into an agreement with Ligand Pharmaceuticals to use its Captisol product to make allopregnanolone more water-soluble. Allopregnanolone formulated in Captisol for intravenous use is what Sage now calls SAGE-547, the company's main drug.

Allopregnanolone is a naturally occurring compound synthesized from the sex hormone progesterone. It belongs to a class of substances called neurosteroids - steroids that affect brain function through their influence on neurotransmitter receptors, including the inhibitory GABAA receptor. The idea of harnessing such substances for medical purposes is by no means new. To the contrary, 19 years ago, one researcher traced the history of "water-soluble steroid hypnotic[s]" back to 1927 but lamented that such drugs never proved worthwhile, especially in light of the alternatives:

[W]e are therefore left to wonder whether it is likely that any steroid anaesthetic agent will have a pharmacological profile superior to other i.v. [intravenous] induction agents presently available. (emphasis added) (6)

Allopregnanolone was not exempt from this skepticism. Fifteen years ago, a group of researchers, noting that neurosteroids "are currently considered as having a future role in the management of epilepsy, anxiety, insomnia, migraine and drug dependence," found that repeated administration of allopregnanolone in mice led to tolerance, ultimately making it ineffective against seizures. The researchers concluded:

Collectively, the results of this study, along with recently published data…indicate similar pharmacological and side-effects profiles of benzodiazepines and neurosteroids. Moreover, a similar efficacy of allopregnanolone and midazolam [a benzodiazepine] has been found. These findings, together with the conversion of neurosteroids in the brain to other steroid hormones (testosterone, estradiol, and aldosterone), add to the accumulating evidence suggesting a less favorable pharmacological profile for this class of drugs than was previously thought. (emphasis added) (8)

By late 1990s, a biotech firm called CoCensys, which had been working on a synthetic form of allopregnanolone called ganaxolone for use as an anticonvulsant therapy, suspended development and its equity lost almost all of its value before being sold to Purdue Pharma for ~$7.5 million. In 2004, Marinus Pharmaceuticals purchased the rights to ganaxolone (9), but the company has struggled to produce convincing clinical results. Today, despite its strong similarities and direct links to Sage,[2] Marinus trades for just one-tenth of Sage's market cap and has seen its stock price fall 50% in the past twelve months.

Notwithstanding the checkered history of neurosteroids in medicine, Sage began in 2012 to test allopregnanolone on patients with super-refractory status epilepticus, relying on special "emergency use" rules; it then commenced a formal (albeit small, single-arm, and open-label) Phase 1/2 clinical trial in January 2014. In spring 2015, Sage completed its IPO and announced the results of the trial, touting them as "unprecedented." A few months later, it began its 140-patient, placebo-controlled Phase 3 trial, which it expects to yield top-line data by the second half of this year.

III. Sage-547 Is a Band-Aid

The condition that SAGE-547 is supposed to treat is really a symptom, not a disease. While having a seizure at some point in one's life is relatively common, typical seizures don't last long; in patients with status epilepticus (SE), on the other hand, seizures are either protracted (five minutes is a common benchmark) or recurrent. The causes of SE vary widely, from stroke to cerebral tumor to meningitis to something unknown (so-called cryptogenic SE). The mortality rate appears to vary widely as well: one study found that anoxic SE, in which the brain loses access to oxygen as a result of e.g. cardiac arrest, has the highest mortality rate (51%), while withdrawal from antiepileptic drugs in patients with epilepsy has the lowest mortality rate (10%) (3).

The standard first line of treatment for status epilepticus consists of benzodiazepines like lorazepam and diazepam - drugs that, just like SAGE-547, enhance the effects of the inhibitory GABAA receptor and thereby reduce brain activity. While benzodiazepines and neurosteroids like SAGE-547 bind to different allosteric sites on the receptor and favor different forms of the receptor (GABAA receptors are each composed of five different sub-units selected from a menu of 19, creating many possible "isoforms"), the underlying mechanisms are extremely similar.

In many patients, benzodiazepines quickly terminate status epilepticus. But some patients progress to what is sometimes called established status epilepticus and receive second-line treatment in the form of anti-epileptic drugs like phenytoin or valproate. If that doesn't work, patients are classified as "refractory" and proceed to the third line of treatment: general anesthesia, most often in the form of propofol, midazolam, or pentobarbital. After 24 hours, doctors usually attempt to wean refractory patients off of anesthesia and many emerge seizure-free, albeit often in poor neurological condition. But if the seizures come back, the patients, now classified as super-refractory, go back on general anesthesia, often in five-to-seven-day cycles punctuated by additional weaning attempts, which often succeed.

What this treatment paradigm shows is that, by the time patients have reached super-refractory status, temporarily "pausing" their brains doesn't address the underlying network disturbance. Benzodiazepines, anti-epileptics and anesthetics have all done their part to shift the balance from excitation toward inhibition, yet once the drugs are tapered off, the seizures return; some entrenched anomaly - for instance, an injury that healed incorrectly, wreaking havoc on the brain's delicate wiring - is still there. Strengthening the inhibitory GABA system - as benzodiazepines, anesthetics, and SAGE-547 all do in slightly different ways - can make individual cells quiet down, but it does nothing to address the higher-level problem.

This perspective is shared by the many doctors and researchers intimately familiar with SRSE with whom we have spoken. In the words of one of them, "If a person is coming in because they have antibodies attacking NMDA receptors, or intracranial hemorrhage, or traumatic brain injury, the allopregnanolone is not going to have any impact on the cause." Another put it succinctly: "So much of long-term survival and outcomes depend on what the underlying etiology of the disease is." In other words, both allopregnanolone (SAGE-547) and existing treatments can only hope to buy time and give patients a chance to recover on their own; for instance, an auto-immune attack causing repeated seizures might spontaneously end. But the treatments themselves have no enduring benefits. This is especially true for allopregnanolone, which has a brief half-life of about an hour [3], implying that, within four to five hours of administration, it effectively vanishes. It can only enhance inhibition while it's actually binding to a GABAA receptor. When it's gone, the normal (lower) level of inhibition resumes and if the underlying problem generating the seizures still exists, that level of inhibition may not be enough to keep the seizures in check.

In short, giving SAGE-547 (or anesthetics) credit for SRSE patients' recoveries is like giving a Band-Aid credit for the healing of a wound. The Band-Aid just kept the problem from getting worse; the wounded person's own endogenous mechanisms were what actually fixed it. Band-Aids are useful, of course, but they're already cheap and widely available; a slightly different type of Band-Aid is not going to garner much interest, let alone earn a massive price premium. SAGE-547's very premise is thus inherently flawed.

IV. SAGE-547 Is More of the Same

To counter the natural conclusion that, relative to existing treatments for SRSE, SAGE-547 has little to offer, Sage tells a reassuring story suggesting that SAGE-547 is special after all. As Sage's CEO recently put it:

SAGE-547 modulates GABAA. It's called a positive allosteric modulator of GABAA, and it basically serves to calm the brain down. It does so through a unique mechanism. So most of us are familiar probably either professionally or personally with benzodiazepines; they help you sleep, and they are allosteric modulators of GABAA. They however work at one part of the brain called the synaptic receptor. That receptor has a characteristic which is not helpful for chronic therapy or in...


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