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ITCI - Investors Should Proceed with Caution with Imminent Phase 3 Readouts & FDA Decision In Co

Central nervous system (CNS) disorder drug development is a particularly difficult branch of biopharma drug development. ITCI has experienced this first hand, with inconsistent late stage results for ITI-007 (Lumateperone), a promising therapy for certain CNS disorders. We have experienced this first hand as biopharma investors too, with other companies such as Alkermes (ALKS), who have had high-profile drug failures due to inconsistent late stage trial results. One particular issue for clinical trials for CNS disorders, is controlling artificially high efficacy in the placebo arm.

ITCI has a number of binary events ahead this quarter, some of which are only about a week away. Coming the week of July 8, are top line results for 2 phase 3 trials in bipolar depression (BPD) (one U.S. only and one international). We feel that there is a lot of uncertainty in these readouts for the following reasons: First, although there is some data on depression-related readouts in some ITI-007 schizophrenia trials (see e.g. CDSS scores in Table 2 of the Phase 2 trial publication), there is no prior BPD data for ITI-007, which is unusual for a molecule in a phase 3 trial; Second, ITI-007 has a very complex mechanism of action that to us makes it more unpredictable in an indication where there has been no prior human clinical data for this therapeutic candidate; and third, we are concerned regarding a high placebo effect, which has been difficult to control in CNS trials and which ITCI saw rear its head in a prior ITI-007 phase 3 trial (See Study ITI-007 failed Study 3 press release), albeit in schizophrenia and not BPD.

It would be excellent for patients if the results of the two upcoming phase 3 BPD trials are positive, but investors should play with extreme caution ahead of these readouts because of the uncertainty that the company will be able to hit a statistically meaningful result for the primary efficacy endpoint in both trials. Of course, if both trials yield clean, positive results, ITCI's stock price should increase at least 25% and could increase by much more than that given the blockbuster opportunity in BPD for ITI-007 and ITCI currently has an enterprise value under $500M.

As far as the Adcomm scheduled for July 31, 2019, and PDUFA date of September 27, 2019 (See here), for ITI-007 in schizophrenia, again extreme caution is warranted in our view. We still remember well, for example, the FDA's refusal to approve ALKS's drug ALKS 5461 for Major Depressive Disorder (See ALKS 5461 CRL press release). In that situation, similar to ITI-007, there was a positive phase 2 trial and a positive phase 3 trial, but one failed phase 3 trial (See Study ITI-007 failed Study 3 press release). Furthermore, like ITI-007's phase 2 trial, for ALKS 5461 a lower dose cohort showed significant efficacy, but not the high dose cohort. (See Figure below showing failed efficacy in higher cohort for ITI-007 - FIG. 2 from ITI-007 Phase 2 publication).

In the end, for ALKS-5461 the FDA discounted the phase 2 trial as a proof of concept trial and suffering from not predefining certain statistical analysis (See FDA Briefing Document for ALKS-5461). This was based on specific facts that we do not know for ITI-007, especially with respect to the phase 2 trial. For example, did ITCI characterize the ITI-007 phase 2 trial as a "proof of concept" study during meetings with the FDA and in its statistical analysis? Was a predefined statistical analysis agreed on with the FDA for ITI-007's phase 2 trial, to deal with Type-1 error rate considering that there were 2 dose arms? Plus, ALKS made some changes to trial design in its Phase 3 clinical trials, apparently without the FDA's blessing, which frustrated the agency (See FDA Briefing Document for ALKS-5461), and as far as we know, that was not the case for ITCI.

Of course there are some clear factual differences between the ALKS 5461 situation and the ITI-007 situation. Safety is in ITI-007's favor vs. ALKS 5461. ITI-007 has consistently had an excellent safety profile, differentiating it from standard of care. On the other hand, ALKS 5461 had an opioid component that concerned the FDA. The FDA reviewed ALKS 5461 for Major Depressive Disorder, not schizophrenia. Finally, ITI-007 showed good efficacy and safety in a switching trial, where patients effectively switched back and forth between ITI-007 and other schizophrenia therapies, showing no worsening of schizophrenia, and improvement in some symptoms, as well as improved cardio-metabolic parameters without motor side effects. Of course, failure of the FDA to approve ITI-007 for the treatment of schizophrenia will be a large negative on ITCI's stock price, although the magnitude of the drop will depend somewhat on where the stock lies after the BPD readouts next week.

ITCI has plenty of cash to get through these readouts with slightly over $300 million in cash and short-term investments as of the end of Q1, and an expected spend of up to $185 million for the remainder of 2019. Of course, we would expect a capital raise (dilution event) if any of these readouts are positive and move the stock price significantly higher.

All in all, ITI-007 looks promising, but important and uncertain milestones lie ahead that will help to determine just how promising without further phase 3 studies. For example, how clean of a positive efficacy signal will we see in both of the upcoming BPD trials? Regarding the schizophrenia PDUFA, for the FDA there is the difficult task ahead of weighing safety and efficacy where efficacy for one of the phase 3 trials did not separate from placebo and the phase 2 trial showed efficacy at a lower, but not a higher dose. As investors, these uncertainties keep us to a small position in our most diversified small/mid-cap clinical stage biopharma fund, and analyzing stock options plays that give us a positive return if there is a large movement up or down in the stock across any of these readouts.

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