Sahm Adrangi, Chief Investment Officer, will host a conference call today, Wednesday, March 23, at 4:00pm EDT to discuss the company’s report.

To participate in the conference call, dial (888) 390-3983 (US and Canada) or (862) 255-5354 (international) and reference the Kerrisdale Capital conference call. The call can also be accessed at kerr.co/sage-mar23.

A replay of the call will be available following the call at kerr.co/sage-mar23.

Sage Therapeutics 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 (SRSE) 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 GABA_A 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 GABA_A 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 GABA_A 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 – 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.

Read our full report here.

[1] Illustrative citations:

• “[A]naesthetic agents, for example, propofol, have also been demonstrated to act at extrasynaptic receptors and enhance tonic inhibition”(14)
• “Like other GABA_A receptors, δ-containing receptors [the main class of extrasynaptic receptors] are also allosterically potentiated by barbiturates such as pentobarbital”(13)
• “The tonic conductance in cultured hippocampal neurons is enhanced by the benzodiazepine midazolam”(15)
• “The NMDA antagonist ketamine has recently been demonstrated to be a weak potentiator of GABA_A receptors with some selectivity for the α6β2/3δ [extrasynaptic] receptor subtype. In addition, at concentrations above 100 μM, ketamine could directly activate these receptors”(13)