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Morningstar | Allergan Faces Pipeline Setback on Rapastinel Clinical Failure

Allergan announced that its NMDA partial agonist, rapastinel, failed three of its phase 3 acute depression trials and is unlikely to meet its endpoints in a fourth trial for relapse prevention. Since we viewed rapastinel as one of the more promising products in the company’s pipeline, the announcement is another unfortunate setback for Allergan. Despite the disappointing news, we still think the current stock price undervalues the business and assumes a dire scenario for the company’s future. While we modeled modest probability-adjusted peak sales of near $350 million for rapastinel, removing the drug from our model only has a modest effect on our cash flow projections, and we’re lowering our fair value estimate to $235.

We view the rapastinel setback as increasing pressure on Allergan's wide moat. While Allergan has had success with a number of its other pipeline products, including favorable data for its oral migraine products, this news does concern us from a moat perspective. We applaud management’s attempts to build a differentiated pipeline, but recent failures, like uterine fibroid drug Esmya and now rapastinel, diminish growth opportunities and raise concern on management’s capital allocation track record. Allergan acquired rapastinel as part of the Naurex acquisition that included $560 million upfront payment plus milestones.

We originally felt Allergan’s rapastinel would be well-positioned against Johnson & Johnson’s recently approved Spravato (esketamine) for treatment-resistant depression. Rapastinel has a clean side-effect profile versus the dissociative and psychosis effects seen in Spravato. Following its FDA approval, Spravato is a Schedule III controlled substance and has a strict Risk Evaluation and Mitigation Strategy program, which stipulates the drug can only be administered in certified treatment centers. While depression clinical studies are notorious for high placebo effects, we assume this will end rapastinel’s development. Additionally, we assume this removes the prospects of Allergan’s oral partial NMDA agonist in development.