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Supernus PharmaceuticalsNASDAQ: SUPN

Recommendation: BUY

DC Morris, Garrett Smith, Evan Radomski

Investment Thesis

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Recommendation: Given Supernus’ strong drug pipeline along with current products already on the market, we recommend the Investment Club to take a position in Supernus to be better represented in the Healthcare Industry

Rationale: Supernus’ unique portfolio of approved and developing drugs that treat Central Nervous System Disorders offers significant upside

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Supernus has revolutionary drugs in development that will change the way diseases like ADHD and IA are treated

The Investment Club must invest more in healthcare, and specifically pharmaceuticals, given the industry’s long term growth projections

Price Target: $50.83

37.53% upside to current price $36.96

Approved drugs offer a stable source of revenue for years into the future

3Sources: IBISWorld US

Federal Funding From Medicare & Medicaid ($bn) Healthcare Stock Performance vs. S&P 500

Potential Risks

Increased Regulation• Industry is subject to many regulations influencing

manufacturing, pricing, and marketing• Industry regulation is expected to increase slowly in the

coming years

International Trade• Brand name pharmaceuticals are traded on international

markets• When domestically manufactured drugs become relatively

more expensive, global demand for industry exports decreases, which is bad for the industry

2018 Revenue $174 billion

Average profit margin 19.5% of revenue

Drugs for rare diseases 50% of new drugs

Sales volume lost at LOE 90% of sales

Industry R&D + SG&A costs 17% of revenue

Average cost to bring a drug to market

$2.6 billion

Biopharma Industry Growth

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$200

$400

$600

$800

$1,000

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2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

• Medium volatility levels but high average growth• Funding for both programs has increased for 27 out of the last

30 years

CAGR: 4.1%

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XLV SPY

Fast Facts

Drug Development Process

4Sources: Seeking Alpha, Bloomberg

Early Stage Research Life Cycle of a Drug (Years)

Clinical Trials Probability of Advancing at Each Phase

Preclinical Testing

• Once a molecule of interest is identified, a company or private research group conducts studies using non-human subjects to check for safety and biological activity

• This stage lasts for about three and a half years. Roughly 1 in 1,000 potential drugs survives this stage

Investigational New Drug Application (IND)

• The company files an IND with the FDA to begin testing in human patients

• The IND includes the results of experiments, the structure of the molecule, and how it is manufactured

Phase I• This study involves around 50 healthy people. The goal of

phase I is to prove that the drug is safe, determine the proper dosage range, and track how the molecule moves through the body. This process takes about a year

Phase II• The number of people in the study grows to over a hundred

individuals with the illness meant to be treated. The drug is tested for efficacy against placebos and alternatives

Phase III• Over 1,000 patients are tested in hospitals and clinics. The

goal is find any rare or inconvenient side effects that arise across a larger sample size

63%

31%

58%

11%

0%10%20%30%40%50%60%70%

Phase I Phase II Phase III Phase I toNDA

Preclinical Development

Clinical Trials

NDA

Market Maturation

Loss of Exclusivity

1 3 10 15~20 16~23

5Sources: IBISWorld US

Description Healthcare Stock Performance vs. S&P 500

Potential RisksExpiring Patents• Both of Supernus’ drugs currently on the market will lose

exclusivity in 2027• This caused significant sell-off in the markets during 2019 Q1

Drug Candidates’ Competitive Advantage• There is worry surrounding the ability for new drugs to

significantly differentiate themselves from current generic drugs

Supernus Overview

Key Financials

• Supernus Pharmaceuticals (NASDAQ: SUPN) was founded in 2005 in Rockville, Maryland and incorporated in Delaware. It had its initial public offering on the NASDAQ in May 2012

• SUPN is a pharmaceutical company focused on the development and commercialization of drugs that treat central nervous system disorders

Current Drugs & Candidates

• The company currently has two drugs on the market: Oxtellar XR, which treats epilepsy and Trokendi XR, which treats both epilepsy and migraines.

• There are three drug candidates that have a significant chance of hitting the market

• SPN-812—Phase III, ADHD• SPN-810—Phase III, impulsive aggression• SPN-604— Phase III ready, Bipolar disorder

Jack A. Khattar– CEO and Founder• Began business after high-level experiences at other

pharmaceutical companies• Has served as CEO, President, and Director since inception

Padmanabh P. Bhatt, PhD– Chief Scientific Officer• Joined Supernus at inception after working with Mr.

Khattar at Shire Labratories• Earned B.Pharm and M.Pharm degrees from the University

of Bombay, India

Gregory S. Patrick– Chief Financial Officer• Joined Supernus in 2011 as the CFO• Began career at Exxon Chemical Company and was hired

from ROI2

Market Capitalization $1,934 million

EPS (TTM) $2.05

P/E Multiple 18.01x

52 Week High-Low $61.25-$30.05

Average cost to bring a drug to market

$2.6 billion

EV/EBITDA Multiple 12.7x

Supernus’ FDA Approved Drugs

6Sources: 10-K, Earnings Call

Strong Growth in Prescriptions Epilepsy Overview

Oxtellar XR

• Epilepsy is a neurological disorder that results in unpredictable seizures

• Seizures cause uncontrollable muscle spasms and are associated with rhythmic muscle jerks and twitches

• A major issue with epilepsy control is adherence to prescription drugs, which usually must be taken multiple times a day

• Americans spend $16bn treating epilepsy annually

• Oxtellar XR is a prodrug, which means that when it is consumed it is biologically inert. Once it reaches the liver, the drug is metabolized into its active form, 10-MHD

• 10-MHD stabilizes electrical impulses in the brain by inhibiting sodium-gated voltage channels

• Oxtellar is the only MHD that is an extended-release drug• This limits side effects and also allows patients to only have to

take one pill a day • Oxtellar XR currently represents only 3% of the MHD-

epilepsy treatment market• Loss of exclusivity: April 2027

Trokendi XR

63.2 97.9 124.3 132.1 147.5135.2

278.7378.7

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2014 2015 2016 2017 2018

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Oxtellar Trokendi

• Trokendi XR is a tropiramate that treats both epilepsy and migraines

• Like Oxtellar, Trokendi inhibits sodium-gated voltage channels in the CNS to reduce electrical impulses in the brain that lead to seizures

• It is also an extended release drug, so it is only required once a day and has less side effects than other tropiramatescurrently on the market

• Trokendi XR currently represents 5% of the tropiramate market

• Loss of exclusivity: November 2027

SPN-812

7Sources: AlleyDog.com, Supernus 10k, Seeking Alpha

Overview

Current Progress

ADHD

• SPN-812’s active chemical is viloxazine hydrochloride (VAH)

• VAH is a non-stimulant norepinephrine reuptake inhibitor

• By increasing norepinephrine levels in the body, individuals have a higher capacity to store and retrieve information in the brain

• For years, the chemical has been marketed in Europe as an anti-depressant

• The ADHD prescription market is currently valued at $9.1bn, and the non-stimulant share of this is expected to grow

• Supernus executives hope to file a new drug application (NDA) in the second half of 2019

Market Competitors

• SPN-812 is currently in Phase III of drug testing

• Supernus is developing an XR form of SPN-812 to meet demands in the pediatric market

• Trials so far have shown a significant enough difference from stimulant ADHD medication

• Positive topline data from three successful Phase III clinical trials were reported in 2018, and data from a fourth Phase III trial is expected to be released very soon

• After filing the NDA, Supernus executives believe SPN-812 can reach consumers some time in 2020

• ADHD stands for Attention Deficit Hyperactivity Disorder

• Individuals with ADHD may exhibit signs of inattentiveness, hyperactivity, and impulsivity

• The majority of the medications currently on the market are stimulants

• There is rising demand for extended release (XR) drugs that can treat ADHD, as most major ADHD drugs on the market have developed poor reputations for side effects

• Parents, in particular, are in favor of treating their children with XR, non-stimulant drugs to mitigate adverse impacts

44%

26%

19%

6%5%

Amphetamine Methlyphenidate XR

Vyvanse ® Desmethylphenidate XR

Strattera ®

SPN-810

8Sources: AlleyDog.com, Supernus 10k,

Overview

Clinical Results

Impulsive Aggression (IA)• SPN-810 (molindone hydrochloride) is a drug that Supernus is

currently in the process of developing to treat Impulsive Aggression (IA)

• The drug is meant to be a novel treatment for impulsive aggression (IA), which is common in people with ADHD

• Molindone hydrochloride blocks the effects of dopamine in the brain, and it has been used in the past to treat schizophrenia

• Dopamine is tied to impulsive, risky, and destructive behavior

• By targeting this neurotransmitter, Supernus hopes to reduce aggressive tendencies in individuals with CNS disorders

Potential IA Drug Sales ($bn)

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ADHD

Autism

PTSD

0 1 2 3 4

• SPN-810 is currently in Phase III of drug testing, and is expected to be the first product approved explicitly for the treatment of IA

• Phase III trials will finish in 2019 for patients aging from 6-11 years old, while trials for adolescents will continue into 2020

• Trials completed so far have shown a favorable clinical profile compared to existing therapies

• Phase II trials also indicated that the immediate release formulation of the drug was safe and had a significant effect on its patients

• Impulsive Aggression (IA) is defined as the sudden or unpredictable use of force by an individual without taking the time to consider the action or its consequences

• One-third of all ADHD prescriptions are meant to treat IA, however, there is no drug that effectively cures IA

• Market research by Supernus has indicated that IA also occurs in other CNS diseases such as Autism, Alzheimer’s, bipolar disorder, and dementia

• Pharmaceutical executives maintain that the prescription market for IA is over $6bn ($3.2bn in ADHD, $0.8bn in Autism, and $2.3bn in PTSD)

SPN-604

9Sources: NAMI.org, Supernus 10k,

Overview

Development

Bipolar Disorder

• SPN-604 is designed to treat bipolar disorder, a condition that impacts over 5 million Americans. Many of them struggle to find effective treatment options

• Like Oxtellar XR, SPN-604 is an oxcarbazepine that is entering Phase III of clinical research

• Oxcarbazepine’s are anticonvulsants; these types of drugs are becoming increasing popular in the treatment of bipolar disorder as they have less side effects than traditional antidepressants

• SPN-604, therefore, has the potential to capture a large share of the prescription bipolar market

Percent of US population with Bipolar Disorder

• SPN-604 is advancing into Phase III of testing, with clinical programs set to start in the second half of 2019

• The next tests will test to see if the drug’s extended release yields an effect on patients

• SPN-604 will likely reach the market in 4-5 years, given its position in the development process

• Bipolar disorder is a brain disorder that causes unusual shifts in mood, energy, activity levels, and the ability to carry out day to day tasks

• The current market size for the pharmaceutical treatment of bipolar disorder is $5bn

• The disorder is becoming increasingly common in younger Americans, and therefore analysts believe the prescription market will significantly expand

• Typical methods of treatment include therapy, medication, psychotherapy, and other various treatment options

4.7%

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SPN-817

Pipeline Overview

§ In October, 2018, Supernus bought Biscayne Neurotherapeutics, thereby acquiring SPN-817

§ SPN-817 is a novel synthetic form of huperzine A. It will treat people with severe epilepsy

§ Huperzine A acts as an acetylcholinesterase inhibitor. In the body, this chemical results in higher levels of acetylcholine. Acetylcholine is the neurotransmitter that activates muscles throughout the body

§ SPN-817 will have new chemical entity status in the US and is currently in Phase I of the clinical trial process

SPN-809

§ SPN-809 uses the same chemical as SPN-812, viloxazine hydrochloride, and is designed to treat patients with depression

§ Viloxazine is a norepinephrine reuptake inhibitor. Viloxazine raises norepinephrine levels in the body to stimulate muscle action and increase positive emotions

§ In Europe, viloxazine has been approved to treat depression, however, previous attempts in the 1970s to sell it in America as an anti-depressant failed

§ SPN-809 is about to enter Phase II in the clinical trial process

Supernus’ Early Stage Drugs

Sources: Bloomberg, Company Annual Reports

Final Recommendation

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Recommendation: Supernus (NASDAQ: SUPN) is undervalued in the market with substantial long-term upside; therefore, we recommend a buy

Base Case

Price Target: $50.83Upside: 37.53%

Upside Case

Price Target: $75.45Upside: 104.14%

Downside Case

Price Target: $32.58Downside: -11.85%

Appendix

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Valuation – Comparable Companies

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Valuation – WACC

Valuation – DCF (Base)

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Valuation – DCF (Base)

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Valuation – DCF (Upside)

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Valuation – DCF (Upside)

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Valuation – DCF (Downside)

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Valuation – DCF (Downside)

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