Bipolar disorder is relatively common, with 2.8% of adults, or 6 million Americans, reporting symptoms over a 12-month period. But the market is underserved; in particular, only a limited number of pharmaceutical companies have succeeded in launching treatments for bipolar-related depression. Hence, the recent clinical success of Intra-Cellular Therapies' (NASDAQ:ITCI) antipsychotic drug, lumateperone, in the treatment of bipolar-related depression is a noteworthy catalyst for investors.

But does this clinical success make Intra-Cellular Therapies a Buy? Let's find out.

Pills and pills and more pills

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The portfolio targets multiple neuropsychiatric and neurological disorders

Intra-Cellular Therapies secured its first-ever U.S. Food and Drug Administration (FDA) approval for Caplyta (lumateperone capsules) to treat schizophrenia in December 2019. Launched in late March, Caplyta earned $1.9 million in sales in the second quarter of fiscal 2020. More than 95% of people covered by Medicare Part D and Medicaid programs now have access to this schizophrenia drug.

Intra-Cellular Therapies has big label expansion plans for lumateperone. Besides bipolar-related depression, the company plans to launch a phase 3 trial for oral lumateperone in treating major depressive disorder (MDD), as well as human clinical trials for a long-acting injectable (LAI) formulation of lumateperone, in late 2020. 

Intra-Cellular Therapies is also studying a few other drug candidates for a range of conditions in early-stage trials. While these candidates will matter in the long run, they are unlikely to have a material impact on Intra-Cellular Therapies' valuation for some time. 

A closer look at bipolar depression trials for oral lumateperone

Intra-Cellular Therapies has reported strong results for lumateperone as an add-on therapy to the mood stabilizers lithium or valproate for treating major depressive episodes related to bipolar 1 or bipolar 2 disorder. 

The company has also tested two doses of oral lumateperone as a single-agent treatment for bipolar-related depression. In one phase 3 trial, when administered to patients as a 42-milligram dose once a day for six weeks, the drug demonstrated statistically significant placebo-adjusted improvements in the enrolled patients.

However, the drug showed a far smaller placebo-adjusted benefit in reducing depression in another phase 3 study with similar design, which also showed a higher-than-anticipated response to placebo (a relatively common problem in trials of drugs for bipolar disorder). Ironically, patients on a 28-milligram once-a-day dose of oral lumateperone in the latter study actually performed worse than those on placebo. 

The two phase 3 trials differed in one key aspect: The latter enrolled patients only in the U.S., while the former enrolled patients across the world. Hence, the higher-than-expected placebo effect in the latter study may be due to a better standard of care for bipolar depression in the U.S., as one analyst notes. 

Based on the positive Phase 3 trial results as well as previous safety studies, Intra-Cellular Therapies will be submitting a supplemental new drug application (sNDA) to the FDA asking it to approve oral lumateperone for bipolar depression -- both alone and as an add-on therapy to lithium or valproate -- in late 2020 or early 2021. 

Favorable tolerability and safety profile are key advantages

Most of the other existing antipsychotics come with side effects including weight gain, metabolic disturbances, movement disorders, and abnormally high levels of the hormone prolactin. Intra-Cellular Therapies estimates that almost 74% of patients on traditional antipsychotics quit treatment within 18 months because of these side effects. 

For oral lumateperone, Intra-Cellular Therapies saw side effects at levels almost similar to those of a placebo in studies involving schizophrenia and bipolar disorder patients -- and that could mean much higher compliance and better patient outcomes, both of which would be major competitive advantages. 

More than $1 billion in revenue is possible by 2024

We can assess the revenue potential of lumateperone by studying a few of its key competitors. AstraZeneca's (NYSE:AZN) Seroquel, Sumitomo Dainippon Pharma's Latuda, and AbbVie's (NYSE:ABBV) Vraylar -- are all earning close to $1 billion in annual revenue within a few years of launch. 

There are two types of bipolar disorder, 1 and 2, with each subtype accounting for half of the total patient population. Seroquel is the only FDA-approved antipsychotic for treating depression associated with both bipolar 2 and bipolar 2 patients; the others are only approved for bipolar 1. Latuda is the only FDA-approved drug in an adjunct setting, and that too is only for bipolar 1 patients. 

Based on clinical trial results, lumateperone can get FDA approval for both bipolar 1 and bipolar 2. Amnd with almost 70% of bipolar disorder patients responding adequately to mood stabilizers such as lithium and valproate as maintenance therapy, the adjunct indication is important, giving lumateperone access to niches of the bipolar disorder market not targeted by existing antipsychotics. 

With broader applicability, equivalent efficacy, and a better safety and tolerability profile, lumateperone could reach blockbuster status by 2024 or even earlier. 

A strong balance sheet should fuel growth

Intra-Cellular Therapies had $409 million in cash and cash equivalents and $25 million of total debt on its balance sheet at the end of June 2020. Management recently announced a $350 million underwritten offering of common shares, with a 30-day option to underwriters to purchase up to 15% additional shares. 

For the past 12 months, ending in June, the company recorded a net loss of about $187 million. Taking 1.5 times this loss as a proxy for an annual cash burn rate, we see that Intra-Cellular Therapies can sustain its operations at least until mid-2022 without resorting to any further capital raises. (The assumed cash burn rate is higher in this projection to account for the increased expenses associated with late-stage research and commercialization of lumateperone.)

There are a few risks to consider

Caplyta carries a "black box" warning from the FDA regarding its use in elderly patients with dementia-related psychosis. While a similar warning is carried by most of the FDA-approved schizophrenia drugs in the U.S., Intra-Cellular Therapies' investors will have to be extra cautious because the company's prospects are almost completely dependent on this drug. 

Biotech companies are known to raise capital through public offerings after successful clinical trial results, and Intra-Cellular Therapies is no different. This can lead to significant equity dilution for existing investors. 

The risk-reward profile is favorable

FDA approval for oral lumateperone in bipolar-related depression will be the next big milestone for Intra-Cellular Therapies. While nothing is certain when it comes to drug approvals, lumateperone's compelling efficacy and favorable safety have significantly raised chances for a positive FDA decision. 

Intra-Cellular Therapies remains well below its all-time high of $58.76 attained in November 2015. That gives this company significant upside potential backed by the clinical and commercial success of lumateperone. Based on its risk-reward proposition, Intra-Cellular Therapies looks like a smart buy for healthcare investors who can tolerate a reasonable degree of risk.