By
Smith On Stocks
:
Investment Recommendation
I am reiterating my buy recommendation on Trius Therapeutics
(NASDAQ: [[TSRX]]). This note is follow-up to a
35 page report called "Trius Therapeutics'
Tedizolid has Blockbuster Potential for MRSA Infections"
which was issued on May 30, 2012 when Trius closed at a price of
$5.01. I laid out my thinking on why I thought tedizolid could
reach $1 billion of sales in 2020 and why I thought that Trius
could potentially sell at $60 per share in 2020. I would urge
investors to refer to that report for a more comprehensive
analysis, but in this note I want to briefly update and refresh
investors on my thinking regarding the stock.
Since the report was issued, Trius has been in a trading range
of $4.87 to $6.49 per share. I think that the stock can break out
of this range on the upside following the potential release of data
from a second Phase III early in 2013. This IV-oral switch study is
intended to confirm the positive results of the earlier oral Phase
III trial for acute bacterial skin and skin structure infections
(ABSSSI). I would buy the stock before the release of that data.
Success in this Phase III trial, which I am expecting, will give
investors the confidence that tedizolid will be approved. It is
important to note that investors often anticipate that companies
will do a financing off of a successful trial result and this can
cause the stock to trade down on the good news. However, Trius has
its financial house in order with $84 million of cash on its
current balance sheet so that concern for a possible equity
offering should not be a drag on the stock price.
I think that after this event, Trius will also clarify which
path to commercialization it will take. It has retained all product
rights in the US, Canada and the European Union, giving the company
great flexibility and control. It may choose to launch the product
on its own or with a partner in the US, but because of daunting
infrastructure needs, it will almost certainly choose to partner in
Europe. Because of its financial strength, Trius does not have to
bring on a partner until after the results are announced. The "go
it alone" in the US is the strategy that I prefer and believe would
lead to the greatest shareholder value in the long term. However,
Trius also has the option to partner the product in the US as well
as in international markets or to just sell the entire company.
Investors usually prefer the partnering or outright sale options
as they take away a significant part of the launch risk and produce
a quicker immediate return. I would expect a significant increase
in price if an acquisition occurs. In December 2006, Forest
Laboratories (
FRX
) paid $594 million (including $494 million upfront) to acquire
Cerexa Inc. The company was just about to enter Phase III trials
for ceftaroline, an intravenous cephalosporin antibiotic for use
against MRSA and certain gram-negative bacteria. Ceftaroline
operates in a somewhat different setting than tedizolid; I consider
tedizolid to have more commercial potential. A takeover value of
$594 million for Trius translates into $15 per share.
The decision to go it alone in the US might result in a more
modest move in the stock in the near term as investors would be
concerned about launch risk; I would estimate a price move to $7+
with this option. However, I think this would be the best outcome
for long-term shareholders as my analysis leads me to project a $60
target price in 2020. A worldwide partnering deal might produce an
in between outcome on the stock price of perhaps $7 and $12. All of
these estimates assume successful results in the upcoming Phase III
trial.
Overview
Investing in emerging biotechnology is based on assessing the
challenges faced by a company in developing its product, gaining
regulatory approval and then commercializing the drug. This process
can last five to ten years or even longer. As goals are met and
investors' questions are answered, the investment scenario is
de-risked and the value of the company increases. Considerable
value can be built before the product even gets to market, but
ultimately it is the degree of success in the marketplace as
measured by sales that is most influential in determining the stock
price. This report goes through my checklist for Trius.
What is the market being addressed?
Staphylococcus aureus
is arguably one of the greatest bacterial threats to mankind. It is
a rapidly growing and particularly virulent bacterium that is often
the causative pathogen in infections involving the skin and skin
structure tissues, the lungs (pneumonia) and blood stream
(bacteremia). The death rates for pneumonia and bacteremia are
alarming at about 20% and 25%, respectively.
Continued usage of antibiotics and bacterial evolution have
given rise to methicillin resistant
Staphylococcus aureus
or MRSA strains. Tedizolid is targeted at MRSA, non-resistant or
methicillin sensitive
Staphylococcus aureus
and other troublesome gram positive bacterial infections. These
resistant bacteria or MRSA render many antibiotics ineffective.
Previous antibiotics in the penicillin and cephalosporin classes of
antibiotics that have long been used to treat Staph are
increasingly ineffective or useless.
Resistant bacteria are a significant problem within hospitals.
However, one of the major problems with MRSA is that it has moved
into the non-hospital setting as well. It is estimated that as many
as 50% of Staph infections in the non-hospital setting are now
caused by MRSA. This is a new and dangerous health situation.
What is the opportunity for new products to treat
MRSA?
In treating MRSA, the "go to drug" is vancomycin, which has been
around since 1958. Vancomycin has been (and remains) a remarkably
effective agent; however, in recent years as vancomycin
non-susceptible MRSA strains have emerged, increased failure rates
have driven doctors to increase the dose and when this happens,
toxicities can occur. In these cases, there is a need for an
alternative to vancomycin.
Antibiotics have varying properties so that no one antibiotic is
the optimal choice for all patients. Differences relate to: (1)
potency which is based on the concentration of drug necessary to
inhibit bacterial growth, (2) bactericidal action (kills bacteria
directly) or bacteriostatic (holds bacteria growth in check
allowing the immune system to finish eradicating the pathogen), (3)
dosing schedule and oral or intravenous administration, (4)
duration of dosing, (5) spectrum of activity, (6) pharmacokinetics,
(7) resistance profile and (8) safety and tolerability and
metabolism and elimination. Depending on the interplay of these
factors, patients may respond quite differently to different
antibiotics.
Over the last decade, Pfizer's (
PFE
) Zyvox and Cubist's (
CBST
) Cubicin have emerged to complement vancomycin in the MRSA market.
I estimate Zyvox's US sales will reach $640 million in 2012 and
Cubicin will reach $830 million. There remains a strong need for
new antibiotics to meet needs that vancomycin, Zyvox and Cubicin
don't adequately address.
How big is the market addressed?
In terms of sales, the market for MRSA agents appears not to be
that large in the US at only $1.7 billion, but this is deceiving.
Vancomycin accounts for 74% of total days of therapy in the market,
but it is a generic drug and is priced at only $8 per patient day
of use. If it were priced at $250 per day, comparable to Zyvox and
Cubicin, it would be a $5 billion product and the addressable
market for all MRSA antibiotics would be $7 billion.
A new entrant in this huge MRSA market can achieve very
significant sales with just modest penetration in the market;
particularly given vancomycin's decreasing effectiveness. For
example, I estimate that Cubicin will reach $830 million of US
sales in 2012, but will account for only 11% of the market as
measured by patient days of therapy. My projection for tedizolid is
that in 2020, it will carry a price of $280 per day, have a 6%
share of the market as measured in patient days of therapy and
achieve US sales of $625 million.
How effective is tedizolid as judged by clinical
trials?
There are three major classes of antibiotics used to treat MRSA
with each having one dominant product: the glycopeptide class has
vancomycin; the lipopeptides, Cubicin; and the oxazolidinones,
Zyvox. Trius' tedizolid is on track to be the second antibiotic of
the oxazolidinone class of antibiotics and has meaningful
differentiating factors from Zyvox. All of these drugs are
effective products, and it is usually the case that clinical trials
are non-inferiority studies that show a new antibiotic to be as
effective as a proven existing one, not superior.
Tedizolid has been effectively de-risked in its first Phase III
trial that showed it was non-inferior to Zyvox in treating skin and
soft tissue infections. This first Phase III trial (the "112"
trial) reported topline results in 667 patients. The primary
endpoint was cessation of spread of the infected lesion and absence
of fever at 48-72 hours. Tedizolid met this endpoint in 79.5% of
patients as compared to 79.4% for Zyvox showing that it is an
effective drug. Because of a slight imbalance in missing
temperature readings between the two arms of the study, the
difference in relative efficacy between the tedizolid and Zyvox
arms is enhanced when the fever component of the endpoint is
subtracted (Tedizolid: 87.5%; Zyvox: 85.4%).
The impact of missing temperature readings and other issues
related to the relevancy of fever as a component of the primary
efficacy outcome has prompted the FNIH (Foundation for the National
Institutes of Health) to recommend to the FDA that fever not be
included as a component of the primary endpoint (FDA ABSSSI Docket
ID: FDA-2010-D-0433) and it is expected that this recommendation
will be adopted by the time that tedizolid and other
investigational antibiotics are reviewed under the final ABSSSI
guidelines.
With respect to safety and tolerability, patients in the
tedizolid arm of the 112 study showed a statistically significant
improvement in platelet reduction and gastrointestinal adverse
events compared to the Zyvox arm. The improvement in platelet
reduction is a particularly important advantage in treating
infections that require long-term treatment.
The second Phase III trial is now enrolling and topline data is
expected in early 2013. Based on the positive results of the first
Phase III trial there is a high probability for this second trial
to be effective. This could set the stage for an NDA filing in
second half of 2013 with possible approval in 2014.
How does tedizolid fit in the market?
An obvious question is why we need new antibiotics if they are
equally effective as ones that are already available. One reason is
that bacteria build resistance to antibiotics over time and become
less susceptible; this can render the antibiotic ineffective or
require higher doses that can lead to toxicity. Vancomycin has been
the drug of choice for many years, but certain bacterial strains
are becoming more resistant. This necessitates higher doses to
control the infection, but this also increases the risk of toxicity
to the kidney, requiring kidney monitoring, and a tradeoff between
efficacy and safety. Another reason is that, because of ethical
reasons, patients infected with known drug resistant pathogens
cannot be enrolled in a Phase III trial so such a setting does not
reflect how these drugs will be administered or how they will
perform in an actual clinical setting.
No two antibiotics are the same and some work better in certain
situations than others. Physicians need a much broader
armamentarium than they now have with just three main drugs-
vancomycin, Cubicin and Zyvox. Let me give an example of this.
Cubicin is on track to be a $1 billion product in 2013. However,
Cubicin is inactivated by surfactants in the lungs and can't be
used to treat pneumonia; its biggest role is in skin and soft
tissue infections and bacteremia. Zyvox was associated with
increased mortality compared to vancomycin in a bacteremia trial
and yet over 15% of its use is off-label to treat bacteremia simply
because doctors have no other option. Tedizolid could be of use in
these situations where Cubicin and Zyvox come up short.
The primary opportunity for tedizolid is likely to be taking
share from Zyvox. Some of tedizolid's key advantages are that it is
a more potent drug that is bactericidal as opposed to Zyvox which
is bacteriostatic; offers once a day dosing versus twice a day for
Zyvox; has a better dosing schedule of 6 days as opposed to 10-14
days for Zyvox and appears to be safer in patients requiring
long-term treatment. A survey conducted on behalf of Trius
indicated that physicians might switch as many as 40% of their
patients from Zyvox over to tedizolid when it becomes
available.
Hospitals may start with a generic antibiotic and then switch to
a branded product. Results from the same survey suggested that
physicians might move 15% to 20% of their use of vancomycin to
tedizolid because of the concern about renal toxicity with
vancomycin as a result of the higher doses needed to treat
resistant strains. The renally impaired component of the market
comprises about 25% of the total days of therapy.
A third opportunity is in the outpatient setting which is
comprised of roughly 800,000 patients. Cubicin achieves about half
of its sales in this market segment although vancomycin is the
market leader based on patient days of therapy. Pfizer has not
placed as much emphasis on this area. Infusionists would be
interested in a branded product to compete against Cubicin.
The fourth area of opportunity is in long-term care. If a
nursing home patient becomes infected and is sent to a hospital,
the nursing home loses revenues while the patient remains in the
hospital. If the patient can be treated effectively in the nursing
home, there is a strong incentive for treating the patient in the
nursing home. Vancomycin with its IV only formulation and need for
dose adjustment does not lend itself to this environment. Cubicin
can be used in this environment, but it requires infusion
expertise. Zyvox and tedizolid both lend themselves to this
environment. The patient can be treated in the nursing home or in
the hospital initially and then sent home with the oral dose. The
once a day dosing of tedizolid versus twice a day for Zyvox is a
meaningful advantage in terms of compliance and reducing labor
costs.
If found effective, will the FDA approve tedizolid, and
how promptly will the FDA act?
Assuming success in the second Phase III trial, tedizolid is on
track for an NDA filing in 2H, 2013 and potential approval in 2014.
However, investors have found that successful clinical trials don't
always mean quick approval. In response to the majority of newly
submitted NDAs, the FDA has issued Complete Response Letters which
are often due to sections of the NDA other than the clinical data
such as chemistry, manufacturing and control. A CRL usually delays
approval by a year or more.
I can't assure investors that tedizolid won't run into some
issues like this at the FDA. However, the company has been very
careful to work with the FDA to make sure that its studies are
designed to have new endpoints that the FDA has been developing.
Both of the Phase III trials were conducted in agreement with FDA
under Special ProtocolAssessments (SPAs). The trials are also large
and as shown in the first Phase III trial, appear to be well
executed. Finally, pressure from Congress and outside organizations
to address the growing need for novel antibiotics, including the
recently approved GAIN Act, has encouraged the FDA to approve novel
antibiotics. I think that there is a good chance for approval in
2014, but there is always the chance for a modest delay.
Questions about the launch
I have essentially modeled a launch curve for tedizolid with the
same shape shown by Cubicin. However, there is concern by some Wall
Street analysts that tedizolid will be held in reserve and used
only if vancomycin, Cubicin and Zyvox are ineffective. This is an
academic argument that has intuitive appeal, but the experience in
real life appears to be different. The hold in reserve argument
applied to Zyvox and Cubicin, but both had successful launches and
sustained growth beyond the launch. Infectious disease physicians
seem to opt for the drug that they feel will be most effective.
This is not surprising as they are often dealing with quickly
spreading, life threatening infections.
Zyvox will be losing its patent exclusivity in May of 2015 and
some investors worry that physicians will elect to use generic
Zyvox first and then switch to tedizolid if that fails. This may be
appropriate is some cases. However, Zyvox and Cubicin did very well
despite the availability of generic vancomycin. I think that
efficacy and safety are often more important factors than price in
choosing an antibiotic.
Initially, tedizolid will only be approved for skin and soft
tissue infections which account for about 30% of Staph infections
in the hospital and will not have completed trials in pneumonia
(30% of infections) nor bacteremia (25%) at the time of potential
approval for ABSSSI in mid-2014. In the case of Cubicin, this was
not an issue as the company indicated in a conference call
conducted one year after its launch that 50% of sales were in
off-label indications. I expect broad off-label use of
tedizolid.
Competition
There are a number of companies competing in the MRSA market and
a host of new products in development, but I see tedizolid as the
most promising of these. I find three products to be of the most
interest. Durata Therapeutics (
DRTX
) is developing dalbavancin and The Medicines Company (
MDCO
) is developing oritavancin. Both belong to the glycopeptide class
of antibiotics of which vancomycin is the charter member. They are
on the same development timeline as tedizolid and both will be
revealing topline data from Phase III trials in 2013 and depending
on the outcomes, could be filing NDAs in 2013 at about the same
time as tedizolid. The third product is Forest Laboratories'
Teflaro (ceftaroline), a fifth generation cephalosporin antibiotic
with good activity against MRSA that was introduced in 2010; Forest
is guiding for sales on $65 million for the year ending March
2013.
The major appeal of dalbavancin and oritavancin is their dosing
schedule. Dalbavancin is given as one dose on day one followed by a
second on day eight while oritavancin is given as one dose on day
one. The argument is that this will allow patients to avoid being
hospitalized for treatment or be discharged sooner. I think that
this will be of some appeal in milder infections, but in more
severe cases there are issues with titration and reimbursement that
create problems. I think that tedizolid is a more versatile drug
that can also compete on the dosing issues with its easy step down
from injection to oral dosing. Also, as a member of the
oxazolidinones class of antibiotics, it is differentiated from
glycopeptides, dalbavancin and oritavancin.
Competition from dalbavancin and oritavancin could be an issue
for Trius as proponents sometimes over-emphasize aspects of these
drugs. This could periodically create issues that affect tedizolid,
but I don't see them as impairing the growth of tedizolid. I see
dalbavancin, oritavancin and ceftaroline as carving out smaller
niches in the MRSA market than tedizolid, but being successful
drugs. There is also an enormous amount of development going on in
the field of MRSA and a promising new drug will almost certainly
come along that could create concerns.
What other products are in the pipeline?
Trius has focused almost all of its resources on tedizolid, but
it beginning to move on its second product. It began IND-enabling
studies for Gyrase-B in December 2011. This drug candidate has
potent activity against gram negative bacteria including
E. coli
,
Klebsiella
,
Acinetobacter
and
Pseudomonas aeruginosa
. Phase I trials are planned for 2013. Clinical development through
Phase I is being funded by a $28 million NIAID contract. Trius
expects to start.
What is the patent life of tedizolid?
One of the strongest investment attributes of tedizolid is that
it currently has patent protection in the United States on the
composition of matter patent through February 2028. Additional
patent term extensions as well as pending separate composition of
matter applications could extend protection to 2030. All patents on
all products are routinely challenged by generic companies within a
few years of launch. However, composition of matter patents are
very hard for generic companies to successfully challenge. Also, a
provision of the GAIN Act provides for an additional five years of
data exclusivity that, in addition to the potential five years of
Hatch Waxman data exclusivity, could provide for tedizolid market
exclusivity through 2024. This would represent an IP safety net in
the event that Trius patents are challenged and invalidated.
What is coming up?
There have been no dramatic new developments. The company has
firmed up the timelines on its Phase III trials for tedizolid in
pneumonia and expects to initiate the study in 1H2013. Th e company
has not provided guidance on when a study in bacteremia will start,
but I am estimating that it will be in 2014. The ICAAC conference
will be held on September 9 to 12 in San Francisco. There could be
some interesting data coming out of that conference.
Disclosure:
I am long [[TSRX]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
this article.
See also
Prepare Now For The Looming Fiscal Cliff
on seekingalpha.com