Big Growth Stories in Biotech
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By George S. Mack of The Life Sciences Report.
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Bacteria are pure survivalists, and over billions of years they have evolved to produce ever-newer chemicals to protect themselves against other bugs, and in the last 100 years they have begun to protect themselves against the antibiotics that humans have developed from those same bugs. But guess who’s winning. In September 2012 the FDA said that greater than 70% of the bacteria that produce hospital-associated infections (HAIs) are now resistant to at least one type of antibiotic, and in the year 2000 alone, there were almost 2 million (M) cases of HAIs that caused close to 99,000 deaths. Too bad the agency didn’t give a more updated number, because it’s a certainty that things are not getting better. Unless a sustainable system is developed to counteract this tide, a catastrophe is just a matter of when, and not if. With not even a tiny bit of exaggeration, the appearance of a devastating superbug is a looming global crisis.
The solution is multifaceted, and public-private collaborations are a necessity. Governments must be involved because development of new agents must be done quickly and at great cost without regard to return on investment. Shareholder-owned companies cannot do this. Indeed, in some instances new products may not be profitable for drug developers because antibiotics are used for acute disease and not for ongoing chronic therapies the way statins are used in patients with hypercholesterolemia. Furthermore, FDA and other global regulators may at times order that new antibiotics be held back for infrequent use to prevent them from initiating development of new resistant bacteria. In other words, they may be reserved for catastrophic circumstances.
The U.S. Congress passed the Generating Antibiotic Incentives Now (GAIN) Act, which was intended to provide biotechs and pharmas with inducements to spur development of new antimicrobial agents that would be effective against resistant strains of bacteria. Those inducements for developers producing what the GAIN Act calls qualified infectious disease products (QIDPs) include an additional five years of exclusivity beyond the normal five years; a priority review where a new drug application would be evaluated in eight months versus a more typical 12 months; and fast tracking, which would open up the lines of communication for quicker access between the drug developer and the FDA. Companies that might benefit from provisions of the GAIN Act include Optimer Pharmaceuticals, Cubist Pharmaceuticals, Cempra, Polymedix and a very low-valuation Trius Therapeutics (NASDAQ: TSRX).
I had a wide-ranging conversation with Managing Director and Head of Health Care Equity Research Ram Selvaraju of Aegis Capital who wanted to talk about Trius before going to any other topic. “We have been bullish on Trius for quite some time,” he says. “It just recently raised capital, and it is very well funded and it is therefore highly unlikely that there will be an additional near-term dilutive capital raise. So we think that investors should take a look at this company now and consider this a reasonable and timely entry point.”
Trius’ lead candidate is its phase 3 product tedizolid phosphate, which is being tested for acute bacterial skin and skin structure infections (abSSSI). Selvaraju is anticipating a major catalyst in the lifecycle of the company in the second half of March when it releases top-line data from a confirmatory phase 3 trial for abSSSI. “Since the designs of the first phase 3 trial, and this one were virtually identical, we do not believe this second trial would be anything other than positive,” he says. “So we're very high on this upcoming data release.” The value proposition for the company, according to Selvaraju, is that Trius is the only small-cap antibiotic developer with a late-stage compound in a class of antibiotics that is not crowded with others clamoring to get to market. The product will go head-to-head with Pfizer’s Zyvox (lenezolid) which is currently grossing $1.4B per year. Trius with a $209M market cap is poised to give investors a windfall. “We think that its [valuation] is extremely low for a company that's already in phase 3 development and that has a risk-mitigated asset with a previously reported positive phase 3 study,” he says.
Selvaraju is also very bullish on Synergy Pharmaceuticals (NASDAQ: SGYP), which has recently demonstrated and reported very favorable phase 3 data on its lead candidate plecanatide for chronic constipation. “We think that there’s a possibility that the company could provide evidence that plecanatide is meaningfully better than Ironwood Pharmaceutical's (NASDAQ: IRWD) drug, Linzess (linaclotide), which was approved at the end of August and has already been launched here in the U.S.” Actually, Selvaraju likes both companies, but Ironwood is valued at about $1.4 billion currently. Synergy's plecanatide is in the same class of drug as Linzess, and it has gone through four positive phase 3 trials. “It [Linzess] was launched in mid-December with Ironwood’s marketing partner Forest Laboratories, which booked $19 million of Linzess sales in just the last two weeks of December alone,” he says. “So even if you assume that a significant proportion of that number was due to channel stuffing and stocking, we could still legitimately expect this to be a $100 million+ generator in 2013, and we certainly expect it to eventually become a blockbuster drug.” He believes that Synergy’s product plecanatide could be a better drug than Linzess. Moreover, Synergy owns all of plecanatide, whereas Ironwood owns only 40% of Linzess. “For that reason, we don't believe that Synergy deserves to trade at such a significant discount down at a $390 million market cap.” He values Synergy at around $1 billion.
This was my third conversation with Selvaraju, and he is always enthusiastic and eager to talk about his favorite ideas. Speaking with Ram is always the highlight of my week, because he loves to find undervalued names that could become grand slam homeruns. He points to three micro-cap ideas, Galena Biopharma, Neuralstem and Lpath, all of which have special technology platforms that could be developed into revolutionary therapies. He likes Galena because it’s focus is breast cancer, a quite large disease indication, and it’s doing it with a vaccine, not an antibody. The idea is to prevent recurrence of the disease. Although he’s disappointed in the slower pace of development, he likes Lpath because it’s the only company that is developing antibodies against bioactive lipids. Its lead product candidate, Isonep (sonepcizumab) in phase 2, is addressing a massive unmet need in wet age-related macular degeneration (AMD), and it is partnered with Pfizer, one of the world’s giants in drug development and sales. Finally, Neuralstem has a two-pronged platform with small molecules and stem cells addressing spinal paralysis, stroke, depression and other central nervous system diseases. The company’s lead stem cell program with NSI-566 (human spinal cord stem cells), has shown that its cell therapy approach can restore damaged spinal cords in rats, which regain motor and sensory function. It is now being tested in humans.
To read the entire interview with Ram Selvaraju, visit The Life Sciences Report.
Author George S. Mack personally and/or his family own shares of the following companies mentioned in this interview: None. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports does not accept stock in exchange for services or render general or specific investment advice and do not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
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