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 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, in which a new drug application would be evaluated in eight months versus the 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 (TSRX:NASDAQ).
I had a wide-ranging conversation with managing director and head of healthcare 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, it is very well funded, and it is therefore highly unlikely that there will be an additional near-term dilutive capital raise. 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 2013, 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 are virtually identical, we do not believe this second trial will be anything other than positive," he says. "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 $1.4 billion ($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 (SGYP:NASDAQ), which has recently reported very favorable phase 3 data on its lead candidate, plecanatide, for chronic constipation. "We think there's a possibility that the company could provide evidence that plecanatide is meaningfully better than Ironwood Pharmaceuticals' (IRWD:NASDAQ) drug, Linzess (linaclotide), which was approved at the end of August and has already been launched in the U.S." Actually, Selvaraju likes both companies, but Ironwood is valued at about $1.4B 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 $19M 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 $100M-plus generator in 2013, and we certainly expect it to eventually become a blockbuster drug." He believes that Synergy's 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 $390M market cap." He values Synergy at around $1B.
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 Inc., Neuralstem Inc. and Lpath Inc., all of which have special technology platforms that could be developed into revolutionary therapies. He likes Galena because its focus is breast cancer—a quite large disease indication—and it's attacking 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 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. The therapy 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.
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