By Jake King
Transition Therapeutics (NASDAQ:TTHI) is mostly known for its Alzheimer's disease (AD) treatment candidate, ELND005, however partner Elan Corp. (NYSE:ELN) is currently focused on advancing the drug in two 400-patient Phase II trials (for bipolar disorder and Alzheimer's agitation), while the Alzheimer's "cognition" indication is in a holding pattern (Phase III ready). A larger drug company could, perhaps, step up and help take ELND005 through Phase III for cognition, which could be what ELN is aiming for. Meanwhile, the drug candidate has become less interesting to investors without ongoing "cognition" trials (the largest AD-associated indication), hence TTHI's tiny market cap of ~$62M. ELND005 reduces inositol levels in the brain and has shown the ability to lessen agitation. The compound also works by inhibiting the build-up of amyloid plaque in the brain and, and given the partial success of Eli Lilly's (NYSE:LLY) solenezumab candidate in mild Alzheimer's patients, ELND005 alone should be enough to at least justify TTHI's current valuation. But it's another of Transition Therapeutic's compounds that is beginning to pique investor interest in this micro-cap biotech firm. The company's dual glucagon/GLP-1 receptor agonist, TT-401, works via well-documented pathways to treat Type II diabetes, a large treatment market and a focus for many large-cap drug companies. In fact, TTHI licensed this potential diabetes treatment from Lilly in the pre-clinical stage, and if data from a confirmatory Phase I trial are positive in the coming months, Lilly could exercise an option to re-acquire ownership of TT-401 and advance the compound's development as TTHI's partner. Such a deal would result in significant milestone payments, complete coverage of further development costs, and royalties to TTHI on commercial sales of the drug. Importantly, there have been deals reached for Phase I compounds that work similarly to TT-401, with transaction values in the $250M-$500M range (details below). As a result, the upcoming TT-401 Phase I results could be a key catalyst for TTHI, and we would not be surprised to see the stock trade up into this event, which is expected in early Q2.
TT-401 has blockbuster potential and deals for similar compounds suggest TTHI is way undervalued. TT-401 is a novel dual acting agonist of both the Glucagon Like Peptide-1 (GLP-1) receptor and the Glucagon (OTC:GCGR) receptor itself. The candidate is a peptide (small protein) designed as a once-weekly injectable treatment to both lower blood glucose and to help Type II diabetic patients lose weight. Currently approved GLP-1 agonists (also given by injection) make up a large and growing therapeutic category and represent an important approach in the treatment of Type II diabetes. But next generation therapies are being studied in early clinical development for their potential to provide a superior product profile over currently available drugs through improved efficacy, broader therapeutic application, or less frequent administration. Deals involving early-stage candidates in the glucagon/GLP-1 dual agonist drug class have been noteworthy. For instance, Zealand Pharma and Boehringer-Ingelheim announced a $500M partnership in 2011 for the development of these types of compounds, including Zealand's Phase I candidate, ZP2929. And in 2010, Roche (OTCQX:RHHBY) acquired Marcadia Biotech in a deal valued at $537M specifically for the GLP-1/GIP dual agonist MAR701, which was also in Phase I. In terms of approved GLP-1 agonists, the sales justify the high prices for early-stage diabetes assets with strong proof-of-concept. For instance Bristol-Myers Squibb's (NYSE:BMY) Byetta did $580M in revenue in 2011, and Novo Nordisk's (NYSE:NVO) Victoza generated sales of $1.2B in the first nine months of 2012. Meanwhile, orally-active DPP-IV inhibitors that slow down GLP-1 degradation have been wildly successful; Merck's (NYSE:MRK) Januvia and Janumet (Januvia plus metformin) did $4.7B in worldwide sales in 2011. Big cap drug companies certainly know that the market opportunity for next-generation compounds leveraging GLP-1 activity is large, so demand for these assets should remain strong. Deep-pocketed pharmaceutical companies involved in the diabetes area include: Eli-Lilly, Sanofi-Aventis (NYSE:SNY), Novo Nordisk , Bristol Myers Squibb , and Merck, and other primary care companies like Pfizer (NYSE:PFE), AstraZeneca (NYSE:AZN), and Novartis (NYSE:NVS) could also enter (or re-enter) the segment. As a result, favorable data for TT-401 should mean a significantly higher valuation for TTHI, whether LLY exercises its option to reacquire the compound or not.
Prior data indicate that TT-401 has a high probability to achieve positive Phase I safety and efficacy results. So far, TT-401, as a novel glucagon/GLP-1 agonist, has demonstrated considerable promise, and with its proven mechanism, should perform well in mid- and late-stage trials. However, the next data set will be important, as it will serve to confirm the initial Phase I results and increase the compound's visibility within the industry, and with investors. Preclinical data for TT-401 demonstrated sustained glycemic control, weight loss, and lipid improvements in animals, all key markers for treating diabetes. In June of 2012, a 48-patient Phase I trial of TT-401 demonstrated an acceptable safety and tolerability profile for the compound, and additionally, a pharmacological effect on glucose and pharmacodynamic biomarkers. Based on those results, TTHI announced that it would pursue a multiple ascending dose proof-of-concept study of TT-401 in obese subjects with Type II diabetes. The second Phase I trial is now underway, and results that could unlock value for this asset and for TTHI shares are anticipated to be announced in early 2Q 2013. Considering the proven track record of GLP-1 agonists and that Type II diabetes affects more than 300 million people globally, the market opportunity for TT-401 is large. The Phase I proof-of-concept results will be a key indicator of value for TTHI, as they will not only serve to validate the candidate, but also will help clarify the level of commitment by potential partner, Eli Lilly.
LLY deal loaded with significant milestone and royalty potential. In March 2010, the company entered into a licensing and collaboration agreement with LLY, in which TTHI acquired, for $1M, exclusive worldwide rights to develop and commercialize TT-401 and other preclinical compounds. Transition has since advanced TT-401 into the clinic, and as part of the agreement, LLY retains an option to reacquire rights to compounds under the agreement, including TT-401, through the end of Phase II studies. There are three potential scenarios with regards to LLY exercising its option for TT-401:
1) Eli Lilly could choose to exercise its option shortly after the upcoming final Phase I results, and TTHI would receive $7M from LLY, milestone payments of up to $150M, and royalties on sales in the high single-digit range.
2) LLY could wait to exercise its option on TT-401until after Phase II completes, and in this case, TTHI would still receive $7M after the upcoming Phase I data, another larger milestone payment for the Phase II results, total milestone payments of up to $250M, plus low double-digit royalties on sales of the drug.
3) LLY could choose not to exercise its option on TT-401 at all, but would be eligible to receive low single-digit royalties from Transition on sales of the drug, if commercialized.
While all scenarios have their benefits to TTHI, particularly because the market is giving the stock no credit for this asset, we believe the first scenario would have the most favorable short-term impact on the stock. This is because LLY exercising its option right after Phase I proof-of-concept data represents a major vote of confidence in TT-401's long-term potential, thereby increasing the probability of success, vs. scenario two, which has better long-term economics but leaves open a higher-risk question of whether further trials will succeed. Despite lower milestones and royalties under scenario one, note that TTHI would not have to spend an estimated $20M to conduct a large Phase II trial for TT-401, hence, the company's cash position would be projected to last for many years. Under scenario two, TTHI would still have enough cash to run the Phase II trial for TT-401, especially given the $7M that the company will receive from LLY if Phase I is positive. Most importantly, development of TT-401 ultimately becomes LLY's full responsibility if - and regardless of when - LLY exercises its option, hence value accrues to Transition shareholders, while precious R&D resources can be saved or utilized elsewhere. Under the scenario where LLY reacquires the product within 60 days following the Phase I data (scenario one), we estimate that Transition would save ~$10M annually on R&D spend, or roughly two-thirds of its anticipated R&D expense in 2013 and 2014.
Positive Phase I data is upside whether LLY plays or not. No doubt, LLY, as a leader in the diabetes segment, would be a great long-term partner for TTHI. Additionally, LLY exercising its option would be a major vote of confidence in the TT-401 program and the Phase I results. LLY has a large established sales forces in both the primary care and endocrinology segments, marketing a number of insulin-based products (Humalog, Humulin, and Glucagon), as well as the DPP-IV inhibitor diabetes treatment, Tradjenta. Additionally, LLY's experience launching and commercializing Byetta from 2005 to 2011 before returning rights back to Amylin (now part of Bristol-Myers) also positions this large cap drug company to promote TT-401 should it reach the market. In fact, given TTHI and LLY's crossover in both diabetes and Alzheimer's disease, it is quite possible that LLY simply acquires TTHI for its complimentary drug pipeline. However, should Phase I and Phase II trials read out positively, and LLY choose not to become the lead partner on the candidate, TTHI would be free to further develop TT-401, and potentially out-license it to another pharmaceutical company for more money up front and better royalty rates in the future.
TTHI - very inexpensive now, but perhaps not for long. Currently, the technology value for TTHI (market cap less estimated cash at year end) is ~$40M, and it appears that the market is not factoring much value, if any, for the company's diabetes program. Based on comparisons like Alexza (NASDAQ:ALXA) and Avanir (NASDAQ:AVNR), one could argue that $40M value for TTHI's Alzheimer's assets is fair, if not low, suggesting that investors can own TT-401 for free. Because other glucagon/GLP-1 assets in Phase I have been acquired or partnered at multi-hundred million dollar valuations, TTHI presents a real opportunity for investors to get involved with minimal risk and significant upside if TT-401's Phase I results are favorable. Expect TTHI to begin moving higher into the Phase I trial results as investors start to recognize the unappreciated value of this asset.
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