By Jason Napodano, CFA
On March 12, 2013, Trius Therapeutics (TSRX) reported financial results for fourth-quarter and full-year 2012. Total revenues in the quarter were $5.2 million, and consisted of $1.0 million in contract research from the company's NIAID and DTRA grants and $4.1 million collaborative and licensing fees from Bayer Pharma AG, the company's partner in Asia/Pacific market for tedizolid phosphate. For full-year 2012, Trius recognized a total of $8.5 million in contract research revenues and $18.7 million in revenues from Bayer, which included a $5.0 million milestone payment in the first quarter for the successful completion of the first Phase III study, ESTABLISH-1 (TR701-112). The second Phase III study, ESTABLISH-2, should be out within the month.
Net loss in the fourth quarter totaled $14.2 million, or 36 cents per share. Research and Development expenses in the quarter totaled $16.5 million. S&GA expense totaled $4.7 million. R&D was lower than expected, down from the $19.3 million in the third quarter 2012. We remind investors that enrollment in the second Phase III study, ESTABLISH-2, completed on Dec. 10, 2012. SG&A was higher than expected, up from $4.4 million in the third quarter and $3.0 million earlier in the year. Management noted pre-commercialization activities and higher personnel costs associated with increasing headcount leading to the uptick in operating expenses during the quarter.
For full-year 2012, Trius reported a net loss of $53.9 million, or $1.42 per share. Loss was driven by $69.0 million in R&D and $15.4 million in SG&A. We expect the trend of slightly lower R&D and increasing SG&A to continue in 2013 as the company continues to prepare for the commercialization of tedizolid.
Solid Cash Position
Trius exited 2012 with $66.0 million in cash and investments. We remind investors that on Aug. 31, 2012, the company entered into a common stock purchase agreement (CSPA) with Terrapin Opportunity, L.P., pursuant to which Trius may, from time to time, sell Terrapin shares of common stock. In October 2012, Trius sold 612,133 shares of common stock under the CSPA to raise net proceeds of $3.4 million.
In January 2013, the company entered into an underwritten public offering by selling 7.169 million shares of common stock at $4.75 per share, resulting in net proceeds of $31.6 million. Taking into account an estimated operating burn of around $15 million in the first quarter of 2013, we forecast that Trius will report roughly $80 to $85 million in cash as of March 31, 2013. We find this to be sufficient to fund operations throughout 2013.
ESTABLISH-2 Results Imminent
As noted above, Trius completed enrollment in the second Phase III study, ESTABLISH-2, on Dec. 10, 2012. We remind investors that ESTABLISH-1 completed enrollment on Sept. 15, 2011, and reported top-line data 95 days later on Dec. 19, 2011. Assuming a similar timeline, 95 days after Dec. 10, 2012, would be March 15, 2013. We suspect that compiling data from ESTABLISH-2 (118 clinical sites globally) will take an extra week compared to ESTABLISH-1 (84 clinical sites globally). We also note ESTABLISH-2 had far more sites outside the U.S., thus we are expecting data the last week of March 2013.
We remain optimistic on the results of ESTABLISH-2, believing that tedizolid will demonstrate non-inferiority to linezolid on the primary endpoint of response rate, defined as cessation of spread and absence of fever at 48-72 hours. We outlined our bullish thesis on Trius in December 2012.
Next Up -- File the NDA, Sign an EU Deal, Initiate a Phase III Pneumonia Study
Assuming the results from ESTABLISH-2 are positive, we expect that Trius will be in position to file the new drug application (NDA) on tedizolid for acute bacterial skin and skin structure infections (ABSSSI) during the second half of 2013. Management recently noted they have completed all supporting studies necessary for the filing.
We expect that Trius would like to sign a commercialization deal for tedizolid in the European Union and keep U.S. rights for themselves. We remind investors that Bayer, the company's Asia/Pacific partner paid Trius $25 million upfront to license tedizolid for Asia/Pacific. They deal also includes 25% of the future global development costs for the drug in ABBBI and pneumonia, $69 million in certain development, regulatory, and commercialization milestones, and double-digit royalties (we model 15%) on sales.
The deal size for Europe is difficult to predict, however. The Bayer deal was signed in July 2011, before enrollment in ESTABLISH-1 had even completed. If ESTABLISH-2 is successful, Trius will be able to go to marketing partners with two positive Phase III trials with tedizolid and potentially a U.S. NDA under review. That dwarfs the resume that Trius had back in July 2011 when Bayer forked over $25 million. Before the Bayer deal, in May 2011, Trius stock traded with a market capitalization of around $150 million. Today, the market value is north of $300 million. The story has been significantly de-risked. The market is saying Trius is worth twice as much, so we assume potential partners will agree.
However, Europe is a stagnate market with difficult pricing. Growth in China and the rest of emerging Asia for drugs like Zyvox, Tygacil, and Cubicin is far ahead of the pace in Europe. In fact, sales of Zyvox (linezolid) were down year over year in 2012 to $302 million at Pfizer (PFE), vs. $306 million in 2011. Sales of Tygacil were up only slightly in 2012 to $67 million vs. $64 million in 2011. Emerging markets, however, showed strong growth for Zyvox, up to $224 million in 2012 vs. $188 million in 2011. Any deal that Trius signs for tedizolid in Europe will surely take into consideration the market opportunity in Europe simply is not as large as Asia/Pacific.
Trius plans to conduct a Phase III pneumonia (lung) study with tedizolid to start before the end of the year. In the past, management has said they would also like to conduct a bacteremia (systemic infection) study with tedizolid. We suspect that may take place in 2014. Expanding the label indication for tedizolid is key to the future growth of the drug. With a fully expanded label, tedizolid will have clear differentiation from its two closest competitors: Pfizer's Zyvox (linezolid), which is approved for skin and lung infections, and Cubists' (CBST) Cubicin (daptomycin), which is approved for skin and systematic infections. Trius' goal with tedizolid is to gain approval in all three major indications of use.
Fundamentals Remain Strong
We believe fundamentals at Trius remain solid. We see the development of tedizolid, with data from its second Phase OOO trial expected in the next two weeks, as low risk. Management has presented impressive safety and efficacy data from the first Phase III trial at recent medical meetings, including the IDWeek2012 meeting in October 2012 and ICAAC in September 2012.
Finally, Trius is well funded. We model over $80 million in cash will be on hand at the end of the first quarter 2013. We see fair value at $12 per share based on our 10-year DCF model. We think tedizolid is a $400 million drug in the U.S. and $750 million globally. We believe Trius is an attractive takeover candidate for a specialty pharmaceutical company looking to enhance its anti-infectant pipeline. Once tedizolid is commercialized, we think investors will start to pay more attention and assign value to the company's preclinical pipeline, which includes Gyrase-B, currently in IND-enabling studies.
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