Investment Summary and Conclusion
I began recommending Trius (TSRX) with an initiation of coverage report that was published in May of 2012 and I continue to recommend the stock. That report and three subsequent updates explain my thinking on the clinical and commercial potential of its lead drug tedizolid, an antibiotic that is effective against gram positive bacteria including MRSA. These reports can be found on my website.
Trius is approaching a key clinical milestone in late March or April as it is expected to report topline data on the second of two Phase III trials involving tedizolid- ESTABLISH-2. The first Phase III trial was successful and I have a high level of confidence that this trial will also be successful. This should allow Trius to file an NDA by mid-2013 and potentially receive approval and begin marketing in the US in mid-2014.
My expectation is that the company will market tedizolid with its own sales force in the US and partner the product in Europe and other regions not covered by a previous partnering agreement with Bayer. This new partnering deal could be concluded late this year or early next and result in an upfront milestone payment of perhaps $50 million. As importantly, I expect that it will require the partner to pick up a good part of ongoing development costs for tedizolid.
Tedizolid is the second drug to be introduced of the oxazolidinone class of antibiotics, the first being Pfizer's (PFE) Zyvox. Unlike other antibiotic classes, there is not a great deal of competition developing in this class. I see tedizolid as having advantages that will allow it to gain market share from Zyvox; these are discussed later in this report. I also see growth in the oxazolidinone class as a whole as it gains market share from the market leading drug vancomycin which accounts for about 63% of the market as measured in patient days of therapy.
I project that tedizolid will be approved and launched commercially in the US and Europe in 2H, 2014. I have projected a launch that produces US sales of $39 million in 2015 (the first full year of marketing), $137 million in 2016 and $625 million in 2020 respectively. International sales achieved by partners could be of the same magnitude and royalties as a percent of sales could be 15% to 20%.
I think that the valuation based on 2020 worldwide sales of $1.2 billion could be 3x revenues (or more) reflecting the long patent life (through 2029) and good growth potential remaining through 2029; this would result in a market capitalization of $3+ billion and a stock price of $40+ around the 2020 timeframe. The stock price calculation is based on an estimate that the number of shares outstanding will increase from the current level of 49 million to 75 million in 2020.
Just as sanity check on this valuation, let's take a look at Cubist (CBST) whose primary drug is the antibiotic Cubicin, a direct competitor of tedizolid. This drug achieved US sales of $809 million in 2012 and international sales by partners of about $130 million; somewhat comparable to sales I projected for tedizolid in 2012. Cubist has a current market valuation of $3.0 billion. Of course, a meaningful part of its valuation is the promise of the pipeline, but I would expect Trius to develop a meaningful pipeline by 2020 as well.
Trius ended 2012 with $66 million of cash. It then raised $32 million in 1Q, 2013 equity offering. The Company has not issued guidance on the potential quarterly burn rate for 2013. However, the burn rate for the four quarters of 2012 varied from $11 to $14 million. If this burn prevails in 2013 and assuming no partnering deal, the company would end 2013 with $42 to $54 million. However, as I previously mentioned, I think that a partnering deal later this year or early next could bring in $50 million.
The equity offering in 1Q, 2013 was questioned by some investors, but it has proven to be a smart move by management. It has put the company in a strong financial situation that allows it to bargain from a position of strength with potential partners. Importantly, with the offering, the Company no longer faces the stock headwind to which an anticipated equity offering often gives rise. The stock has progressed nicely in the aftermath of the offering underlining the fact that equity offerings are not necessarily bad for existing stockholders.
Potential Partnering of Tedizolid
Trius has retained all commercial rights to tedizolid with the exception of the Far East, where the product is partnered with the German company Bayer. The Company will likely enter into a partnering deal after the Phase III results are announced. It most likely will keep US rights and partner tedizolid in the rest of the world where Bayer does not have rights. This could bring in a significant upfront milestone of $50 million or more and the partner will almost certainly pick up a significant amount of development expenses going forward. Bayer previously paid an upfront milestone fee of $25 million for its territories. Trius should be in the position of being able to launch tedizolid with its own sales force in the US, which perhaps doubles shareholder returns as opposed to what might be realized through partnering.
Future Clinical Development of Tedizolid
The three primary therapeutic areas in which tedizolid and drugs with which it competes are used are acute bacterial skin and skin structure infections (ABSSSI); pneumonia; and bacteremia (infections in the blood). The initial approval will be in ABSSSI, although based on the experience with the Cubicin and Zyvox launches, I expect significant off-label prescribing in pneumonia and bacteremia. However, Trius will conduct trials aimed at getting indications for pneumonia and bacteremia on its label. Trius plans to begin a Phase III in pneumonia later this year and could begin a trial in bacteremia in 2014. This label expansion is important to future growth.
Recent Stock Price Trends
The stock was trading at $5.23 on Thursday, January 28th and it was announced after the close that Trius has raised $32 million at a stock price of $4.75. The next day, the stock closed at $4.90. There seems to always be a knee jerk reaction that "all" equity offerings are bad because they result in the issuance of new shares and dilute existing shareholders. However, this is a myopic viewpoint. In evaluating the effect on existing shareholders, the key point to assess is what the return on investment will be for the money raised.
As investors looked carefully at what this equity raise portended, they came to view this deal as a positive. It took away the headwind that anticipation of an equity offering can create. More importantly, it put the company in a strong financial position to negotiate terms on a partnering deal later this year. The stock has traded steadily higher since the offering and closed on Friday, March 15th at $6.76.
Part of the recent increase in stock price may be the result of a popular trading strategy in which investors buy a stock in the days leading up to important upcoming event (the announcement of topline data from ESTABLISH-2) and sell the stock before the announcement. It is not uncommon to see a stock trade down just before or after announcing positive results. This may or may not occur with Trius, but it has no effect on my investment thinking which is focused on the potential stock price if tedizolid meets my expectations and as I previously noted this could lead to $3 billion market capitalization and a stock price of $40 per share by 2020.
The next important event after the announcement of topline data on ESTABLISH-2 will be the filing of the NDA and the announcement of a partnering deal on terms that I have projected; both should occur this year. The next significant event after that would be the approval and launch of tedizolid in the US in 2014. I can't tell you what each of these events will do to the stock price, although it could allow for further appreciation in the stock. The key factor I focus on is what might be the long-term value of the tedizolid asset which I believe can support a stock price of perhaps $40 per share by 2020. However, I can assure you that the stock price appreciation from here to there will not be linear, even if I am correct.
US Market for Gram Positive Focused Antibiotics
In 2012, the US market for gram positive focused antibiotics with efficacy against MRSA in which tedizolid will compete was about $1.8 billion. Based on sales, the market leader is Cubicin with $809 million of sales in 2012 followed by Zyvox at $665 million. Vancomycin had sales of $91 million. This is misleading however, because Cubicin is priced at about $250 per patient day of therapy, Zyvox is priced at about $225 and vancomycin at about $7. In terms of patient days of therapy, I estimate that vancomycin has about 63% of the market followed by Cubicin at 16% and Zyvox at 14%.
Zyvox was the first of the oxazolidinone class of antibiotics and tedizolid is on track to be the second. Based on its market research and the clinical data created so far, management believes that the greatest economic opportunity for tedizolid is replacing some of the usage of Zyvox. However, as has been the case with Zyvox, tedizolid also should be able to take market share from vancomycin.
My projections for tedizolid assume that the market in terms of patient days of therapy will grow at about 4% per year due to the growing problems with MRSA infections. My calculations suggest that in 2020, tedizolid will have about 6% of the market as determined by patient days of therapy and will be priced at $265 per day. This results in my 2020 sales estimate of $625 million. Detailed calculations are shown in my initiation report of May 2012 that can be found on my website.
Zyvox Patent Situation
One frequently voiced concern of investors is that Zyvox (linezolid) may go generic in January of 2016 as its composition of matter patent expires. Competing with a generic would be a headwind to establishing tedizolid in the market. However, there is another patent on the crystalline form of linezolid that extend into 2018 that may afford additional protection. Teva (TEVA) was the first to file an ANDA on Zyvox and it recently announced a settlement with Pfizer on its generic challenge. The terms of the settlement were not announced, but it is likely that Teva will not enter the market until early or mid- 2017. This would allow Trius as much as three years to establish tedizolid before generic versions of Zyvox reach the market. I don't think this is in the stock price.
How Zyvox and Tedizolid are Differentiated from Vancomycin
The oral dosage form of Zyvox offers advantages over vancomycin and accounts for about half of its use. This allows the patient to be released more quickly from the hospital reducing costs for the hospital. It is also much more practical for treating infections that can require long-term therapy of 10 to 60 days such as infections of the heart valves, bones, joints and blood. Tedizolid also offers both an oral and IV formulation; the bioavailability of both dosage forms is comparable allowing for an easy transition from the IV.
Vancomycin can cause kidney toxicity and about 15% to 20% of potential patients have pre-existing kidney impairments. This can preclude vancomycin use or require extensive monitoring of vancomycin treatment in these patients which is not required for Zyvox or tedizolid. Because of decreasing susceptibility of Staphylococcus aureus to vancomycin, current dosing guidelines are calling for ever higher doses of vancomycin. However, when vancomycin is dosed according to the current guidelines, there is a significant risk of kidney toxicity and this creates the need for Zyvox or Cubicin or tedizolid to be prescribed instead.
Differentiation of Tedizolid from Zyvox
There is no one marketing hook that differentiates tedizolid from Zyvox, which is a very good drug. However, there are a significant number of differentiations which in the aggregate should allow Trius to carve out a nice niche in the market. Based on the weight of evidence tedizolid is superior to Zyvox on several broad measures.
In laboratory tests, tedizolid has been shown to be 4-16 times more potent than Zyvox against both MRSA and MSSA bacteria.
Tedizolid is given once-a-day versus twice-a-day for Zyvox and requires only six days of therapy (in ABSSSI infections) rather than ten for Zyvox. Physicians feel these features are extremely important because it increases compliance. Missing a dose or doses can result in a drop in blood levels of an antibiotic to sub-therapeutic levels and allow the infection to resurge. The more doses required per day and the longer the duration of therapy, the greater is the risk for non-compliance especially if the patient feels better and stops medication on their own.
Tedizolid is also bactericidal which means that it kills bacteria. (Technically, tedizolid is bacteriostatic in vitro and bactericidal in vivo.) One of the most important reasons for Cubicin's success is that it is bactericidal, while Zyvox and vancomycin are bacteriostatic and only slow or halt the growth of bacteria. They must rely on the immune system to help eradicate the bacteria. Physicians generally believe that bactericidal agents are more effective than bacteriostatic agents in eradicating disease and prefer bactericidal drugs for serious infections and those requiring a long duration of therapy.
Tedizolid and Zyvox both showed good safety and tolerability in the first six days of therapy in the first Phase III trial conducted by Trius and which compared the two drugs. However, tedizolid did show statistically fewer reports of nausea, vomiting, diarrhea and dyspepsia.
The most serious side effect of Zyvox is that it can cause myelosuppression (damage to bone marrow) and result in a dangerous decrease in blood platelets. This starts to occur at around six days of therapy and can grow more severe as duration of therapy increases. Animal studies suggest that tedizolid may not have the same risk.
Animal studies and Phase I trials also suggest that tedizolid has much better penetration in lung tissues than Zyvox which promises greater efficacy in pneumonia. Cubicin, incidentally, is destroyed by proteins found in lung surfactants and cannot be used in pneumonia.
Zyvox failed in a clinical study in bacteremia, potentially because it is bacteriostatic. Nevertheless, about 15% of the usage of Zyvox is in bacteremia because it still produces some benefit. Animal studies show that tedizolid should be effective in bacteremia.
Examples of Therapeutic Settings in Which Tedizolid May Offer Unique Advantages
Prescribing an antibiotic for a suspected MRSA infection is as much of an art as a science. These infections can take many different forms in different organ systems so that no two situations are the same. To give an example, let's take a look at how doctors might choose to prescribe tedizolid over Zyvox and Cubicin in bacteremia. In the case of life-threatening bacteremia (blood) infections, in a clinical trial Zyvox was associated with higher mortality and failed to gain approval for this indication. Cubicin is approved for this indication, but it is destroyed by surfactants in the lung so that when Cubicin is prescribed for bacteremia, it will not control bacteria in the lungs; this could provide a reservoir for the bacteria to hide in and resurge. Tedizolid is bactericidal and should be more effective than Zyvox in bacteremia and it is also well absorbed in the lung fluids and tissues. It is a logical choice when treating bacteremia to choose tedizolid over Zyvox and perhaps Cubicin. By the way, it is estimated that 15% of the use of Zyvox is in bacteremia even though it was associated with the higher mortality rate.
Another example is the treatment of infections like osteomyelitis that require treatment of up to 60 days. Vancomycin and Cubicin can only be given IV so that it is difficult to use them in this setting. Due to convenience, Zyvox with its oral dosage form is often preferred for osteomyelitis, but upon long-term use, it can cause myelosuppression resulting in decreased blood platelets, as well as peripheral and optic neuropathy. This is another potential setting where tedizolid might be preferred. These are only two examples, but they illustrate how complex the prescribing of MRSA antibiotics can be and how tedizolid in important niches of the market may provide highly differentiable properties.
There are a number of risk factors in considering an investment in Trius; these are discussed in more detail in my initiation report:
· There is risk in all clinical trials and ESTABLISH-2 might disappoint.
· An NDA involves approval of other aspects relating to commercialization of a drug such as chemistry, manufacturing and control. There can sometimes be issues with CMC that cause significant delays in approval.
· I believe that tedizolid is meaningfully differentiated from Zyvox, but I could be overestimating this.
· Some physicians feel that new antibiotics should be held in reserve to delay the development of resistance.
· Hospitals are being squeezed by Medicare cutbacks and this could encourage the use of Zyvox over tedizolid if Pfizer were to discount prices on Zyvox to make the launch of tedizolid more difficult.
· There is a significant amount of new drug development as Durata (DRTX) is in late stage development of dalbavancin and The Medicines Company (MDCO) is in late stage development of oritavancin. These are lipoglycopeptide antibiotics, the same class as vancomycin. These may reduce the opportunity for tedizolid to a greater extent than I have estimated.