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Anacor Pharmaceuticals (ANAC) continues to hold onto most of the ~70% gains made throughout the last week after the company reported the results of a successful Phase II dose-ranging trial for their psoriasis drug AN2728 in patients aged 12-17, which showed significant improvements from baseline as measured by the Atopic Dermatitis Severity Index (ADSI). In addition, the notable adverse events that were witnessed in the 86 patient trial were not associated with AN2728 according to the company's statements, which is obviously important to the drug's chances at FDA approval down the road. It was also encouraging to see consistency in the data, which implied that the 2.0% BID dosing regimen was "optimal for a Phase III program." They might have been able to up the dosage within their ointment even more, but current results suggest that the established efficacy versus baseline should be quite sufficient.

Going forward, we expect to see the drug undergo another dose-ranging study for patients aged 12 or below, with the initiation of the Phase III trial with the 2.0% BID dose in patients aged 12-17. While we don't know exactly when the trials will complete the enrollment process, the next dose-ranging study should have results relatively soon - perhaps near the end of this year or in early 2014. The phase III trial, on the other hand, should take much longer.

Although the pendulum seems to have swung in favor of the bulls in very recent trading, the recent rally only erases the selloff that we saw after the company released preliminary results from its first phase III trial for flagship drug tavaborole, which were overall in line with expectations. Tavaborole is a treatment for oncychomycosis, which is a fungal infection of the nails (it appears most often in toenails).

Although this indication seems unattractive, it could have substantial profit potential based on the sheer number of people with oncychomycosis - estimated by Anacor to be 35-36 million in the United States alone. It's suggested that a bit less than half of those with the infection don't seek treatment, although this particular trend doesn't seem to be related to the limited efficacy of current treatments.

Tavaborole uses a radically different mechanism of action based on the company's boron technology to inhibit an essential fungal enzyme known as leucyl transfer RNA synthetase (LeuRS) which is required for fungal protein synthesis. Since regrowth of the fungi is the main problem we'd need to address regarding oncychomycosis treatment, tavaborole looks promising. The notion that tavaborole can penetrate the nail plate "250 times more effectively than Penlac" offers another advantage, and may limit the necessity for patients to undergo a debridement procedure.

Anacor gets a lot more interesting when you look at the company's market capitalization of ~$235 million relative to the peak sales of another oncychomycosis treatment known as Lamisil (terbinafine) just prior to the expiration of its exclusivity patent. In 2004, Lamisil had worldwide sales of $1.2 billion and brought its parent company Novartis (NVS) a huge return on investment relative to its developmental costs.

I don't think Anacor can come close to matching these results as a very small pharmaceutical company, which is why I think the company might be an acquisition candidate for a big pharma company. Many acquisitions tend to happen after the developer successfully completes phase III trials or sees FDA approval for their flagship drug. Due to this, I wouldn't expect an acquisition of Anacor in the near future, although this is a distinct possibility later on.

The other possibility, which is more probable, is a partnership between Anacor and a larger company for the commercialization of tavaborole. While Anacor would only see a fraction of the tavaborole revenue through royalty payments, these may be able to cover most (if not all) of Anacor's expenses given that the drug can penetrate the oncychomycosis drug market in line with our current expectations. There are also milestone payments, which certainly help.

The takeaway is that Anacor is more of a waiting game at this stage of development, although the possibility of a tavaborole partnership/acquisition adds significant, unpredictable upside potential for the stock.

Source: Anacor Rallies On AN2728 Progress And Market Attention