Undue Pressure On Trius Creates An Entrance Point

| About: Merck & (MRK)

By Jake King

Shares of Trius Therapeutics (TSRX) took a 7% dive on Wednesday, creating an entrance opportunity for those not yet involved, as the unsubstantiated rumors that caused the sell-off haven't changed the fundamentals at Trius. Sources have indicated to PropThink that the weakness is a result of an institutional investor, Ayer Capital, closing its doors and therefore winding down its funds, including a position in TSRX. We've been hearing that Ayer was unwinding for some time, so this means one of two things: 1) The rumor is true, and at some point the selling pressure will stop, and TSRX will snap back; or 2) The Ayer chatter is simply a rumor, and yet again, the selling is unwarranted and TSRX will, again, snap back (recall that in December of 2012 the company went through a similar spell).

It's a great situation for traders who time the bottom, or those with a long-term investing horizon; as we've outlined before, Trius' promising antibiotic asset, tedizolid, is backed by a strong balance sheet, and the company has options in how it moves forward with its commercialization strategy. Tedizolid just completed Phase III testing for the treatment of acute bacterial skin and skin structure infections (ABSSSI), and we expect a New Drug Application for ABSSSI to be filed in the second half of 2013. Its closest comparator and current headlining competition in the segment, Zyvox (linezolid) by Pfizer (NYSE:PFE), did $640M domestically in 2011, and $1.3B worldwide. Thus, we believe that Trius' $305M market capitalization -- an enterprise value of just $225M -- fails to capture the full tedizolid opportunity. It's all about label expansion, and following FDA approval of tedizolid, the company intends to evaluate the drug in pneumonia and possibly bacteremia (systemic infection), which would meaningfully expand the drug's market opportunity.

PropThink contributors Jason Napodano and Dr. Aafia Chaudhry laid out the full bull thesis in December of last year, and they see fair value for TSRX at $12. Clearly there's upside to be captured, and while Napodano doesn't necessarily expect Trius to partner tedizolid in the U.S., we think there's good reason for Pfizer to be eyeing tedizolid -- and Trius as a whole. Pfizer's Zyvox (linezolid) goes off patent in two years (three years in the EU), and now that tidezolid has demonstrated non-inferiority in ABSSSI and a better dosing profile, it makes a compelling asset through which Pfizer might cannibalize Zyvox sales in the indication. Both drugs are oxazolidinones, de-risking tidezolid as a potential treatment for lung infections (where Zyvox already has labeling), and tedizolid has a differentiated dosing profile (once daily for 6 days, vs. linezolid's twice daily for 10 days).

Note that there's already a natural link to the large pharmaceutical company: Craig Thompson, Trius' Chief Commercial Officer, formerly led Pfizer's Zyvox commercialization efforts as VP of marketing for Pfizer's specialty care unit. And, CEO Jeffrey Stein, Ph.D, sold his former anti-infectives company, Quorex Pharmaceuticals, to Pfizer in 2005. We wouldn't be holding TSRX on the basis of an acquisition alone, but the possibility offers a nice backdrop to the strong fundamental story at Trius.

Again, we believe that the weakness in TSRX is only temporary, a result of either Ayer's wind-down or rumors of such. As we've said before, TSRX is undervalued. A break below the 50D MA at $6.36, just below Wednesday's closing price, may send the stock as low as its 200D MA at $5.63, in which case TSRX is at fire-sale prices. The next expected catalyst for Trius is a European partnership announcement; tedizolid is already partnered with Bayer in the Asia-Pacific region.

Disclosure: I am long TSRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.