Anacor Pharmaceuticals (ANAC) has nosedived over the past week of trading with shares down over 14%. Nevertheless, analysts and institutions alike have placed rather optimistic price targets on the stock that are more than double its current levels (see below). In fact, institutions have bought up nearly 60% of the float ahead of the company's New Drug Application (NDA) for tavaborole, an antifungal treatment for onychomycosis (ringworm of the nail). Whenever I see such optimism by institutions, I am certainly intrigued. What do they know? Why is this company a darling of Wall Street? Should I follow their lead? In this article, I give an overview on Anacor, and discuss whether or not retail investors should follow in the footsteps of these institutional giants.
Anacor Pharmaceuticals focuses on discovering, developing and commercializing novel small-molecule therapeutics derived from their boron chemistry platform, which has led to the development of eight molecules to date. The company's lead product candidates are two topically administered dermatologic compounds-tavaborole and AN2728, an anti-inflammatory for the treatment of atopic dermatitis and psoriasis. Anacor also has three other wholly-owned clinical product candidates, which are backup compounds to their lead clinical candidates. That said, the primary value driver for ANAC in the near-term will undoubtedly be tavaborole.
Earlier this year, Anacor announced positive results from both of its Phase 3 trials conducted under a Special Protocol Assessment with the FDA. In these trials, tavaborole reached statistical significance on all primary and secondary endpoints. Specifically, 6.5% of patients treated in the first trial met the primary endpoint of "complete cure," compared with 0.5% of patients treated with vehicle (p=0.001) at week 52. By contrast, 9.1% of patients in the second trial treated with tavaborole met the primary endpoint of "complete cure," compared with 1.5% of patients treated with vehicle (p<0.001) at week 52. Based on these positive trial results, Anacor has decided to file an NDA for tavaborle in mid-2013.
The market opportunity for tavaborole is largely unclear, however. Former partner Merck even returned the rights to Anacor after positive Phase II results in 2010. Apparently, Merck didn't believe the market opportunity was particularly significant given the competition in the space. Specifically, tavaborole's efficacy fell well below rival efinaconazole, which cured 17.8% of patients in clinical trials. Even so, some analysts still estimate peak sales of tavaborole to come in around $350 M per year, based on the fact that the market for nail fungal treatment sits at well over a billion per year, and most of the market (over 50%) goes untreated. Given that Anacor currently has a tiny market cap of about $200 M, peak sales of even $100 M would significantly revalue this biotech. Indeed, I believe this is the very reason why institutions have begun accumulating shares of ANAC prior to the company filing an NDA for tavaborole.
Anacor Fundamental and Technical Analysis
As of March 31st, 2013, Anacor reported having $32.4 in cash and cash equivalents, raised largely through sales of its common stock. Indeed, $21.4 M was raised through a public offering this month, and revenues generated through research and development agreements only brought in about $560k per month to the company's coffers. Anacor is presently burning about $3.73 M per month in cash due to its extensive research and development expenses, and this could go much higher with a possible solo commercial launch of tavaborole in the next 16 months. So without a settlement with Valeant over Efinconazole this September, Anacor will more than likely have to raise additional capital within a year's time, which will probably be through further dilution of shareholders. For investors new to this stock, Anacor is suing Valeant for damages of $215 million for breach of contract relating to certain development services provided by Valeant's subsidiary, Dow Pharmaceuticals, for tavaborole.
On the technical side, Anacor is entering oversold conditions with a relative strength index of 42. This is largely due to the recent selling pressure stemming from the company's missed earnings report last week. Even so, shares of ANAC are still trading 2.92% above their 200 day SMA, and institutions have increased their holdings by 2.35% in the past quarter. Institutions now hold 58.6% of the float in ANAC, demonstrating the confidence large investors have in the future of the company. What I find most intriguing about the institutional ownership of late is that JPMorgan jumped into the fray buying > 278k shares in the last quarter, and that several big names more than doubled their holdings of ANAC. Moreover, the institutions that sold out of ANAC were mostly small fries. The giants, so to speak, either initiated new positions or markedly increased their holdings.
Keeping with this bullish theme, the mean analyst target price for ANAC sits at $14.67, although it is unclear if this target will stand after last week's earnings report. Personally, I find it difficult to reconcile this bullish price target with the company's financials. I can only assume these targets either factor in a $200 M settlement with Valeant later this year or a possible partnership for the commercial launch of tavaborole. Based on the company's recent conference call, I wouldn't bet the farm on either one of those events happening anytime soon.
Anacor Pharmaceuticals is being accumulated by major institutional investors ahead of its NDA for tavaborole, and this accumulation is taking place even in the face of significant dilution by the company to raise the capital necessary to meet its short-term financing needs. With the FDA's decision likely to come before year's end, retail investors interested in playing biotechs should look at ANAC carefully. Based on the clinical trial results, I believe tavaborole will be approved as an indication for onychomycosis, which should boost PPS. That said, the market opportunity and commercialization costs of tavaborole are completely unknown at this time, making it impossible to guesstimate how high the market will reevaluate shares of ANAC. If the company is forced into a solo launch (assuming approval), major dilution is certainly to follow. From my perspective, I believe there are far too many unknowns with ANAC to call it a "strong buy," or even a decent bio run-up play. For the gamblers out there, ANAC does hold promise. A settlement with Valeant or a partnership over tavaborole could instantly double ANAC's market cap. So for investors looking for growth stocks with limited risk, ANAC is not for you. For the speculative investors willing to take on the substantial risk of further dilution, ANAC should be on your radar for a possible near-term double in PPS. In conclusion, retail investors should always keep in mind that institutions are often wildly incorrect in the biotech space (ARNA and DVAX are just two examples). Personally, I have decided not to follow in the footsteps of the giants on ANAC, and instead, seek safer harbors in the biotech space.
Additional disclosure: This article was co-authored by Stacey Baterina, a staff writer at EPE.