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(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Introduction

This week's edition of SmithOnStocks Opines has a focus article on bacterial resistance. I have also included brief comments on news concerning ImmunoCellular Therapeutics (NYSEMKT:IMUC) and Cadence (CADX), last week, and have highlighted an upcoming presentation that could be a boost to Neuralstem's (NYSEMKT:CUR) stock.

Some Thoughts on the Growing Crisis of Bacterial Resistance to Antibiotics

Investment Overview

We hear constantly from the media about problems with bacterial resistance to antibiotics. I think that this is an indication that we have reached the point at which society will collectively decide to declare a war on resistant bacteria that could provide the same impetus to the development of anti-microbial drugs that the war on cancer has done for oncology drugs. I discuss in this report why I think that this could become a hotbed of drug development and investment opportunities for companies that have the technologies to address this problem.

I think that the FDA will move more quickly to approve new antibiotics in contrast to the very cautious, slow moving approach it has taken for the last two decades. Within my universe of coverage, Trius (TSRX) could be the biggest beneficiary. I recently wrote about a newly issued patent that indicates that its lead drug tedizolid in combination with Cubist's (CBST) daptomycin (Cubicin) could be effective in treating bacteria resistant to daptomycin in bacteremia. The forces now at work could cause the FDA to expedite the development of tedizolid for this indication. The FDA may also expedite the approval of tedizolid for less frequently encountered infections such as intra-abdominal, bone and joints and diabetic ulcers by accepting less demanding and lengthy trials.

There are certainly many other companies that will benefit from this trend and I don't want to give the impression that Trius is the sole beneficiary. It just happens to be a company that I have done extensive work on. Cubist as one of the leading players in antibiotics will also be a beneficiary, and I hope to identify a number of other companies in the future. There should also be opportunities for new approaches to treating bacterial infections beyond the traditional antibiotic approach that Trius and Cubist follow. The small company NovaBay (NYSEMKT:NBY) is using an immunotherapy approach based on simulating the way that neutrophils attack bacteria and other microbes. Its lead drug auriclosene as a topical application offers a novel anti-microbial approach and is in phase II proof of concept trials for impetigo, urinary encrustation and blockade and adenoviral conjunctivitis.

Again, I mention NovaBay because it is a company in my universe and I do not mean to imply that this is the only company of interest. I do not have the immediate capacity to identify and analyze all of the companies that can benefit. I also want to emphasize that this movement is likely to help drugs intended to treat viral and fungal infections as well. I have recently begun to do some research on Agenus (NASDAQ:AGEN), which is using a novel immunotherapeutic approach based on heat shock protein-peptide complexes to treat herpes simplex HSV-2, the primary causative agent of genital herpes. This is one of the great unmet medical needs.

Perspective on Bacteria's Role on the Planet

As humans survey the planet, we see ourselves as the apex predators. There was a time perhaps one million years ago on the African savanna when we were the hunted prey, but this time has long vanished. No lion prides can stand up to an Abrams tank or, for that matter, a hunting rifle, and great white sharks are no match for nuclear submarines. Our technology makes us master of all we survey on our planet.

However, we are not necessarily the master of that which we cannot survey. We share the planet with trillions and trillions of microbes, tiny one celled organisms like bacteria, fungi and algae. They were here first as scientists trace their origins back two to three billion years, close to the very beginning of the earth. These life forms are amazingly well fitted to survive on the planet. They have seen the coming and going of numerous multi-celled life forms, take the dinosaurs, for example.

They have survived climate changes of such severity that it would give Al Gore nightmares. There were times in its history when the earth was a frozen ice ball and other times when dinosaurs lived at the South Pole. Through it all, microbes have survived and flourished. Various species have adapted to live everywhere on the earth and in the earth. They live in such hostile environments as poisonous sulfur hot springs, lava eruptions on the ocean floor, high in the atmosphere and deep inside rocks within the Earth's crust.

Until 1675, we humans weren't even aware that there were microbes. In that year, Anton van Leeuwenhoek developed a microscope that gave us our first glimpse of bacteria and our first awareness that we are sharing the planet with species other than the large multi-cellular organisms that our eyes can detect. In the ensuing three plus centuries, we have come to understand that bacteria and other microbes are all around us, on us and in us. Bacterial species like Staphylococcus and Streptococcus live happily on our skin and in our nasal passages. Billions of bacteria including such species as Escherichia coli line our intestines to a depth of nearly a centimeter and are critical to the digestion of food; we couldn't live without them.

While we have learned to co-exist with bacteria and other microbes, they are not always our pals. Up until the last part of the nineteenth century, we did not understand that sometimes they feed upon our bodies and create infections that can be life threatening. An opening in the skin can allow Staphylococcus aureus to enter our blood stream so that it is no longer just a friendly hitch hiker, but a malevolent predator. Each copy of Staphylococcus aureus in ideal conditions can reproduce itself every half hour so that one bacterium can produce over 1 trillion copies in just 20 hours. Transported rapidly throughout the body by the blood, it can quickly cause massive life-threatening infections.

Although bacterial infections were the leading cause of death in the old days there was limited awareness of cause and effect. There was no understanding in human societies that they should practice cleanliness in everyday life to minimize exposure to bacteria. Surgeons would operate without gloves and without any attempt at protecting the patient from germs in the operating theater. They often caused more damage through the infections that resulted from their unclean procedures than the benefit that might be achieved from the surgery.

The Discovery of Antibiotics

As scientists became aware in the early twentieth century of the role of bacteria and microbes in causing human disease, there was a sense of great helplessness in fighting back. Then in 1928, Sir Alexander Fleming observed that colonies of the bacterium Staphylococcus aureus could be destroyed by the mold Penicillium notatum. He had stumbled on the discovery that microbes have defense mechanisms to defend themselves when they are attacked by other microbes. Penicillin notatum produces an enzyme that inhibits cell wall synthesis in many species of bacteria and leads to their death. Critically, this enzyme does not meaningfully interfere with other physiological functions in the human body so that it can be given to destroy bacteria without killing the human host.

The discovery of penicillin ushered in the age of antibiotics. It provided the valuable insight that microbes produced poisons to kill other microbes, hence the name antibiotics (a substance produced by a microorganism that is antagonistic to the growth of other microorganisms). Humans learned that they could highjack this mechanism of action for use as a drug if the poison was lethal only to the targeted bacteria and not human beings. The life saving effect of antibiotics needs no elaboration. Penicillin saved innumerable lives of wounded soldiers in World War II by treating infections and after the war; there was a concentrated effort to find more antibiotics that occurred in nature like penicillin.

In the euphoria of antibiotic development in the post-World War II era, a golden age of antibiotic development arose. Many scientists and lay people believed that we had conquered bacterial infections. By the late 1980s, there began to be criticisms about the pharmaceutical industry's efforts to develop new antibiotics. Critics argued that there were already enough antibiotics available to treat every type of infection. They believed that new antibiotics being developed by the pharmaceutical industry were not really needed and were way overpriced in comparison to older generic antibiotics. This had a marked effect on pharmaceutical drug development. Eli Lilly (NYSE:LLY) was a pre-eminent developer of antibiotic drugs in the 1960s, 1970s and 1980s and derived most of its sales from antibiotics. The attacks on antibiotic drug development caused Eli Lilly (and other antibiotic developers) to shift its drug development focus so that today Eli Lilly derives virtually no revenues from antibiotics.

The Emergence of Resistant Bacteria

Everyone -- scientists, drug regulators, pharmaceutical companies, industry critics, etc. -- underestimated the resiliency and adaptability of bacteria. They haven't survived for 2 billion years for no good reason. Bacteria have dealt with antibiotics produced by other microbes through evolving mechanisms for defeating the antibiotics. One way is that they evolve rapidly and through the process of natural selection, bacteria that are resistant to antibiotics will survive, flourish and multiply. In addition, the genes that bacteria create to ward off antibiotic attacks can be freely exchanged between the same species and also with totally different species. This rapid mutation has led to the recent development of "super-bugs," bacteria that are resistant to modern antibiotics. Methicillin resistant staphylococcus aureus or MRSA is the best known super bug, but it is only one of many.

The exploding resistance to antibiotics is not surprising. The more a bacterial species is exposed to antibiotics, the more quickly and effectively they select for resistant organisms. Antibiotics are used very broadly in our society, sometimes appropriately and sometimes inappropriately. When we use an antibiotic to treat a serious infection, sub-therapeutic amounts are excreted in the urine and feces and finds its way into sewage which is teeming with bacteria. This exposure of bacteria to sub-therapeutic amounts of the antibiotic speeds the development of resistance. In the same way, the widespread use of antibiotics in the hospital, even when used in the most careful and correct manner, can expedite the development of resistance. A resistant strain needs only to develop in one patient and from that humble beginning can spread widely through the tightly packed patient population, causing a hospital wide epidemic.

There is also widespread inappropriate use of antibiotics. Antibiotics are used promiscuously as feed additives for livestock and to prevent infection. The runoff from farms containing traces of antibiotics runs into waterways so that we are finding antibiotic resistant strains in remote lakes and estuaries. A recent report highlighted the discovery of highly resistant strains of bacteria in a lake in the Ozark Mountains that was near a chicken farm. The mud and water of that lake had accumulated traces of 23 antibiotics. Another example is the use of antibiotics in low concentrations in topical over the counter products. And of course, the best known of all is the use of bacteria against viral infections for which they are ineffective.

We are now in the diametrically opposed situation than we thought we were in in the late 1980s. Expert after expert is warning of the dangers of epidemics caused by resistant bacteria. Professor Sally Davies, Chief Medical Officer (CMO) and Britain's most senior medical adviser, recently told Members of Parliament that the issue of "antibiotic resistance" should be added to national risk register of civil emergencies. She described what she called an "apocalyptic scenario" where people undergoing simple operations in 20 years' time will die of routine infections "because we have run out of antibiotics."

The GAIN Act Signals an Important Shift

The shift from the complacency in the 1980s to one of increasing concern and panic today about the threat of antibiotic resistance has caught the attention of Congress. Spurred by warnings from numerous experts about the emergence of difficult to treat, resistant bacterial strains, on October 1, 2012, Congress passed the Generating Antibiotics Incentives Now Act or GAIN.

The GAIN act is intended to spur development of new antibiotics through streamlining a regulatory process that has been oppressive for much of the last decade. Responding to the prompting of Congress, it is to be expected that the FDA will approach regulatory approval of new antibiotics and novel new anti-microbial drugs with a greater sense of urgency as it does with cancer drugs. The end result should be quicker approval of new drugs and new indications for existing products. Development of antibiotics and anti-microbials has been a neglected area for nearly two decades, but this is rapidly changing. Many experts believe that antibiotics will be increasingly looked at very much as cancer drugs are now. We should move to a "war on pathogens" approach similar to the "war on cancer" that has been so instrumental in developing novel new cancer drugs.

New Approaches

The answer to addressing the antibiotic resistance problem is not just to spend more money to develop new antibiotics and make it easier to speed them through the regulatory process, although this is a good starting point. There simply may not be an unlimited number of antibiotics produced in nature or in laboratories and we may have exploited many of them already although this is difficult to say. There is no question that we need to think in different ways about how we can kill disease causing microbes.

One natural place to look for new solutions is the human immune system, which long before the development of antibiotics evolved to protect the human body from infections. We live in a sea of microbes that try to perpetuate themselves and see the human body as an ideal habitat for that pursuit. Over hundreds of millions of years, the human immune system evolved to defend us from these non-stop attacks. Critically, microbes have not been able to develop widespread resistance. The obvious proof is that we are still here.

The success of the immune system relies on an incredibly complex regulatory system that can distinguish between self and non-self and launch an attack to destroy invading microbes. It does this through an elaborate and dynamic regulatory communications network in which millions and millions of cells are organized into sets and subsets, which pass information back and forth like bees swarming around a hive. Within this system, there are cells that directly attack the microbes and others that attack indirectly through the release of specifically designed microbe killing proteins. Exponential growth in understanding the functioning of the human immune system is leading to the development of new and novel therapeutic advances.

ImmunoCellular Therapeutics: The company announced that the phase II trial of ICT-107 had reached an interim point that was determined by 32 deaths having occurred in the trial. The Data Monitoring Board recommended that the trial continue, which was in line with my expectations and the guidance of the company. Some investors had predicted or hoped that this interim look would show dramatic therapeutic benefit that would cause the DMB to stop the trial and allow IMUC to submit a BLA. The press release on Friday was accompanied by 7% increase in the stock price, so this news was not taken to be disappointing. The next important point in the trial will be the occurrence of 64 deaths, which will lead to the stopping of the trial and analysis of the data. This is expected late this year.

Neuralstem: Eva Feldman, the lead investigator of the phase I trial of the company's neural stem cells in ALS will be the keynote speaker at the Canadian Neurological Sciences Federation meeting June 12-14. This will be her first public presentation on the ALS trial in a North American setting and follows her recent presentation at the Romanian Neurological Society Congress. She will speak at 8:30 a.m. on June 13 and the title of her speech is "Intraspinal Stem Cell Transplantation in ALS". This could give a boost to the stock.

Cadence Pharmaceuticals: There was unusual price and volume action last week in the stock. The stock closed at $6.65 on Friday, May 31, and traded 196,900 shares. On Monday, June 3, the stock traded 1,161,100 shares and closed at $7.66 and on Tuesday, June 4, traded 1,398,700 shares and closed at $8.09. Cadence normally trades about 350,000 shares per day. Trading volume declined to more normal levels on Thursday and Friday and the stock closed the week at $7.43.

I was unable to find a reason or even a rumor to explain the trading action on Monday and Tuesday. My immediate thought was that perhaps a patent settlement had been reached with Exela, but there was no subsequent press release. Also, management remained silent on the stock behavior. Consequently, I can't explain the trading.

Disclosure: I am long TSRX, CUR, IMUC, NBY, CADX. 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.

Source: SmithOnStocks Opines: June 9, 2013