By Scott Matusow
Similar to how a blue-chip company might have an increase in stock price before an earnings call, small-cap developmental biotechs often increase in price before important clinical data releases, Advisory Committee Meetings (ADCOM), and U.S. Food and Drug Administration (FDA) drug approvals. However, some of these developmental biotechs can actually decrease in price based on poor company financial position (subsequently leading to cash raises), management ability, and other factors.
Synthetic Biologics (SYN) is one company that we believe could see significant stock appreciation from drawing trader and investor interest before its Phase II Multiple Sclerosis (MS) clinical trial data release in April.
Synthetic develops biologics for the treatment of serious infectious diseases including multiple sclerosis and C. difficile infections. For a company with a market capitalization a little over $100M, any positive developments with these programs could lead to a large increase in speculation investment. With some recent large insider buys and an important data release coming for its patent held combination drug treating MS in April, we think the company's stock should see significant appreciation.
MS is an autoimmune disease that attacks the central nervous system and disrupts our body's most critical functions. People with this disease have immune cells that erroneously attack the Myelin sheath. When the Myelin sheath is destroyed, it disrupts the transmission of nerve signals. This disruption can cause symptoms that range anywhere from limb numbness, to paralysis, to even blindness.
Catalyst Drug In Focus: Trimesta/Copaxone Combination
Although there is no cure for Multiple Sclerosis, several companies are working on developing treatments. Synthetic Biologics is testing Trimesta (oral estriol) in conjunction with Copaxone for its effects on Multiple Sclerosis. Estriol is a hormone released during pregnancy and has been documented to help women with autoimmune diseases, including Multiple Sclerosis. In small doses, some researchers believe that Trimesta can be used as a treatment for Multiple Sclerosis. Although Trimesta has been used in Europe and Asia for over 40 years, it is not currently approved for use in the United States. In a small trial done at the University of California at Los Angeles when only using Trimesta alone, researchers found the following:
As compared with pretreatment baseline, relapsing remitting patients treated with oral estriol (8mg/day) demonstrated significant decreases in delayed type hypersensitivity responses to tetanus, interferon-γ levels in peripheral blood mononuclear cells, and gadolinium enhancing lesion numbers and volumes on monthly cerebral magnetic resonance images. When estriol treatment was stopped, enhancing lesions increased to pretreatment levels. When estriol treatment was reinstituted, enhancing lesions again were significantly decreased.
The results of this Phase I trial were not overtly impressive, but they did spark the interest of Dr. Rhonda Voskul, a well-respected researcher in neuroimmunology to further investigate Trimesta's potential to treat MS.
Based on the Phase I results, Synthetic and Dr. Voskul believe that Trimesta combined with Teva Pharmaceutical's (TEVA) Copaxone should garner significantly positive results for patients with MS.
Phase II Study: The Trimesta-Copaxone Combo
Trimesta is currently being utilized in combination with Copaxone in a randomized, double-blind, placebo-controlled Phase II multi-center clinical trial involving 164 women for the treatment of relapsing-remitting multiple sclerosis in women.
Copaxone is Teva's trade-marked name for glatiramer acetate, a random polymer of four amino acids; glutamic acid, lysine, alanine, and tyrosine, and may work as a decoy for the immune system. Glatiramer acetate is approved by the FDA for reducing the frequency of MS relapses, but not for reducing the progression of the disability.
Investigators at the multi-centers are administering either Trimesta (8 milligrams orally per day) in combination with Copaxone (20 milligrams per day), or a placebo plus Copaxone to patients enrolled in the trial.
The primary outcome measure for the study is the rate of relapse between the placebo and treated groups at two years, which is the generally accepted FDA-approvable endpoint in MS.
The completed Phase II clinical trial was supported by grants exceeding $8 million awarded by various MS institutes across America.
The design of the Phase II trial here is as good, if not better than most Phase III trials, so successful data could mean the company can by-pass a phase III trial, and directly move to file an New Drug Application (NDA) with the FDA.
Market Opportunity for Synthetic Biologics and Teva Pharmaceuticals
About 2.3M people worldwide have Multiple Sclerosis and about 400,000 of those people are in the United States. The Multiple Sclerosis market is fairly large, with Copaxone generating $4.3B in revenue for Teva in 2013. Teva generated $20.3B in total revenue in 2013, so Copaxone was a large portion of that total.
Synthetic Biologics holds the exclusive worldwide license to U.S. Patent 8,372,826 and 6,936,599 and pending patents for multiple sclerosis and other autoimmune diseases covering the uses of its drug candidate, Trimesta. Patent 8,372,826 covers the use of Trimesta in combination with Copaxone.
We find the fact that Synthetic holds the license to this patent as very significant if the Phase II data proves to be positive. With Teva losing patent protection with Copaxone, it might consider partnering or even acquiring Synthetic if data are positive in April. This could allow Teva a way to extend its Copaxone patent, and potentially offer a better solution for Copaxone in a combination, patent-protected MS treatment. With Copaxone coming off patent protection this year, this potentially puts Synthetic in a strong business leverage position.
Obviously, all of this speculation is moot if data in April does not show to be positive.
Dec 17, 2013
KIRK RANDAL J Beneficial Owner (10% or more)
Purchase at $1 per share.
Jan 7, 2013
RILEY JEFFREY SCOTT Officer
Purchase at $0.17 - $1.71 per share.
Jan 3, 2013
RILEY JEFFREY SCOTT Officer
Purchase at $1.75 per share.
Jan 3, 2013
RILEY JEFFREY SCOTT Officer
Purchase at $1.71 per share.
Jan 2, 2013
RILEY JEFFREY SCOTT Officer
Purchase at $1.78 per share.
Oct 29, 2012
KIRK RANDAL Beneficial Owner (10% or more)
Purchase at $1.60 per share.
Oct 16, 2012
KIRK RANDAL J Beneficial Owner (10% or more)
Statement of Ownership
As we can see from above, Randall Kirk *purchased 2.5M shares from the offering the company engaged in December of last year. Additionally, Mr. Kirk indirectly purchased over 3M shares before the offering in October of last year.
Randall Kirk has become somewhat known in the developmental biotech space from his active purchases of Halozyme (HALO) over the last year. Mr. Kirk holds nearly 4M shares of Halozyme, and we believe his investment with the company will pay off in a big way.
We have been bullish on Halozyme for some time now, mainly for the potential of its PEGPH20 program.
Halozyme hopes to demonstrate in clinical trials the dismantling of the HA component of the tumor architecture and tumor microenvironment. This would open previously constricted vessels which may increase blood flow to the tumor, in turn making the tumor much more treatable.
The catalyst with Synthetic reminds us of Prana Biotechnology Limited (PRAN) in the fact that the company was not well-known until investors became aware of the large potential of its drug PBT2, which is being tested in clinical trials with the goal restore cognition in patients suffering from Huntington's (HD) and Alzheimer's disease (AD).
Yesterday, the company reported debated positive results for one of its catalysts, data from a Phase IIa for HD.
- Primary endpoints of safety and tolerability met.
- Secondary endpoint: Statistically significant improvement in a measure of executive function (cognition) in research participants administered 250mg PBT2 daily (p=0.042).
- PBT2 250mg was also associated with a favourable signal in functional capacity.
- Preliminary evidence suggests PBT2 250mg reduced atrophy of brain tissue in areas affected in Huntington disease, seen in a pilot imaging sub-study.
- Company plans to advance PBT2 to a confirmatory Phase 3 clinical trial.
Some investors I have personally spoken with note that the trial did not show significant improvement over placebo in actually restoring cognitive function. However, it seems the endpoint was not intended to do so. In this regard, we need to keep a close eye on this developing situation, notwithstanding the upcoming data release in Q2 for the AD indication.
While this certainly does not mean Synthetic will see the same stock price appreciation as Prana, we believe the case is made here on why the stock is currently very under speculated, and could see similar stock price appreciation before the end of April because MS is also a very large and lucrative monetary indication.
Prana is one of but many examples of developmental biotechs that get hot speculation on their potential. However, investors and traders should be aware of the huge risk some of these developmental biotechs carry.
If Prana's HD was poor, the stock might have sold off to under $5 a share, which would have represented a 30% loss from its last closing price of $7.25 from Friday of last week. The data for Synthetic's Trimesta/Copaxone trial are due in late April, so investors and traders have a decent time frame window before this data is released.
We feel there is a big reward with Synthetic if the data release in late April turns out to be positive. However, if negative, the stock is likely to fall back to under $2 a share. Because the company has a deeper pipeline, inherent value would remain, but it would be hard for Synthetic to secure the needed financing at a good price if such a failure was to occur. Still, because the company has a deeper pipeline for high monetary value indications, we feel as long as the other products are successful, the company would not be in dire straits.
- Positive Phase II data could mean a direct move for Synthetic to file an NDA with the FDA, by-passing a Phase III trial, but negative data would see a stock decline to under $1.75 in our opinion.
- Company has roughly $15M in cash, and burns about $2.5M a quarter. The company raised a little over $13M in December of 2013, and currently should not have a need to raise additional capital, until when and if Phase II data is positive.
- However, developmental biotech companies have been known to raise money when they really should not. Since the current completed Phase II trial was fully funded by grants, a company raise before data is announced would be viewed by us as a negative sign which we would not support.
- Poor Phase II data here would likely see the stock sell off to under $1.75 a share in our opinion because the company has additional products in its pipeline with potential value.
- Many argue that Trimesta can be found via online pharmacies and compound pharmacies, reasoning that patients and their doctors can go the "do it yourself" route. We strongly disagree with this assessment and explain why below and in the conclusion section.
However, in regard to risk factor number five, we read the following from an article written in 2010,
In 2008, the FDA launched a crackdown on compounding pharmacies, demanding they stop making such "false and misleading" claims about the hormones. Since estriol was unapproved, the FDA also ordered the pharmacies to stop making it altogether "unless they have a valid investigational new drug application." [NDA]
The above shows us how the FDA takes seriously those who make unproven claims who also manufacture and sell these drugs without an NDA and/or official approval from the organization. While in 2009, Congress tried to enact legislation to reverse this, but as of late, the FDA has been cracking down even more on pharmacies that sell certain drugs and make claims that these drugs can treat ailments which they have not been approved for.
With Synthetic holding a patent to a Trimesta/Copaxone combo treatment for MS, the company would have considerable leverage on its side to command either a strong partnership or acquisition if positive data is announced in April. Some might believe that if the FDA eventually approved the drug, doctors will simply off-label prescribe Trimesta and Copaxone separately, and instruct patients to use it. However, with Trimesta not being FDA approved for any indication, this would not be possible.
Copaxone is FDA approved for the treatment of MS. As mentioned earlier, Copaxone is going off patent protection this year, allowing generic companies to sell Copaxone. If Phase II data are successful with the Trimesta/Copaxone patented combination, it's our opinion Teva might have strong interest in either partnering with Synthetic, or flat out acquiring the company.
In September 2013, Pozen (POZN) signed an exclusive license agreement with Sanofi US (NYSE:SNY) for the commercialization of PA8140/PA32540, which are combination aspirin and Prilosec that can be purchased over the counter separately at any drug store with a prescription.
The PA licensing agreement came with $15 million in upfront cash. Pozen is also eligible for $20 million in pre-commercialization milestones, which we assume corresponds to U.S. FDA approval in late January 2014 and the transfer of the NDA to Sanofi (split evenly).
The above represents a very significant monetary deal for a Prilosec/aspirin combination product, that which can be purchased by consumers without a prescription, and over the counter separately.
Pozen expects to hear an approval decision for the above-mentioned PA products from the FDA on April 25th of this year.
The key for Pozen is the patent it holds for its combination, much like Trius held a combo patent for Cubicin, made by Cubist Pharma (NASDAQ:CBST), with its proprietary drug, tedizolid phosphate.
Seeing tedizolid phosphate's potential, and a way to extend its own drug Cubicin, Cubist acquired Trius in July of 2013 for $13.50 a share, or $707M with contingent value rights consideration for Trius shareholders.
- Additional Drugs in Synthetic Pipeline
As we can see above, Synthetic has some other interesting drugs it's currently working on. The company's longer-term focus is the
development of biologics for infectious disease where the medical need is acute. In development is an oral 3-lactamase for the prevention of C. difficile infections, slated to enter Phase 1 in 2014. In addition, mAbs for the treatment of B.pertussis (Phase 1 in 2014)
and Acinetobacter infections are in pre-clinical development. The biologics program is partnered with Intrexon (XON).
We believe the chances for positive data are good here. Although prior clinical testing was not exactly overwhelmingly positive, it was not terrible either, and just included Trimesta alone. We feel the combination of the patented Copaxone/Trimesta synergy should provide positive results that meet the acceptable endpoints. These results would have to show a clear advantage of the dual use of Copaxone and Trimesta together. An equal result from Trimesta against Copaxone alone would be seen as a negative result. Positive data here would give the company the needed leverage to increase its long-term chances.
If the Phase II data release is positive, and if management sails the Synthetic ship on a correct course, the stock could appreciate over the next year substantially. We feel the catalyst trading that should come into the stock might push Synthetic much higher than the current prices, provided the company does not foolishly engage a secondary cash raise, which is always something to consider with a developmental biotech, although we do not think it's likely here before the data release in late April.
*Indirectly purchased through Mr. Kirks company, Intrexon where he serves as Chairman and Chief Executive Officer.
Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.