Huge Opportunities Are Now Possible Due To Market Inefficiencies In Valuing Antibiotic Companies Such As Cubist, Durata, And Cellceutix

| About: Durata Therapeutics (DRTX)


Cubist Pharmaceuticals' Cubicin is an excellent case about the value of new antibiotics. Sales topped $1 Billion in sales in 2013 even though it competes against a generic antibiotic, vancomycin.

Durata Therapeutics realizing the noncompetitive limitation of one and eight day dosing announced today the initiation of a phase 3 study of Delvance as a single dose treatment.

The markets have failed to give any consideration to perhaps the superior drug Cellceutix's Brilacidin, licensed from UPenn, progressing in a phase 2b trial as a single dose treatment.

Huge Opportunities Are Now Possible Due to Market Inefficiencies in Valuing Antibiotic Companies such as Cubist, Durata, and Cellceutix

Antibiotics became cheap generics and Pharmas abandoned the antibiotic market in droves. But times are changing.

Globally, pharmaceutical companies were once prolific antibiotic makers. In the 22 years to 1962, 20 new classes of antibiotics were discovered, but only two in the last 52 years. Just a few years ago, big pharmaceutical companies were jumping out of the antibiotic drug discovery and development business. The reason was pretty simple, as the Food and Drug Administration's regulatory pathway was long, expensive and difficult to maneuver to bring a new antibiotic to market. Most of the select drugs that have made it through the FDA approval process were simply iterations of existing drugs. The cheap generic drugs were effective, leaving little incentive for creating new drugs which can generate significant sales. However, changes are happening due to the dire need for new antibiotics.

How Bad is the Need for New Antibiotics?

The British Pharmacological Society suggests that another 20 classes and subsequent analogues, with an emphasis on Gram-negative therapies, could last us another six decades, but it will take a unified effort of researchers and government support to make that happen. On that point, the Infectious Diseases Society of America says that at least 10 new drugs that can treat superbugs are necessary by 2020.

The dearth of antibiotic discovery complex has given bacterium decades to mutate and grow resistant to available drugs, rendering many of them relatively - or completely - ineffective.

"The truth is, we have been abusing [antibiotics] as patients, as doctors, as travelers, and in our food," said Professor Dame Sally Davies, Chief Medical Officer for England, in her book "The Drugs Don't Work - A Global Threat". "We are staring at a future in which antibiotics don't work, and many of us or our children will not be saved from TB, cholera, deadly forms of dysentery, and germs contracted during surgery," Davies told attendees at a UK-based Chatham House meeting in March. She believes that people may start dying from common operations and conditions that can be treated today as bacteria continue to outsmart today's drugs.

Some may call it fear mongering, but the multi-drug antibiotic resistance threat is very real and at a global scale. It's slated to be a topic at the World Health Organization (WHO) at its annual assembly of health ministers next month. The Centers for Disease Control and Prevention issued "Antibiotic Resistance Threats in the United States, 2013" to heighten awareness about the seriousness of problem. Precious Matsoso, Director General of Health of South Africa, recently called a meeting to express her concern over superbugs and to discuss a strategy to deal with the situation, including antibiotic resistance related to malaria and a case of Klebsiella pneumoniae last year in South Africa that was resistant to every known antibiotic.

Millions of people become sick from bacterial infections each year with about 50,000 people in the U.S. and Europe dying from them, according to the WHO. The CDC estimates that the 2+ million people that are infected with drug-resistant bacteria annually resulting in direct costs of up to $20 billion.

Big Pharma Slowly Getting Back In The Game Because There's Big Money To Be Made

Some experts contest that a new antibiotic will not reach blockbuster status. Based upon published research on antibiotic resistance and commentary from leading pundits globally, there is certainly an argument to be made against that case. Lending credence to the value of new antibiotics, several companies are once again opening their R&D doors and wallets. The realizations have set in that life saving drugs can be sold for as much as $1,000 a pill or dose, as shown recently by Gilead with its Hepatitis C treatment drug Sovaldi. Sovaldi will cost $1,000 per pill. A typical course of treatment will last 12 weeks and run $84,000, plus the cost of necessary companion drugs. Some patients may need treatment for twice as long.

After more than a decade on the sidelines, Roche (OTCQX:RHHBY) stepped back in the game in December, spending $40 million upfront and earmarking another $520 million for milestone payments and double-digit royalties in a deal with Switzerland-based Polyphor, mainly to advance POL7080 for hospital-acquired Pseudomonas aeruginosa. Part of a new class of drugs called macrocycles, POL7080 is a synthetically engineering drug that is slightly bigger than a small molecule, but packs the potency of a large molecule.

Genentech, a biotech that Roche spent $46.8 billion in 2009 to buy the 44 percent that it didn't already own, made an undisclosed upfront payment and agreed to shell-out $111 million more in milestone awards - as well as royalties - under a drug discovery deal with two-year old RQx Pharmaceuticals to research new antibiotics. RQx is focused on modifying arylomycin compounds, naturally produced narrow-spectrum antibiotics that most bacteria are resistant to, but altering their structure could lead to a new class of broad-spectrum drugs.

Cubist Pharmaceuticals, Durata Therapeutics, and Cellceutix Corporation

Cubist Pharmaceuticals (CBST) is an excellent case about the value of new antibiotics. Cubist's Cubicin, an injectable version of the antibiotic daptomycin, topped $1 billion in sales in 2013 even though it competes against a generic antibiotic, vancomycin. As resistance grows among the population to vancomycin, Cubist' sales keep growing. Cubist is aiming to become a global leader in antibiotics, saying it plans to spend roughly $400 million in 2014 to develop its antibiotic portfolio for infections that the CDC has deemed as serious threats, including Pseudomonas aeruginosa, as well as extended-spectrum beta-lactamase (ESBL)-producing Escherichia coli (E. coli), Klebsiella pneumoniae, and other Enterobacteriaceae bacteria.

Late in March, Cubist won unanimous approval of an FDA advisory panel for tedizolid phosphate, a drug it wants to market under the brand name Sivextro for Gram-positive Acute Bacterial Skin and Skin Structure Infections (ABSSSI), including those caused by methicillin-resistant Staphylococcus aureus (MRSA). The FDA doesn't have to follow the recommendation of the advisory panel (although it often does) and a final decision is expected by June 20. Cubist spent $707 million in cash and committed to another $111 million in milestone payments to get the drug by acquiring Trius Therapeutics last July. The CDC estimates that there are more than 80,000 MRSA infections in the U.S. every year, resulting in in excess of 11,000 deaths.

Cubist has also recently hit its primary endpoints in a phase 3 trial of ceftolozane/tazobactam for treatment of urinary tract infections and intra-abdominal infections and plans to submit applications for FDA approval by the end of June. Further, the company is marketing Dificid for the treatment of C. difficile infections. Dificid was the lead drug of Optimer Pharmaceuticals, a company Cubist spent $535 million in cash and committed another $266 million in milestone payments to acquire at the same time it bought Trius.

If Sivextro garners FDA approval it will go head-to-head with Pfizer's (NYSE:PFE) Zyvox (linezolid), the current market share leader with $1.4 billion in sales in 2013. Zyvox is losing patent protection next year, which will mean a run of generics hitting the market, but they likely will meet the same fate as Zyvox likely would anyway: some limited acceptance due to being a longer-course therapy than Sivextro. A six-day dosing regimen for Sivextro is expected to be given in IV form at a hospital and then the patient will take it in pill form from home. This compares to Zyvox's dosing scheme of twice daily for at least ten days. For comparably priced antibiotics to treat MRSA and severe skin structure infections, about 66% of pharmacy directors support keeping formularies stocked with shorter-course therapies because it promotes earlier patient discharge.

From payers to patients, everyone knows how fast hospital bills add up. Even if the absolute price of Sivextro appears to be more, the savings from patients leaving the hospital sooner will counterbalance to price tag. Further, Sivextro is believed to have a better safety profile and at least equal efficacy to Zyvox, likely leaving Pfizer's drug as the odd man out.

Durata Therapeutics (NASDAQ:DRTX) MRSA/ABSSSI drug dalbavancin, which is planned to be marketed under the brand name Dalvance if approved, is also on the FDA's decision itinerary, following an FDA advisory board also giving the drug candidate their blessing. Durata's late-stage, three-arm trial of dalbavacin showed that the drug was not inferior to the commonly used IV antibiotic vancomycin or vancomycin followed by Zyvox. From purely a number of doses standpoint, Dalvance takes the prize compared to current drugs, with one infused dose given on the first day and then a second infused dose coming on day eight. A concern I have is the choice of vancomycin as the comparator drug for showing non-inferiority. As resistance to vancomycin is growing the market is moving towards the less resistant drugs such as Cubicin/daptomycin.

In a Reuters' article on March 31, 2014, the day the FDA advisory board voted in favor of recommending the FDA approve Dalvance, the article states "one analyst polled by Thomson Reuters sees delbavancin sales reaching $449 million by 2019". The article acknowledges that this is on the high side as the article also states, "If approved, the drug is expected to generate annual sales of $219 million by 2019, according to the average estimate of six analysts polled by Thomson Reuters". The article continues that the drug already has some pressures looming over it. For starters, the FDA advisory panel had some concerns about potential side effects of dalbavancin on the liver, especially in patients with liver disease.

The second question regarding the dosing regimen could be even more problematic. It's been long-argued that one of the major problems with the emergence of antibiotic drug resistance has been patient compliance. Simply, people take an antibiotic until they feel better and then don't complete the program, allowing the bugs to weaken, but not die and then grow stronger with a resistance to the treatment. On that point, it is not difficult to surmise that plenty of people may get a Dalvance infusion at the hospital and then never return on the eighth day to complete the protocol. Think about it. If someone feels fine, do you think they will take the time to head back to the hospital? By not doing so, the cycle of antibiotic resistance is actually being exacerbated, not stifled, and that could be to the long-term peril of Dalvance. Durata realizing this potential limitation to market acceptance announced today that they are initiating a phase 3b study of Delvance as a 1500mg. single dose. This higher single dosing still does not remove the issues of toxicity and resistance issues related to its comparator vancomycin.

The key takeaways here is that pharma is back on the path to develop new antibiotics and spending money to partner, even if drug candidates are still in the early stages. Analysts are pegging annual sales in the hundreds of millions for Sivextro and Dalvance, primarily because they are shorter-course therapies than available drugs today.

The Dark Horse May Be the Best Horse

With the spotlight on these two drugs, the dark horse in the race is Cellceutix Corp. (OTCQB:CTIX) with Brilacidin, a novel antibiotic licensed from the University of Pennsylvania. Brilacidin represents a new class of drugs called defensin-mimetics and is in a phase 2b clinical trial for ABSSSI. Defensin-mimetics are modeled after host defense proteins, the first-line of defense in the immune system. They destroy bacteria the same way that the body does naturally, decreasing the risk of antibiotic resistance developing.

A previous 215-patient phase 2a clinical trial hit its primary endpoints while comparable in efficacy to daptomycin.

Cellceutix snagged Brilacidin, in its acquisition of the assets of PolyMedix following the embattled biotech filing for bankruptcy protection last year. With a price tag of only $2.1 million in cash and 1.4 million shares of CTIX stock, taking ownership of much of the corporate assets of PolyMedix is looking more like a heist than an acquisition at this point. The reason is pretty simple as it parallels the logic behind the valuations of Sivextro and Dalvance.

$449 million. That's the aforementioned figure that a Reuters' story mentions an unnamed analysts put on annual sales of Durata's Dalvance and the therapy requires a return visit to the hospital for a second infusion 8 days after the first. In Cellceutix's 200-patient trial, patients are being treated with Brilacidin in three different dosing regimens, including two single-dose regimens, and compared to patients being treated with Cubist's Cubicin. The longest dosing regimen for Brilacidin in the trial is three days, meaning that Brilacidin has the most favorable dosing schedule compared to Sivextro and Dalvance, or anything currently on the market for that matter.

Enrollment in the Brilacidin trial is on schedule at 40 patients per month and no drug-related serious adverse events have been reported to date, according to Cellceutix. At the current pace, enrollment should be completed sometime in August with the data unblinded likely in September. Cellceutix says that it intends to use the data to conduct a phase 3 pivotal trial of Brilacidin for ABSSSI. If the data shows that Brilacidin could indeed be a single-dose antibiotic, it would seem highly probable that big pharma will come calling to partner for a phase 3 trial. Simply, a "one-shot/one-kill" antibiotic would control the market, and that's too compelling of a proposition for majors to pass-up.

Cellceutix is also building upon previous Brilacidin research that shows the novel drug could work on a host of other indications, including Gram-positive and Gram-negative bacterial infections. The company says it is finalizing research necessary to start clinical trials of Brilacidin-OM for oral mucositis, an often-debilitating side effect of cancer therapy. Research funded by government grants is being conducted at an undisclosed major university in Texas, which recently showed the drug to be active in mouse models against Klebsiella pneumoniae. Additional studies at the university lab are slated to evaluate Brilacidin versus multi-drug resistant Pseudomonas aeruginosa and Acinetobacter baumannii. Candida, keratitis, conjunctivitis, otitis and other infectious conditions and diseases have all been listed as targets for research by Cellceutix.

Outside its antibiotic pipeline, Cellceutix is in the late stages of a phase 1 clinical trial of its novel cancer drug, Kevetrin, for solid tumors being conducted at Harvard's Dana-Farber Cancer Institute and Beth Israel Deaconess Medical Center. Screening for a brief phase 1 crossover study of anti-psoriasis drug Prurisol is ongoing, an 8-week trial that is required to allow the company to take the drug into a phase 2/3 trial under a 505(b)(2) designation by the FDA.

From an investment perspective, Durata's market capitalization rose from about $175 million to $360 million since July because of its advancement of dalbavancin for ABSSSI, the only drug they have in their pipeline. With Durata's newly announced phase 3b clinical trial, Cellceutix's Brilacidin may trail Durata by only about 8 months in the clinical trial timeframe, but Brilacidin could hands-down be the better antibiotic because of the fact that it is a (much-needed) new class of drug and as such would have no bacteria already resistant to it, as well as having none of the toxicity and resistance issues associated with vancomycin class drugs. With Cellceutix's valuation of $168 million, the markets have failed to give any consideration to Brilacidin, as the market cap has essentially been flat ever since the acquisition last September. This should really be viewed as an anomaly that will be corrected as Cellceutix arguably has one of the most robust antibiotic pipelines of any biotechnology firm, large or small. With regulatory agencies implementing policy changes to make the pathway to commercialization of new antibiotics less onerous, Cellceutix certainly seems to have aligned itself in an enviable position.

Closing stock prices and market caps as of April 24, 2014:

Cubist Pharmaceuticals CBST $66.51/share and $4.97 Billion

Durata Therapeutics DRTX $13.48/share and $359.11 Million

Cellceutix Corporation CTIX $1.59/share and $168.34 Million

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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