Why I'm Short Synthetic Biologics After Phase II Relapsing-Remitting MS Data

May.19.14 | About: Synthetic Biologics, (SYN)


Preliminary results of RRMS patients showed improvement at 12 months, but failed to show statistical significance at 24 months.

Dismissal of Phase II RRMS results by investors allows for an opportunity to short the stock.

Reluctance to show p-values in initial press release shows lack of confidence of trial results.

Steve Kanzer, 10% owner, selling 5 million shares at a low share price of $1.43 per share shows lack of confidence in trial.

Attempting to run a Phase III trial after obtaining a non-significant p-value at month 24 of p = .1537 is very risky.

On April 29, 2014, Synthetic Biologics (NYSEMKT:SYN) released supposedly positive preliminary results for its Phase II trial in patients with RRMS. We feel that Synthetic Biologics misrepresented the results, and we will discuss in great detail why we believe this is true.

For starters, the supposed positive preliminary results were released 15 minutes before the market close at 3:45 p.m. Eastern Time on April 29, 2014. This seems to have been done so that the Phase II results were not looked at closely. What Synthetics should have done was to either halt the stock and then release the results after-hours, or it could have waited till the next trading day in the morning before the opening bell and released the full results. That is the first problem that we saw with the way the results were released.

Secondly, Synthetic Biologics passed off the results as positive, but never mentioned in the initial press release whether or not the trial had met the primary endpoint. It also failed to mention whether or not the trial had met on the secondary endpoints of the study as well. Regardless of this, investors immediately saw the results that were released at 3:45 p.m. Eastern Time and decided to sell Synthetic Biologics, sending the share price down by 30% or more.

The Phase II trial was set up to treat 158 women with RRMS, at 16 sites across the U.S. region. Trimesta, which is a synthetic version of estriol, was to be combined with Copaxone and was to be tested against a placebo-plus-Copaxone combo. Copaxone, which was produced by Teva Pharmaceuticals (NASDAQ:TEVA), is a drug used to treat patients with MS -- multiple sclerosis. Multiple sclerosis is an autoimmune disease that causes T-cells to break down Myelin, which is a protective barrier that protects the nerve cells. This breakdown of the Myelin barrier causes symptoms such as pain and cognitive problems in the body. RRMS stands for Relapse-Remitting Multiple Sclerosis. In RRMS, patients experience relapses of bad symptoms, which are then followed up by a recovery period.

The reason for the 30% drop was the immediate results that were released. The Phase II trial for Trimesta with Copaxone did see a 12-month improvement in relapse rates up to 47%, but in year 2, the relapse rate dropped off to 32%. This was the initial press release on April 29, 2014, however, the company never pointed out in the initial press release whether the primary endpoint of the study failed or not. Synthetic Biologics did not disclose the p-values in the initial press release. You would think if the preliminary results were positive, the company would have at least included the p-values in the initial press release and not hide them from investors. It should have also revealed whether the trial met the primary endpoint or not in the Phase II clinical trial. The primary endpoint was set to determine efficacy of Trimesta with Copaxone over a 2-year timeframe. Year 1 established a high relapse rate, but year 2 did not. One sentence from the researchers breaks down the clinical finding exactly:

"Researchers found that at 12 months, estrogen combination therapy was associated with a greater reduction in relapse rates compared to Copaxone and placebo. However, at 24 months, the difference between the treatment groups was not as great as it was at 12 months."

Nobody is denying a great relapse rate in year 1, but the Phase II study was designed for a 2-year time frame in improvement for relapse rate for RRMS patients, not just a 1-year time frame. On top of this, Dr. Korosetz of NINDS -- National Institute of Neurological Disorders and Stroke -- has discussed this situation in a quote:

"The findings presented by Dr. Voskuhl suggest that there may be benefits to supplementing Copaxone therapy with estrogen. A longer study, with more patients, would be necessary to definitively validate these proactive, although early, findings"

What we can infer from the quote above are a couple of key words. For starters, notice that the first part of the quote states that these findings might be beneficial to supplementing Copaxone with estrogen. Dr. Korosetz is not stating that these finding are definitive, and "may be" doesn't instill a lot of confidence of the compound at this stage in time. In the second part, Dr. Korosetz talks about how these results are still early findings and a larger trial with more patients will be needed to possibly validate these "early" findings.

As mentioned above, the initial press release didn't reveal any p-values for the trial. Although, the company did release a subsequent press release the very next day and added the p-values. We think that these results should have been released collectively the very next day, with all the data included. There was no need to release a preliminary release with no p-values added. Although getting a glimpse of the p-values, we can see why the company didn't release them the first day, and why the results were released 15 minutes before the close of the stock market.

On the next day, the press release showed what the p-values were for the Phase II RRMS trial. The 47% decrease in relapse rate was at a p-value of p = .0306, which showed statistical significance for the Trimesta-plus-Copaxone combination. The problem and the reason for the huge drop in share price was that the 24-month p-value for Trimesta plus Copaxone saw a p-value of p = .1537, which is way above the threshold needed for statistical significance. The fact that the p-value did not show statistical significance at the 24-month interval is important, because it decreases the opportunity for a successful Phase III trial. Had the p-value come in at or below p = .01, then we would state that the company may have a great shot at obtaining the primary endpoint in a Phase III trial. Synthetic Biologics stated in the conference call that it could obtain a better p-value in a larger Phase III trial, when it enrolls more patients. We, however, are skeptical that it can lower the p value p = .1537 just by adding more patients to the trial.

So now, the company will have to run a long Phase III trial and enroll more patients to determine if the compound can achieve a lower p-value. Based on the p-value in year 2 of p = .1537, we think that it will be difficult for the company to improve upon its clinical findings, even with a larger trial design. To make matters worse, a large 10% owner, Kanzer Steve. H., sold approximately 5 million shares of Synthetic Biologics on April 30th, 2014, the day after the initial preliminary results, at a low of $1.43 per share.

To counter these bad results, Synthetic Biologics does have other compounds in its pipeline. One such product is SYN-004, which is being developed to neutralize IV antibiotics in the stomach, and is intended to maintain the balance of bacterial flora to prevent C. difficile infection. The C. difficile infection occurs because a lot of hospitals give IV antibiotics that directly enter the gut. These antibiotics stay in the gut and can possibly mess up the bacterial flora of the stomach, allowing the C. difficile bacteria to emerge at greater strength. Synthetic Biologic's goal is to break down the IV antibiotics to prevent the destruction of good flora bacteria in the stomach. The only problem about this program is that it is still in early-stage clinical trial, so the program has a long way to go before it can become a huge catalyst for the share price.

According to the 10-k SEC filing, Synthetic Biologics has $11.3 million cash on hand. A huge part of that cash was due to the equity raise back in December of 2013, in which the company offered 13.2 million shares of stock at $1.00 per share. The recent cash influx is only sufficient for the short term, and the company may have to raise additional cash in 2014. Investors should be cautious of additional financing needed to run the trials and other company operations. Investors should also be aware that Synthetic Biologics has other products in the pipeline. We have a bearish sentiment on Synthetic Biologics because of the released Phase II RRMS data that failed to impress investors. What this means is that the company may or may not be successful with its other products in the pipeline.

In the mean time, we think that this Phase II RRMS data failed to impress investors, thus the 30% drop in share price. These terrible results may also cast more doubt on long-term investors, causing a further decline downwards of the share price even at the current share price of $1.45 per share. For example, if the SYN-004 compound also fails, that could cause an additional share price decline of 15% to 30% just like the RRMS drug. On the flip side, if the trial comes out positive, the SYN-004 compound would capture a huge market opportunity. This is because the C. diff bacterium healthcare costs were approximately $5 billion in total back in 2012. If we take Synthetic Biologics' current market cap at $89 million and apply the total market opportunity for C. diff, the company would be able to obtain a future market cap value of approximately ($1.45 per share X ($5 billion / $89 million)) = $81.20 per share.

The problem, though, is that the calculation above only works if the SYN-004 C. diff results come out positive and capture the entire market. Also, the SYN-004 drug compound is still early in the game, as the company expects to launch two trials in the second half of 2014. One will be a Phase Ia trial for SYN-004, and the other will be a Phase Ib trial for SYN-004. The initial results are expected to be reported by the end of 2014 for these Phase I trials. The problem, though, is that it is only going to test the safety of the SYN-004 compound. Efficacy trials for SYN-004 aren't expected to begin until 2015, so the current risk of shorting Synthetic Biologics is small until the efficacy readout for the C. diff trial. Until then, it may be a good chance to keep shorting Synthetic Biologics while investor confidence is lacking. In shorting Synthetic Biologics, we have suggested the potential downside to be down another 15% to 30% upon another trial failure, which could bring the share price down respectively to approximately $1.01 per share on the low end. We have shown why we are short Synthetic Biologics and why we think that investors can capitalize on this short opportunity.

Disclosure: I am short SYN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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