Transition Therapeutics: Early Stage Play for a Well Diversified Biotech Portfolio

Transition Therapeutics (NASDAQ:TTHI) is a development stage biopharmaceutical based in Toronto, Canada. This is a very small company (market cap $63MM) with just over 23 million shares outstanding. Average daily volume is only about 73,000 shares and just 0.9% of the float is sold short. This company is under the radar. Their primary areas of focus are on the treatment of Alzheimer's Disease, type 2 diabetes and rheumatoid arthirits. TTHI is worthy of a look as one component in a diversified, pre-approval stage biotechnology portfolio.

TTHI's most advanced product is called ELND005. It has received Fast Track designation from the FDA and has completed a Phase 2 study with full, detailed results due in Q3 2011. Plans have been announced that the company (along with partner Elan) intends to initiate a Phase 3 study on ELND005. Amyloid plaques have been found consistently in the brains of Alzheimer's patients and are thought to contribute to the degradation of neurons in the brain and the subsequent symptoms of Alzheimer's Disease. This is called the Amyloid Hypothesis. ELDN005 is taken orally and serves to neutralize Aβ oligomers, a precursor to amyloid plaques. The theory supposes that prevention of the formation of amyloid plaques may prevent or slow the progress of the disease.

TTHI has taken a partnering approach to many of its endeavors. ELND005 is partnered with Elan (NYSE:ELN), a $6 billion market cap biotech that is expected to swing to profitability in 2011. This partnering agreement was recently renegotiated. Previously, TTHI was to bear 30% of all development expenses in exchange for a 30% share of profits. This would have required TTHI to raise money to support a Phase 3 trial. As modified, the agreement provided for an immediate payment of $9MM to TTHI, a payment of $11MM upon commencement of Phase 3 trials, and up to $93MM in additional milestones. TTHI will also receive royalties ranging from 8% to 15% on actual sales.

Although many pharmaceutical firms are pursuing a treatment for Alzheimer's Disease, it is a market with truly blockbuster potential. In 2000, 411,000 new cases were reported, that number was expected to grow to 454,000 in 2010 and is projected to rise to nearly 1 million new cases a year in 2050-- with between 11 million and 16 million total cases in the over 65 population of the United States alone. This disease is a constant factor in the ever present budget discussions as well. In 2010, total payment for Alzheimer's care is expected to total over $172 billion with $123 billion of that being paid by Medicare and Medicaid. Is it any wonder that the FDA is supportive of efforts in this area with programs like the Fast Track designation? 2009 sales of Azlheimer's drugs totaled approximately $6.5 billion with that market only destined to grow.

TTHI has an interesting pre-clinical diabetes program as well as an anti-inflammatory program that is partnered with Eli Lilly (NYSE:LLY). At its current burn rate, TTHI should have enough cash for about two years with no dilutive events necessary. In evaluating biotech firms, I always look at the burn rate and-- all things being equal-- prefer to see at least 18 months of cash on hand or imminent milestone payments.

Finally, a quick look at the executive team reveals stability in a CEO, Dr. Tony Cruz-- who has been with the company since it was formed in 1998. The President and CFO, Elie Farah has been with the firm since 2005 and held a senior position at Beohringer Ingelheim, a firm not unknown to biotechnology investors.
This is an EARLY stage biopharmaceutical firm with one product that should enter Phase 3 trials in the next year or so. Biotech investors should certainly have at least one firm in the Alzheimer's treatment field for their diversified portfolio, and TTHI may make a prudent selection.

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