Trius Therapeutics: Outstanding Potential, Discount Price

| About: Merck & (MRK)

Trius Therapeutics (TSRX) is a development stage pharmaceutical company with a very promising antibiotic in Phase III clinical trials. The antibiotic is tedizolid, a similar compound to Pfizer's (NYSE:PFE) linezolid (Zyvox), which sold $1.2 billion in 2010. A first Phase III trial has already confirmed that tedizolid's efficacy is equivalent to Zyvox. In tedizolid's favor, it is dosed once-daily for six days, compared to twice daily for 10 days with Zyvox. Tedizolid patients also had significantly fewer adverse events than Zyvox. A second Phase III trial has already begun, with results expected in early 2013. This timeline should put tedizolid on the market in early 2014.

Trius has partnered tedizolid with Bayer (OTCPK:BAYZF) in Asia & Emerging Markets for $25 million up-front, up to $69 million in milestone payments ($5 million already received) and double-digit royalties. Bayer will also reimburse Trius for 25% of global development costs. Trius retains all rights to tedizolid in North America and Europe.

I won't go into too many additional details, as Jason Napodano of Zacks has already done a great job, with an introduction to Trius last Spring and a recent thorough update. Also, Trius keeps a good investor presentation available on its website. With an expected approval in acute bacterial skin infection, Jason sees peak US sales of around $350 million and worldwide sales of roughly $750 million. Trius expects to begin two phase III trials in hospital acquire pneumonia this year, and trials in other indications should follow. With additional approvals, tedizolid sales could exceed these projections. It's relatively easy to see Trius achieving a market cap in excess of $1 billion later this decade, representing significant upside from its current ~$160 million level.

The reason I'm eager to get this article out today is that several recent events have conspired to drive down Trius' share price to extremely attractive levels. First, as Jason points out in his update, an early venture capital investor in Trius has recently exited their large position, driving down the share price. I don't think this represents a lack of faith in Trius, but rather the closing of a profitable investment to make new early-stage investments. Second, yesterday Trius announced that it has received an inquiry letter from the SEC regarding their accounting treatment of the Bayer agreement. Trius does not believe that this will result in any changes to their accounts.

Regardless, this is an accounting issue, and fundamentally irrelevant to Trius' current situation and future prospects. Finally, Trius announced that they will be selling an unspecified number of additional shares to raise capital in the future. This issue is relevant, but not particularly surprising or worrisome. Trius had $69 million in cash at the end of September 2011, plus the $5 million milestone from Bayer, which would have funded them through late this year. Their recent cash burn rate has been on the order of $34 million/year, but could rise somewhat as phase III trials escalate. It has been clear that Trius would have to raise capital this year, whether through a share sale or partnering tedizolid in Europe. Even with a 15-20% dilution on this offering, Trius presents a compelling opportunity.

I would like to highlight one additional Trius asset that has received little attention and is almost certainly not priced into their current valuation. On pages 22-28 of Trius' investor presentation, they describe their Gyrase-B broad-spectrum antibiotic program, currently in preclinical development. Briefly, and without going into too much detail, this program is targeting both gram-positive and gram-negative bacteria. Because gram-negative bacteria have an additional protective outer membrane, Tedizold (and linezolid, and several other classes of antibiotics) are ineffective against them. Because gram-negative bacteria are notoriously difficult to develop drugs against, those drugs are extremely valuable, and Trius gyrase-B gram-negative data looks very strong. Additionally, animal models for antibiotics are highly predictive of human efficacy, so antibiotics have a much better chance of success in the clinic than most drugs. (You're actually targeting the bacteria, not the animal/human, so interspecies differences are much less relevant.) So despite the early stage of this asset, I'm cautiously optimistic that it could provide additional upside to Trius if/when it enters/succeeds in early development.

It goes without saying that development stage biotech is a risky area for investment. Nevertheless, Trius is lower risk than most companies in this area, and the current price offers the possibility of impressive returns over the coming years.

Disclosure: I am long TSRX.