Trius Therapeutics (TSRX) is in late stage clinical development of its new antibiotic, tedizolid, for treatment of MRSA infections that have increased to epidemic levels in both the hospital and community settings. There are a number of companies competing in this market and a host of new products in development, but I see tedizolid as the most promising of the new products.
This report is a summary of a more detailed report that I have published on my website. It contains tables that support projections presented in this report.
I project that tedizolid will be approved and launched commercially in the US and Europe in 2H, 2014. I have projected a launch that produces US sales of $39 million in 2015, $137 million in 2016 and $625 million in 2020; international sales should be comparable. I think that the valuation based on 2020 worldwide sales of $1.2 billion could be 3x revenues (or more) reflecting the long patent life (through 2029) and continuing strong growth potential beyond 2020; this would result in a market capitalization of $3+ billion and a stock price of $60+ around the 2020 timeframe.
I know that this argument arouses skepticism in some investors who want to know what is going to happen to the stock in the next year or month or nanosecond and would point out the inherent inaccuracies in long term forecasting. I understand this, but my purpose in doing such a long term projection is to show the value in the franchise that a potential pharmaceutical partner or acquiror or long term investor might see in the franchise.
The stock does face headwinds and uncertainties over the next three years. The outcome of the second phase 3 trial that will be reported in early 2013 will be a critical binary event and while the success of this trial is made highly probable by the safety and efficacy shown in the first phase 3 trial, there is never a guarantee of success. Trials can sometimes fail for execution reasons even though the drug may be effective. Failure would cause a sharp decline in the stock price.
Even if the results of the trial are successful, the company still faces the challenge of gaining approval. In response to the majority of newly submitted NDAs, the FDA frequently issues Complete Response Letters which are often related to non-clinical sections of the NDA such as chemistry, manufacturing and control. A CRL usually delays approval by a year or two. It has also been the case that recent new product launches have been disappointing (at least initially) and investors will be wary of the initial launch phase. It could be 2016 before the outcome of all of these issues are known and put behind the company, a time frame that is forever in the current short term focused market.
The trial uncertainty and the potential for a CRL at the probable PDUFA date in mid-2014, is likely to restrain investors' near term enthusiasm toward the stock. However, there are other aspects to the investment equation that are compelling. Tedizolid has the potential to be one of the most important antibiotics for treating the MRSA epidemic over the next decade. While impatient investors focusing on day to day events may not find this particularly compelling, potential pharmaceutical partners or potential pharmaceutical acquirors could.
I think that there is a high probability for a partnering deal for Europe alone or perhaps the US, Canada and Europe later this year or in early 2013 that would bring in a significant upfront payment. Bayer has already licensed tedizolid for all other countries of the world for an upfront payment of $25 million. Another large upfront fee later this year from a licensee could cause a significant move in the stock.
However, the most upside potential for Trius in the short term comes from the possibility of an outright acquisition by a big pharma company. The prospect of acquiring a product that appears to be a meaningful improvement on Zyvox, which is in late stage development and has a strong patent position, would be a compelling investment opportunity for many big pharma companies. I think that there is a reasonable possibility that this will occur. Turning the product over to a bigger company would produce an excellent return for shareholders and avoid the time and risk involved in commercializing tedizolid. I think that a takeover bid on the order of $12 to $15 is possible (market capitalization of $450 to $570 million).
I am recommending the stock on the basis of these arguments. The current market capitalization of $200 million is not much more than is sometimes accorded to venture capital investments with far less probability of success. I think that patient investors can buy the stock and over the next five to ten years it could be a very rewarding investment. This is made more interesting by the potential for a partnering deal that could cause a meaningful bounce in the stock or an outright acquisition that could double or triple the stock overnight. I think that the most reasonable risk in the risk reward equation is that the stock will be boring over the next year or two or three, particularly if the company receives a CRL. I recognize that there is very significant downside risk down to the $1 to $2 level if the second Phase 3 trial fails, but I think the probability is small.
Perspective on the MRSA Antibiotic Market
Staphylococcus aureus is arguably one of the greatest bacterial threats to mankind. It is a rapidly growing and particularly virulent bacterium that is often involved in infections involving the skin and skin structure tissues, lungs, blood stream (bacteremia) and other organ systems. Each copy of Staphylococcus aureus can reproduce itself every half hour so that one bacterium can produce over 1 trillion copies in just 20 hours. This rapid reproduction rate enables frequent genetic mutations that through natural selection results in strains of Staphylococcus aureus resistant to antibiotics that could once effectively treat them.
Resistant strains of Staphylococcus aureus are referred to as methicillin resistant Staphylococcus aureus or MRSA as opposed to methicillin susceptible (MSSA) strains. Methicillin in the late 1960s was the preferred antibiotic but due to the emergence of resistance, it is no longer effective or in in use. The term MRSA is now broadly applied to Staphylococcus aureus strains that are resistant not only to methicillin, but to many antibiotics of the important penicillin and cephalosporin classes.
A healthy human immune system can generally deal with bacterial infections, but for MRSA or MSSA infections even people with healthy immune systems are still vulnerable to these extremely aggressive pathogens. When Staphylococcus aureus gains access to the interior of the body through open wounds, cuts, burns or intravenous catheters, its rapid replication can overwhelm the immune system and antibiotic support becomes critical. Without effective antibiotic therapy, the outcome can be devastating. Both MRSA and MSSA cause very dangerous infections, but the antibiotic options for MSSA are less making it a greater problem.
There are currently six drugs approved for MRSA: generic vancomycin, Pfizer's (NYSE:PFE) Zyvox, Cubist's (CBST) Cubicin, Forest Laboratories' (NYSE:FRX) Teflaro, Pfizer's Tygacil and Theravance's (NASDAQ:THRX)Vibativ. The pharmaceutical industry has responded aggressively to the medical need for new drugs effective against MRSA as there are at least 9 new drugs in phase 2 or 3 development. Two of these, Durata's (privately held) dalbavancin and The Medicine Company's (NASDAQ:MDCO) oritavancin are as far along in regulatory development as tedizolid. Both have promise, but tedizolid, in my opinion, is the most promising new agent in late stage development.
The most widely used drug for treating MRSA is vancomycin, which was first introduced in 1958 and has been the "go to" drug for MRSA ever since. Because of increased vancomycin usage, strains of Staphylococcus aureus are becoming less susceptible. In 2005, 3% of MRSA strains displayed intermediate resistance to vancomycin and this number increased to 11% by 2009. US sales of the six approved drugs reached $1.8 billion in 2011 led by Cubicin with $699 million, Zyvox $640 million and vancomycin $289 million. The sales figures are not representative of unit usage because Cubicin is priced at about $252, Zyvox at $200 for oral and $225 for IV and vancomycin at $15 per patient day, respectively. I estimate that there were 28 million patient days of therapy in 2011 with vancomycin accounting for 74%, Zyvox 11% and Cubicin 11%.
If vancomycin were priced at $225 per patient day of therapy or midway between Cubicin and Zyvox, it would be a $4.6 billion product. Looked at in this way, the market addressed by tedizolid is a $5.8 billion opportunity. Assuming pricing of $235 per day for tedizolid, each 1% of market share that it gains in the US is roughly $65 million of sales and worldwide could be about double that or $130 million.
The Potential Role of Tedizolid in MRSA
Tedizolid is the second drug from the oxazolidinone class of antibiotics in which Zyvox was the first. Tedizolid offers major improvements over Zyvox even though Zyvox is a very effective drug that is generally considered superior to vancomycin. Tedizolid is bactericidal in vivo while Zyvox is bacteriostatic. In vitro, it is 4 to 16 times as potent against MRSA and MSSA. Tedizolid is dosed once a day versus twice a day and requires a shorter length of therapy. It offers improved tolerability in short term usage and doesn't appear to have certain drug interactions associated with Zyvox. For longer term therapy, it does not appear to depress blood platelets, which is a concern with Zyvox. As with Zyvox, patients can easily be switched from an intravenous to oral dose.
I think that tedizolid has a very significant commercial and medical opportunity, but as is always the case there are investment concerns. Upon the introduction of each new antibiotic, the argument always arises that it should be used sparingly and only after other antibiotics have been tried and fail. The premise is that exposure of a new antibiotic to bacteria will inevitably lead to the emergence of resistance and exposure in the early years should be kept to a minimum so that there will be a drug of last resort. If this were to be widely accepted by the medical community, tedizolid would only be used after vancomycin, Zyvox and Cubicin have been judged to be ineffective either through clinical use or laboratory tests.
A second concern is that the Zyvox patent expires in May 2015 in the U.S. and Cubist has reached a settlement that allows Teva to introduce a generic to Cubicin in 2018. Investors have seen that when major products in other therapeutic categories went generic, it switched usage from other branded products to the newly generic agents. Cost conscious hospital formularies and health care plans jump on the opportunity to reduce costs by incenting generic prescribing.
I think these issues, while legitimate, will not prevent tedizolid from becoming a very successful drug. MRSA is different from many diseases in that it can become life threatening within days of the patient presenting at an emergency room or developing an infection in a hospital. Such infections require aggressive and effective intervention. This is not like treating a slowly progressing chronic disease such as hypertension. Physicians don't have the time to try the least expensive generic first and then switch to a branded product. They need to prescribe the drug which their experience suggests will have the best immediate chance of curing their patient. The concern about overuse of a new antibiotic and its cost are not at the top of the physician's prescribing check list.
The experiences with Zyvox and Cubicin support my point; both were accepted into widespread clinical practice even though vancomycin is generic. This is not to say that physicians should or will use new drugs promiscuously and ignore the "hold in reserve" argument or any price consideration in their prescribing decision. Indeed, vancomycin still accounts for 74% of patient days in the MRSA antibiotic market. It is just that these issues aren't so dominant that they preclude the potential for tedizolid's success. When the chips are down and the physician is faced with a life threatening Staphylococcus aureus infection, he will choose the antibiotic that he thinks has the best immediate chance of curing the patient.
A third issue to consider is that tedizolid will initially be approved only for use in skin and soft tissue infections (ABSSSI) which accounts for about 30% of infections caused by Staphylococcus aureus. The approval in "skin" could come in 2014. It is not likely to be approved for pneumonia until 2016 and bacteremia will be somewhat later. Skin and soft tissue infections, while quite serious, are easier to treat and the competitive advantages of tedizolid are less compelling.
It is in pneumonia, bacteremia and other infections requiring long-term treatment in which tedizolid may offer the most significant therapeutic advantages. While it will take two or more years after tedizolid's initial approval to gain these additional indications, physicians can use a drug off-label and I think there will be considerable off-label prescribing of tedizolid. In 2004 and 2005 during the early days of the Cubicin launch, it was only approved for skin and soft tissue infections, but Cubist reported that about 50% of its use was off-label. Importantly, Cubicin is not effective in lung infections so that most of this off label usage was in bacteremia and endocarditis. The off-label usage has now dropped to about 25% with the approval of Cubicin in bacteremia.
Zyvox achieves about 40% of current sales in off-label indications, primarily in bacteremia and infections requiring long-term therapy. This is importantly due to its being available in an oral dosage form; vancomycin and Cubicin can only be given IV. Zyvox failed to reach its primary endpoint in a bacteremia trial, but it is estimated that 15% of its use still occurs in bacteremia.
Sophisticated physicians will weigh the advantages shown by tedizolid against Zyvox indicated by in vitro, animal and clinical studies and will make their prescribing decisions almost as much on these factors as the label. I expect meaningful off-label prescribing in pneumonia and bacteremia before tedizolid is formally approved for these indications. This will usually be in infections not responding to vancomycin, Cubicin or Zyvox or infections requiring long-term therapy in which oral dosing provides a significant benefit. Because of its potential superiority to Zyvox and because Cubicin is ineffective in lung infections, I see considerable potential in pneumonia.
Development of New Antibiotics for MRSA is Intense
If there is caution by investors about the commercial potential for new antibiotics effective against MRSA, it is not shared by the pharmaceutical industry. There are a large number of companies that are developing MRSA antibiotics and I am aware of 9 drugs in phase 2 or 3 development. This competitive onslaught will also be part of the investment discussion around Trius and tedizolid.
I find three new products to be of the most interest. The privately held company Durata (just filed an S-1) is developing dalbavancin and The Medicines Company is developing oritavancin. Both belong to the glycopeptide class of antibiotics of which vancomycin is the charter member. They are on the same development timeline as tedizolid and both will be revealing topline data from phase 3 trials in 2013 and depending on the outcomes could be filing NDAs in 2013 at about the same time as tedizolid. The third product is Forest Laboratories' Teflaro (ceftaroline), a fifth generation cephalosporin antibiotic with good activity against MRSA that was introduced in 2010; Forest is guiding for sales on $65 million for the year ending March 2013.
Both dalbavancin and oritavancin have previously had NDAs submitted that were not approved by the FDA. Based on my research, I am inclined to think that these rejections were due to trial design. My working view is that both are effective agents, but this can only be determined when phase 3 data is released in early 2013. The major differentiating point for both of these drugs is their administration. Dalbavancin requires an initial IV infusion followed by a second infusion seven days later. Oritavancin requires just one infusion.
Durata and The Medicines Company argue that these drugs will be highly cost effective. A patient showing up at the emergency room can be given an injection and sent home without the need for costly hospitalization. Tedizolid would require an initial IV infusion or oral dosage followed by five days of once-a-day oral therapy in this setting. The assured compliance of dalbavancin and oritavancin could be preferred in some cases.
The dosing advantage of dalbavancin and oritavancin would be most meaningful for the least severe skin and soft tissue infections caused by MRSA. This is not an insignificant market as recent reports indicate that about 60% of the patients showing up at emergency departments with skin and soft tissue infections have MRSA. Of these, about 25% of patients are admitted to the hospital. There are significant cost advantages and health benefits in keeping patients out of the hospital. The hospital is no place to be sick because of the risk of acquiring a new infection.
Patients presenting at an emergency room with the most severe skin and soft tissue infections, pneumonia and bacteremia would almost certainly be admitted to the hospital for medical management of their conditions and observation. Patients with less severe skin and soft tissue infections might receive dalbavancin or oritavancin. I have seen no estimates on how much of vancomycin, Zyvox and Cubicin use is currently in this patient population that can potentially be treated in the emergency room and sent home. My guess is that it is significant and growing rapidly. This market segment is also being treated with generic agents that have activity against community-acquired MRSA, such as clindamycin and trimethroprim combined with sulfamethoxazole. These are unapproved usages.
Patients who show up at the emergency room and who are then admitted are usually treated by an emergency room physician who would likely prescribe vancomycin if MRSA is suspected or a cephalosporin like Keflex if MSSA is believed to be the causative agent. The emergency room physician treats empirically without knowing the cause of the infection might be. Accurate identification requires that a culture be taken and sent to the laboratory which reports back in 24 to 48 hours on what the bacteria is. If the results come back as MRSA, the infectious disease physician or other physician assuming care of the patient would choose to continue vancomycin if already prescribed or if not, shift to vancomycin, Zyvox or Cubicin depending on their judgment and the epidemiology in the hospital. It is unlikely that a patient who is going to be admitted to the hospital would be started on dalbavancin or oritavancin.
Both of these drugs have certain reimbursement issues. Zyvox and Cubicin are priced at about $2,000 per course of therapy. If dalbavancin were priced equivalently each infusion would cost $1,000 and oritavancin would be priced at $2,000 for its only infusion. The cost per course of therapy is the same, but there might be sticker shock at the price of these drugs versus $225 per day for Zyvox and about $252 for a Cubicin infusion.
The hospital might also have another subtle reimbursement issue that could give it pause on these two drugs. In the case of a patient who is admitted to the hospital for say one day, the cost of treating with oritavancin is $2,000 per the previous example and $1,000 for dalbavancin versus $225 for Zyvox and $250 for Cubicin. In the case of Zyvox and Cubicin the remaining cost of therapy would be the responsibility of the patient's health insurance plan. The cost of drug therapy is probably only 10% to 20% of the total cost of a stay in a hospital for a MRSA infection, but a savings of $600 to $1,600 is not insignificant.
I see other issues that have to be addressed by these two drugs. I think that they have the potential to carve out meaningful market niches, but I don't see the dosing advantage as being profound. There will be questions on pharmacokinetics with these long acting drugs and how they might be administered in more severe infections in which the doctor might want to increase the dose. Also in long-term infections requiring 10 to 60 days of therapy there might be a difficulty in scheduling doses.
Teflaro is a different therapeutic consideration. It is quite effective in infections in patients who have or are suspected of having a mixed infection caused by both gram positive and gram negative infections such as occur in severe skin and soft tissue infections, pneumonia and bacteremia and particularly in intra-abdominal infections. Currently in these types of infections with MRSA involvement suspected, the patient is treated with vancomycin, Cubicin (except in pneumonia) and Zyvox in combination with a drug that protects against gram negative bacteria; aztreonam is often used.
Using one drug instead of two is an advantage. However, Teflaro loses this advantage if Pseudomonas aeruginosa is involved and it is frequently involved or suspected of being involved when therapy is started; Teflaro is not active against Pseudomonas aeruginosa. Physicians also avoid using broad spectrum antibiotics if possible due to the side effects inherent in wiping out large elements of bacteria in the bowel. I see Teflaro as having a meaningful niche in mixed infections with MRSA involvement, but its niche is somewhat different from vancomycin, Cubicin, Zyvox and tedizolid. Teflaro also is hampered by the requirement for twice a day IV infusions for 5 to 14 days.