I am reiterating my buy recommendation on Trius Therapeutics (NASDAQ: TSRX). This note is follow-up to a 35 page report called "Trius Therapeutics' Tedizolid has Blockbuster Potential for MRSA Infections" which was issued on May 30, 2012 when Trius closed at a price of $5.01. I laid out my thinking on why I thought tedizolid could reach $1 billion of sales in 2020 and why I thought that Trius could potentially sell at $60 per share in 2020. I would urge investors to refer to that report for a more comprehensive analysis, but in this note I want to briefly update and refresh investors on my thinking regarding the stock.
Since the report was issued, Trius has been in a trading range of $4.87 to $6.49 per share. I think that the stock can break out of this range on the upside following the potential release of data from a second Phase III early in 2013. This IV-oral switch study is intended to confirm the positive results of the earlier oral Phase III trial for acute bacterial skin and skin structure infections (ABSSSI). I would buy the stock before the release of that data. Success in this Phase III trial, which I am expecting, will give investors the confidence that tedizolid will be approved. It is important to note that investors often anticipate that companies will do a financing off of a successful trial result and this can cause the stock to trade down on the good news. However, Trius has its financial house in order with $84 million of cash on its current balance sheet so that concern for a possible equity offering should not be a drag on the stock price.
I think that after this event, Trius will also clarify which path to commercialization it will take. It has retained all product rights in the US, Canada and the European Union, giving the company great flexibility and control. It may choose to launch the product on its own or with a partner in the US, but because of daunting infrastructure needs, it will almost certainly choose to partner in Europe. Because of its financial strength, Trius does not have to bring on a partner until after the results are announced. The "go it alone" in the US is the strategy that I prefer and believe would lead to the greatest shareholder value in the long term. However, Trius also has the option to partner the product in the US as well as in international markets or to just sell the entire company.
Investors usually prefer the partnering or outright sale options as they take away a significant part of the launch risk and produce a quicker immediate return. I would expect a significant increase in price if an acquisition occurs. In December 2006, Forest Laboratories (FRX) paid $594 million (including $494 million upfront) to acquire Cerexa Inc. The company was just about to enter Phase III trials for ceftaroline, an intravenous cephalosporin antibiotic for use against MRSA and certain gram-negative bacteria. Ceftaroline operates in a somewhat different setting than tedizolid; I consider tedizolid to have more commercial potential. A takeover value of $594 million for Trius translates into $15 per share.
The decision to go it alone in the US might result in a more modest move in the stock in the near term as investors would be concerned about launch risk; I would estimate a price move to $7+ with this option. However, I think this would be the best outcome for long-term shareholders as my analysis leads me to project a $60 target price in 2020. A worldwide partnering deal might produce an in between outcome on the stock price of perhaps $7 and $12. All of these estimates assume successful results in the upcoming Phase III trial.
Investing in emerging biotechnology is based on assessing the challenges faced by a company in developing its product, gaining regulatory approval and then commercializing the drug. This process can last five to ten years or even longer. As goals are met and investors' questions are answered, the investment scenario is de-risked and the value of the company increases. Considerable value can be built before the product even gets to market, but ultimately it is the degree of success in the marketplace as measured by sales that is most influential in determining the stock price. This report goes through my checklist for Trius.
What is the market being addressed?
Staphylococcus aureus is arguably one of the greatest bacterial threats to mankind. It is a rapidly growing and particularly virulent bacterium that is often the causative pathogen in infections involving the skin and skin structure tissues, the lungs (pneumonia) and blood stream (bacteremia). The death rates for pneumonia and bacteremia are alarming at about 20% and 25%, respectively.
Continued usage of antibiotics and bacterial evolution have given rise to methicillin resistant Staphylococcus aureus or MRSA strains. Tedizolid is targeted at MRSA, non-resistant or methicillin sensitive Staphylococcus aureus and other troublesome gram positive bacterial infections. These resistant bacteria or MRSA render many antibiotics ineffective. Previous antibiotics in the penicillin and cephalosporin classes of antibiotics that have long been used to treat Staph are increasingly ineffective or useless.
Resistant bacteria are a significant problem within hospitals. However, one of the major problems with MRSA is that it has moved into the non-hospital setting as well. It is estimated that as many as 50% of Staph infections in the non-hospital setting are now caused by MRSA. This is a new and dangerous health situation.
What is the opportunity for new products to treat MRSA?
In treating MRSA, the "go to drug" is vancomycin, which has been around since 1958. Vancomycin has been (and remains) a remarkably effective agent; however, in recent years as vancomycin non-susceptible MRSA strains have emerged, increased failure rates have driven doctors to increase the dose and when this happens, toxicities can occur. In these cases, there is a need for an alternative to vancomycin.
Antibiotics have varying properties so that no one antibiotic is the optimal choice for all patients. Differences relate to: (1) potency which is based on the concentration of drug necessary to inhibit bacterial growth, (2) bactericidal action (kills bacteria directly) or bacteriostatic (holds bacteria growth in check allowing the immune system to finish eradicating the pathogen), (3) dosing schedule and oral or intravenous administration, (4) duration of dosing, (5) spectrum of activity, (6) pharmacokinetics, (7) resistance profile and (8) safety and tolerability and metabolism and elimination. Depending on the interplay of these factors, patients may respond quite differently to different antibiotics.
Over the last decade, Pfizer's (PFE) Zyvox and Cubist's (CBST) Cubicin have emerged to complement vancomycin in the MRSA market. I estimate Zyvox's US sales will reach $640 million in 2012 and Cubicin will reach $830 million. There remains a strong need for new antibiotics to meet needs that vancomycin, Zyvox and Cubicin don't adequately address.
How big is the market addressed?
In terms of sales, the market for MRSA agents appears not to be that large in the US at only $1.7 billion, but this is deceiving. Vancomycin accounts for 74% of total days of therapy in the market, but it is a generic drug and is priced at only $8 per patient day of use. If it were priced at $250 per day, comparable to Zyvox and Cubicin, it would be a $5 billion product and the addressable market for all MRSA antibiotics would be $7 billion.
A new entrant in this huge MRSA market can achieve very significant sales with just modest penetration in the market; particularly given vancomycin's decreasing effectiveness. For example, I estimate that Cubicin will reach $830 million of US sales in 2012, but will account for only 11% of the market as measured by patient days of therapy. My projection for tedizolid is that in 2020, it will carry a price of $280 per day, have a 6% share of the market as measured in patient days of therapy and achieve US sales of $625 million.
How effective is tedizolid as judged by clinical trials?
There are three major classes of antibiotics used to treat MRSA with each having one dominant product: the glycopeptide class has vancomycin; the lipopeptides, Cubicin; and the oxazolidinones, Zyvox. Trius' tedizolid is on track to be the second antibiotic of the oxazolidinone class of antibiotics and has meaningful differentiating factors from Zyvox. All of these drugs are effective products, and it is usually the case that clinical trials are non-inferiority studies that show a new antibiotic to be as effective as a proven existing one, not superior.
Tedizolid has been effectively de-risked in its first Phase III trial that showed it was non-inferior to Zyvox in treating skin and soft tissue infections. This first Phase III trial (the "112" trial) reported topline results in 667 patients. The primary endpoint was cessation of spread of the infected lesion and absence of fever at 48-72 hours. Tedizolid met this endpoint in 79.5% of patients as compared to 79.4% for Zyvox showing that it is an effective drug. Because of a slight imbalance in missing temperature readings between the two arms of the study, the difference in relative efficacy between the tedizolid and Zyvox arms is enhanced when the fever component of the endpoint is subtracted (Tedizolid: 87.5%; Zyvox: 85.4%).
The impact of missing temperature readings and other issues related to the relevancy of fever as a component of the primary efficacy outcome has prompted the FNIH (Foundation for the National Institutes of Health) to recommend to the FDA that fever not be included as a component of the primary endpoint (FDA ABSSSI Docket ID: FDA-2010-D-0433) and it is expected that this recommendation will be adopted by the time that tedizolid and other investigational antibiotics are reviewed under the final ABSSSI guidelines.
With respect to safety and tolerability, patients in the tedizolid arm of the 112 study showed a statistically significant improvement in platelet reduction and gastrointestinal adverse events compared to the Zyvox arm. The improvement in platelet reduction is a particularly important advantage in treating infections that require long-term treatment.
The second Phase III trial is now enrolling and topline data is expected in early 2013. Based on the positive results of the first Phase III trial there is a high probability for this second trial to be effective. This could set the stage for an NDA filing in second half of 2013 with possible approval in 2014.
How does tedizolid fit in the market?
An obvious question is why we need new antibiotics if they are equally effective as ones that are already available. One reason is that bacteria build resistance to antibiotics over time and become less susceptible; this can render the antibiotic ineffective or require higher doses that can lead to toxicity. Vancomycin has been the drug of choice for many years, but certain bacterial strains are becoming more resistant. This necessitates higher doses to control the infection, but this also increases the risk of toxicity to the kidney, requiring kidney monitoring, and a tradeoff between efficacy and safety. Another reason is that, because of ethical reasons, patients infected with known drug resistant pathogens cannot be enrolled in a Phase III trial so such a setting does not reflect how these drugs will be administered or how they will perform in an actual clinical setting.
No two antibiotics are the same and some work better in certain situations than others. Physicians need a much broader armamentarium than they now have with just three main drugs- vancomycin, Cubicin and Zyvox. Let me give an example of this. Cubicin is on track to be a $1 billion product in 2013. However, Cubicin is inactivated by surfactants in the lungs and can't be used to treat pneumonia; its biggest role is in skin and soft tissue infections and bacteremia. Zyvox was associated with increased mortality compared to vancomycin in a bacteremia trial and yet over 15% of its use is off-label to treat bacteremia simply because doctors have no other option. Tedizolid could be of use in these situations where Cubicin and Zyvox come up short.
The primary opportunity for tedizolid is likely to be taking share from Zyvox. Some of tedizolid's key advantages are that it is a more potent drug that is bactericidal as opposed to Zyvox which is bacteriostatic; offers once a day dosing versus twice a day for Zyvox; has a better dosing schedule of 6 days as opposed to 10-14 days for Zyvox and appears to be safer in patients requiring long-term treatment. A survey conducted on behalf of Trius indicated that physicians might switch as many as 40% of their patients from Zyvox over to tedizolid when it becomes available.
Hospitals may start with a generic antibiotic and then switch to a branded product. Results from the same survey suggested that physicians might move 15% to 20% of their use of vancomycin to tedizolid because of the concern about renal toxicity with vancomycin as a result of the higher doses needed to treat resistant strains. The renally impaired component of the market comprises about 25% of the total days of therapy.
A third opportunity is in the outpatient setting which is comprised of roughly 800,000 patients. Cubicin achieves about half of its sales in this market segment although vancomycin is the market leader based on patient days of therapy. Pfizer has not placed as much emphasis on this area. Infusionists would be interested in a branded product to compete against Cubicin.
The fourth area of opportunity is in long-term care. If a nursing home patient becomes infected and is sent to a hospital, the nursing home loses revenues while the patient remains in the hospital. If the patient can be treated effectively in the nursing home, there is a strong incentive for treating the patient in the nursing home. Vancomycin with its IV only formulation and need for dose adjustment does not lend itself to this environment. Cubicin can be used in this environment, but it requires infusion expertise. Zyvox and tedizolid both lend themselves to this environment. The patient can be treated in the nursing home or in the hospital initially and then sent home with the oral dose. The once a day dosing of tedizolid versus twice a day for Zyvox is a meaningful advantage in terms of compliance and reducing labor costs.
If found effective, will the FDA approve tedizolid, and how promptly will the FDA act?
Assuming success in the second Phase III trial, tedizolid is on track for an NDA filing in 2H, 2013 and potential approval in 2014. However, investors have found that successful clinical trials don't always mean quick approval. In response to the majority of newly submitted NDAs, the FDA has issued Complete Response Letters which are often due to sections of the NDA other than the clinical data such as chemistry, manufacturing and control. A CRL usually delays approval by a year or more.
I can't assure investors that tedizolid won't run into some issues like this at the FDA. However, the company has been very careful to work with the FDA to make sure that its studies are designed to have new endpoints that the FDA has been developing. Both of the Phase III trials were conducted in agreement with FDA under Special Protocol Assessments (SPAs). The trials are also large and as shown in the first Phase III trial, appear to be well executed. Finally, pressure from Congress and outside organizations to address the growing need for novel antibiotics, including the recently approved GAIN Act, has encouraged the FDA to approve novel antibiotics. I think that there is a good chance for approval in 2014, but there is always the chance for a modest delay.
Questions about the launch
I have essentially modeled a launch curve for tedizolid with the same shape shown by Cubicin. However, there is concern by some Wall Street analysts that tedizolid will be held in reserve and used only if vancomycin, Cubicin and Zyvox are ineffective. This is an academic argument that has intuitive appeal, but the experience in real life appears to be different. The hold in reserve argument applied to Zyvox and Cubicin, but both had successful launches and sustained growth beyond the launch. Infectious disease physicians seem to opt for the drug that they feel will be most effective. This is not surprising as they are often dealing with quickly spreading, life threatening infections.
Zyvox will be losing its patent exclusivity in May of 2015 and some investors worry that physicians will elect to use generic Zyvox first and then switch to tedizolid if that fails. This may be appropriate is some cases. However, Zyvox and Cubicin did very well despite the availability of generic vancomycin. I think that efficacy and safety are often more important factors than price in choosing an antibiotic.
Initially, tedizolid will only be approved for skin and soft tissue infections which account for about 30% of Staph infections in the hospital and will not have completed trials in pneumonia (30% of infections) nor bacteremia (25%) at the time of potential approval for ABSSSI in mid-2014. In the case of Cubicin, this was not an issue as the company indicated in a conference call conducted one year after its launch that 50% of sales were in off-label indications. I expect broad off-label use of tedizolid.
There are a number of companies competing in the MRSA market and a host of new products in development, but I see tedizolid as the most promising of these. I find three products to be of the most interest. Durata Therapeutics (DRTX) is developing dalbavancin and The Medicines Company (MDCO) 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 III 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.
The major appeal of dalbavancin and oritavancin is their dosing schedule. Dalbavancin is given as one dose on day one followed by a second on day eight while oritavancin is given as one dose on day one. The argument is that this will allow patients to avoid being hospitalized for treatment or be discharged sooner. I think that this will be of some appeal in milder infections, but in more severe cases there are issues with titration and reimbursement that create problems. I think that tedizolid is a more versatile drug that can also compete on the dosing issues with its easy step down from injection to oral dosing. Also, as a member of the oxazolidinones class of antibiotics, it is differentiated from glycopeptides, dalbavancin and oritavancin.
Competition from dalbavancin and oritavancin could be an issue for Trius as proponents sometimes over-emphasize aspects of these drugs. This could periodically create issues that affect tedizolid, but I don't see them as impairing the growth of tedizolid. I see dalbavancin, oritavancin and ceftaroline as carving out smaller niches in the MRSA market than tedizolid, but being successful drugs. There is also an enormous amount of development going on in the field of MRSA and a promising new drug will almost certainly come along that could create concerns.
What other products are in the pipeline?
Trius has focused almost all of its resources on tedizolid, but it beginning to move on its second product. It began IND-enabling studies for Gyrase-B in December 2011. This drug candidate has potent activity against gram negative bacteria including E. coli, Klebsiella, Acinetobacter and Pseudomonas aeruginosa. Phase I trials are planned for 2013. Clinical development through Phase I is being funded by a $28 million NIAID contract. Trius expects to start.
What is the patent life of tedizolid?
One of the strongest investment attributes of tedizolid is that it currently has patent protection in the United States on the composition of matter patent through February 2028. Additional patent term extensions as well as pending separate composition of matter applications could extend protection to 2030. All patents on all products are routinely challenged by generic companies within a few years of launch. However, composition of matter patents are very hard for generic companies to successfully challenge. Also, a provision of the GAIN Act provides for an additional five years of data exclusivity that, in addition to the potential five years of Hatch Waxman data exclusivity, could provide for tedizolid market exclusivity through 2024. This would represent an IP safety net in the event that Trius patents are challenged and invalidated.
What is coming up?
There have been no dramatic new developments. The company has firmed up the timelines on its Phase III trials for tedizolid in pneumonia and expects to initiate the study in 1H 2013. The company has not provided guidance on when a study in bacteremia will start, but I am estimating that it will be in 2014. The ICAAC conference will be held on September 9 to 12 in San Francisco. There could be some interesting data coming out of that conference.