"Let me tell you a little story about immunization," late comedian George Carlin began in one of his famous comedy routines:
"When I was a little boy in New York City in the 1940s, we swam in the Hudson River. And it was filled with raw sewage, OK? We swam in raw sewage, you know, to cool off. And at that time, the big fear was polio…In my neighborhood, no one ever got polio. You know why? Because we swam in raw sewage. It strengthened our immune systems. The polio never had a prayer."
His routine gets a bit more vulgar than that, as is George Carlin, and he was not exactly a molecular biologist. His point, though, was correct. Don't go crazy about germs and hygiene because one's immune system needs practice. Unfortunately, it works the other way around. Germs get practice too. This is especially true regarding antibiotics, which have grown less and less effective since 1928 when penicillin first started being used commercially. And as bacteria have become stronger, it has become progressively harder for pharmaceutical companies to engineer new antibiotics that can compete.
The other problem is the FDA. In the last 4 years, only 2 new antibiotics have been approved. Browsing the news of FDA approvals, you might be fooled, but that's only because the FDA issues a new approval every time a company wants to use a previously approved antibiotic (or any medication) to treat a different problem. This makes the FDA look like it's granting more approvals than it actually is, and it also gives bureaucrats more forms to fill out while having the added benefit of forbidding sick people from taking medicine that has already been proven safe. (Excuse my wry tone.)
One of the most egregious examples of this is Johnson & Johnson's (JNJ) Levaquin, an antibiotic first approved by the FDA in 1998 for urinary tract infections that has since been approved 10 times for the treatment of 10 different diseases, each approval process costing JNJ enormous amounts of capital for the same drug. Most recently, Levaquin was approved for the treatment of, yes, pneumonic plague. I guess before the FDA decided that Levaquin was safe for plague treatment, these patients just had to deal with the black death some other way while the FDA figured that one out.
Point being, when companies have to reapprove their already approved medications every single time they have a new idea for how to use them, things go really slow and money is blown. Taking a step back, here are some examples of antibiotics approved for dermatological treatments since 2000 with annual sales numbers since last year:
1) Tygacil - marketed by Pfizer (PFE) for the treatment of acute bacterial skin and skin structure infections (ABSSSI) caused by methicillin resistant staph, sold $315MM.
2) Teflaro - marketed by Forest Labs (FRX) for the treatment of ABSSSI and pneumonia caused by the same, sold $22.4MM.
3) Invanz - marketed by Merck (MRK) for acute infections, but not effective against methicillin resistant staph, sold $406MM.
4) Zyvox - marketed by Pfizer against methicillin resistant staph, sold $1.3B. This is the one I'd like to focus on. At $115 a pill (according to Wikipedia), that's just over 11.3 million pills. An average 14 day treatment schedule at one pill every 12 hours is 28 pills per patient so we can assume about 400,000 patients led to that $1.3B in revenue. More or less.
The reason (among many others) that Zyvox costs $115 a pill is that it costs Pfizer a lot of money to push it past the FDA, a cost which is always passed down to the insurance company, which is passed down to the patient in the form of skyrocketing premiums. By the way, cannabis, which is extremely cheap and doesn't have to be produced in a lab, has been shown to be very effective against methicillin resistant staph…but it's illegal, so oh well. More money for Pfizer.
Zyvox has been around since 2000 and bacterial resistance to it was reported even back then. At this point, the drug is still effective against 99.8% of cases, but as George Carlin taught us, the more practice it gets, the lower that number will go.
There's a new kid on the block now that is something of a next generation Zyvox. It's an antibiotic called tedizolid phosphate, produced by Trius Therapeutics (TSRX), backed by Bayer (BAYRY.PK). Trius is a small cap of $221MM, but well funded with an asset to liability ratio of 3.7 to 1. According to the company's research, tedizolid phosphate shows a resistance rate 16x slower than that for linezolid (the active ingredient in Zyvox), and has even shown effectiveness against bacterial strains that are linezolid resistant.
Usually, investments in companies such as Trius are pure speculation, which would be the case if we were talking about phase I or even phase II clinical trials. But Trius' tedizolid phosphate has already completed phase III trials successfully for oral treatment. All they have left to do is finish a second phase III trial for intravenous treatment which they expect to complete by early next year, sending in a new drug application to the FDA by the second half of 2013, and then just wait and pray for the FDA board's good graces.
If all goes to plan and Trius and Bayer can undercut Zyvox's whopping $115 a pill cost, then they will be in a very good position to challenge Pfizer for a big chunk of that $1.3B market. In the meantime, methicillin resistant staph will get lots of practice and the cycle will continue. Maybe by the time it gets to be a serious problem, marijuana will be legal. And pigs will fly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.