How Cellceutix Acquired A Next Generation Antibiotic For Pennies On The Dollar

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Immunology. Small molecules. Regenerative medicines. Antibiotics. There are many different pathways to fight deadly diseases, but perhaps none is more essential to our basic existence than the need to develop more antibiotic therapies. Why? Because today's current antibiotics are some of the most frequently used medications today, but they're losing their effectiveness, leading to more deaths than ever before. In what Forbes called an antibiotic "bubble" in May, it was noted that more than seven million pounds of antibiotics are consumed annually in the United States, but nearly 100,000 people still die from infections that are contracted in hospitals alone. Methicillin resistant Staphylococcus aureus, or MRSA, kills more Americans each year than HIV/AIDS, Parkinson's disease, emphysema and homicide combined. On that point, there are not many promising drug candidates in development, putting a premium on those compounds and aligning companies controlling them in a strong position for growth.

In July, Cubist (CBST) a leading antibiotic company solidified its commitment to its antibiotic franchise when it agreed to pay up to $818 million to acquire Trius Therapeutics (TSRX) and as much as $801 million for Optimer Pharmaceuticals (NASDAQ:OPTR) to bolster its pipeline of antibiotics. To help fund the acquisitions, Cubist recently priced $700 million in convertible senior notes, which could grow to around $800 million if all options are exercised.

One of the drugs that Cubist wanted was Optimer's Dificid (fidaxomicin), which was approved by the FDA in May 2011 as the first new antibiotic in the more than 25 years, for treatment of clostridium difficile-associated diarrhea (CDAD) in adults. In 2012 Optimer reported Dificid sales of $62.4 million, but in the second quarter of 2013, sales increased to $19.0 million, compared to $15.2 million in the year prior quarter. The market is large for Dificid, with more than 700,000 cases each year and a 25% recurrence rate, although it is notable that there is skepticism about sales growth because of competition with generic vancomycin, a drug that costs 1/20th the price of Dificid and currently controls the vast majority of U.S. sales.

In snagging Trius, Cubist got tedizolid phosphate, a late-stage antibiotic candidate, and several pre-clinical antibiotic candidates. Tedizolid phosphate is an intravenous- and orally-administered oxazolidinone for the treatment of specific gram-positive infections, including MRSA. The drug met its primary endpoints in two Phase III clinical trials in patients with acute bacterial skin and skin structure infections (ABSSSI), with a New Drug Application expected to be filed with the FDA for the indication before the end of the year.

Another emerging antibiotic company that has been gaining a lot of attention is Tetraphase (NASDAQ:TTPH). Their shares have gained about 50 percent since hitting $7.02 in the waning days of June as a late-stage trial was near dosing commencement and after the company became the target of speculation as a buy-out candidate after the Cubist acquisitions gave rise to some small antibiotic-focused companies. Tetraphase's flagship compound is eravacycline, a broad-spectrum intravenous and oral antibiotic for use as first-line empiric monotherapy treating multi-drug resistant infections. The company has completed a Phase IIa clinical trial of eravacycline with intravenous administration in patients with complicated intra-abdominal infections (cIAI). Tetraphase began dosing patients on June 3 in a Phase III trial of eravacycline in patients with cIAI. The multi-center trial is designed to enroll 536 patients at approximately 100 centers worldwide. The primary endpoint is clinical response at the test-of-cure (TOC) visit in the microbiological intent-to-treat (micro-ITT) patient population in the two treatment arms. A second clinical trial is planned for eravacycline in patients with complicated urinary tract infections (cUTI).

Tetraphase like other antibiotic companies are developing eravacycline under a Qualified Infectious Disease Product (QIDP) designation from the FDA. Apropos, drugs in the Cubist pipeline have received the designation as well. The QIDP designation makes drug candidates eligible for certain incentives in the development of new antibiotics provided under the Generating Antibiotic Incentives Now Act (GAIN Act) that was passed late in 2012. Incentives include priority review, eligibility for fast-track status and eligibility for an additional five-year extension of Hatch-Waxman exclusivity.

Cellceutix (CTIX.OB), which has been making headlines with their diverse pipeline of unique drugs catapulted into the Antibiotics arena with their acquisition of PolyMedix Inc. Cellceutix was already growing in valuation because of its large pipeline, headlined by its p53-activating cancer drug candidate Kevetrin and anti-psoriasis drug Prurisol. One of the assets that Cellceutix acquired from Polymedix was their flagship drug Brilacidin, which is a defensin-mimetic antibiotic that completed a Phase IIa trial that showed the drug to be safe, effective and well tolerated in patients with acute bacterial skin and skin structure infections (ABSSSI) caused by Staphylococcus aureus. Brilacidin is the first compound in the new cidlin class of antibiotics, compounds that imitate how the body's immune system combats bacterial infections. In the clinical trial, Brilacidin hit its primary endpoints with high and low doses outperforming the control arm of Daptomycin, the drug marketed by Cubist as Cubicin.

PolyMedix had met with the FDA and was planning a Phase IIb trial of Brilacidin to evaluate safety and efficacy of three shorter dosing regimes for ABSSSI caused by either Staphylococcus aureus or Steptococcus pyogenese. However, the company hit a roadblock when it announced that it was discontinuing trials of its heparin-reversing drug delparantag over hypotension concerns (despite efficacy), sending shares downward, sparking a lawsuit and ultimately unraveling the company as it defaulted on a loan and filed for bankruptcy protection.

The bankruptcy is not reflective of the effectiveness of brilacidin, the seven other compounds in the pipeline or even the possibility of re-formulating delparantag. Let's not forget that Celgene (NASDAQ:CELG) re-engineered thalidomide (that caused birth defects) into an approved treatment for myeloma. Ultimately, it seems like the PolyMedix management simply threw in the towel and walked away. In March 2012, PolyMedix had a market capitalization of $227 million and analyst firm Cowen and Company tagged PolyMedix with an "outperform" rating. Where there is distress, there can also be opportunity, while Polymedix spent millions and millions of dollars advancing their pipeline Cellceutix scooped it up for a fraction, including all its drug pipeline and equipment and furnishing assets at its 25,000-square-foot headquarters and lab for only $2.1 million in cash and 1.4 million CTIX shares. Cellceutix assumes none of the old PolyMedix debt.

Cellceutix has always been frugal and effective with their cash, getting Kevetrin into clinical trials at Harvard's Dana-Farber Cancer Institute, the University of Bologna (trials expected to commence in early 2014) and other leading institutions like MD Anderson, while advancing Prurisol towards clinical trials on a very limited budget without diluting the life out of the stock. Given the history, it's presumable that the Cellceutix's scientific team thoroughly analyzed the clinical data of the PolyMedix pipeline and sees a potentially very lucrative opportunity.

Cellceutix recently mentioned that it is their intention to move to a higher exchange. This may be beneficial for Cellceutix as it may attract more institutional investors and provide greater brand exposure. Moving to a higher exchange has been very beneficial for Organovo Holdings Inc. (NASDAQ:ONVO), which has its own niche designing and creating functional, three-dimensional human tissues for medical research and therapeutic applications. After moving to a higher exchange on July 9, 2013, their stock has gone from $3.95 on July 8 with 147,000 in volume to around $5.00 with over 5,000,000 shares traded on July 9.

I'm not going to delve into acquisition possibilities for Cellceutix exclusively as a fair argument can be made for Tetraphase as well, nor discount that both companies carry risks associated with biotechs and small cap stocks. It is worth noting, though, that the FDA is doing its part to encourage the development of new antibiotics and big pharma loves the idea of extended exclusivity. With recent developments and several big drugmakers such as Pfizer's (NYSE:PFE) Zyvox losing patent protection in 2014 the next few years will be very interesting in the Antibiotic space.

Disclosure: I am long CTIX.OB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.