The problem with the antibiotics sector is simply one of margins. Antibiotics, like air or gasoline, is such an essential commodity that it is virtually impossible to add a high margin to its market price. That is why the last major antibiotic was developed in the early 1980s. Profit-focused large biotech are simply not interested in spending expensive R&D funds on developing antibiotics.
Carbapenem, a class of last resort antibiotics, was developed to fight a whole spectrum of disease-causing bacteria. The first of these carbapenems was Thienamycin. A number of other carbapenems were discovered and marketed. The story of our fight against infection seemed to have ended with a win by the early 1980s.
However, things are now changing. A new class of infectious bacteria has developed over the last 3 decades, and these are resistant to carbapenems. Called CREs or Carbapenem Resistant Enterobacteriaceae, these are responsible for hundreds of thousands of deaths worldwide, even in developed countries. Ironically, with the rise of this new drug resistant bacteria, antibiotics seems likely to become profitable again. Cubist's (CBST) acquisition by Merck (NYSE:MRK) yesterday highlights the renewed interest in antibiotics among major pharma.
This long introduction is necessary to understand my interest in Achaogen Inc. (NASDAQ:AKAO). The company was co-founded by Nathaniel David, one of the brightest scientists of the younger generation who also happens to have sound business sense, a rarity among scientists. It is run by Dr. Ken Hillian, another outstanding scientist who is also a faculty at UC Berkeley. Dr Hillan recently testified before the United States House of Representatives at a Hearing on 21st Century Cures: Examining Ways to Combat Antibiotic Resistance and Foster New Drug Development. This hearing, properly legislated upon, will make antibiotic research hip among major pharma by making certain important products more profitable to research and to develop. Achaogen's prominence in the sector is highlighted by the fact that its CEO was invited to testify here.
Achaogen is developing plazomicin, a next-generation aminoglycoside that can be a potential treatment option for multi drug resistant (MDR) Enterobacteriaceae, including CRE. In short, AKAO is sitting on the cusp of a new revolution in antibacterial medicine. Plazomicin successfully went through Phase II trials, and is now in Phase III. I have no doubt in my mind that, given the company's strong financial position, it will be able to push the candidate through the long and tedious trials and into the market. At present, AKAO is sitting on some $72 million in cash, with an annual burn rate that will still see it through another 2-3 years of R&D.
AKAO is an interesting speculative takeover play given the Cubist acquisition. Even without an acquisition, AKAO is very promising on the back of plazomicin and other discovery stage candidates. The principal risk associated with Achaogen is whether they can properly commercialize their product, and at what margins. However, given the newfound interest in the antibiotics sector, I believe that is a risk I will take.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.