Cempra: A Revealing SWOT Analysis

| About: Cempra, Inc. (CEMP)

Summary

With an established AdCom and PDUFA date, it was generally assumed Solithromycin would be approved. However, Cempra reported problems with manufacturing supplier that threatened approval by the PDUFA dates.

The November 2nd AdCcom briefing document raised concerns about safety, causing investors to flee as shares sank more than 60%.

The November 4th AdCom review indicated that, while the safety issues were not fully discussed, the efficacy of the drug was unquestioned, and the committee recommended approval.

The uncertainty calls for a new look at Cempra, one that comes from the more balanced lens of a strategic analysis.

The question is whether the new drug application submitted by Cempra (NASDAQ:CEMP) to the FDA for Solithromycin will be approved upon its PDUFA dates of December 27th (oral) and 28th (IV). With the FDA, who can say? But by employing a strategic form of analysis that smart organizations commonly use - SWOT analysis - we can offer an educated guess. For those unfamiliar with the term, SWOT is the acronym for Strengths, Weaknesses, Opportunities, and Threats.

A little background on SWOT

The concept was developed at the Stanford University in the 1960s as part of a research project that analyzed and systematically compared the data of the existing Fortune 500 corporations. From that effort emerged the elegantly simple method that has turned into a strategic exercise used by all of the world's leading companies to formulate strategies and make decisions. At its essence, SWOT is an analysis designed to evaluate the strategic position of a particular company, born of its capabilities, in relation to its competitive environment. Because of the methodological simplicity, it can be used to analyze any type of scenario across any competitive environment, and is commonly used by firms to determine the viability of any M&A under consideration.

In my time as an executive with a Fortune 50 company, I was involved with a number of teams that successfully employed SWOT analyses as a means to understand how best to create strategies that would allow us to achieve our goals or to enable certain strategic decisions. Without question, SWOT generates a range of ideas because it produces a great deal of information. Although, admittedly, not all of it is useful nor does the process enable either the prioritization of issues or specific solutions, the very purpose of the data production is to inform and enable people to make the requisite decisions.

What SWOT includes

At the risk of being obvious, we need to be clear what is meant by SWOT analysis. It is an analysis of an organization's Strengths, Weaknesses, Opportunities, and Threats, with S&W a look at the internal capabilities of the organization and O&T the external factors. So it is that Strengths are positive tangible and intangible internal characteristics that give the company an advantage over another and are the basis for strategies and decisions. Weaknesses are internal characteristics that can place a firm at a disadvantage to others by reducing its ability to attain goals and/or limiting its ability to grow. Opportunities are context dependent external factors that a firm can take advantage of through its capabilities by effectively planning and executing strategies and decisions that enable it to become more profitable and successful. Threats are uncontrollable external factors that arise and jeopardize the profitability or viability of a business. When tied to internal weaknesses, they can compound an organization's vulnerability.

To be clear, SWOT is a situational analysis that helps with understanding the challenges a firm may face and assesses its ability to meet them at a specific point in time. It does that by the creation of a framework for organizing the data gained from both the internal and external environments that offers a fresh and current perspective from which conclusions can be drawn about the organization's situation and its implications for creating strategy or making decisions that will enable it to succeed. As a result, SWOT will serve to provide a clearer understanding of factors for success and to anticipate potential future actions the company might undertake, based on organizational capabilities and competencies. When done well, it will help identify a range of issues not always apparent.

Limitations to SWOT

While an excellent form of analysis, there are limitations to SWOT. To begin with, there is subjectivity used in the analysis and, in no small part, it is based on the variability of the capabilities and interests of the individuals involved in the analysis. The fact is that some people are more skilled or knowledgeable than others. As such, sometimes things get missed or left out (intentionally or unintentionally). Something essential to understand is that, even with the most well meaning and knowledgeable people involved, SWOT cannot exhaustively capture all elements within the internal and external environments; particularly when one considers the velocity of change within competitive markets. Moreover, it is context dependent, which means SWOT is limited to a point-in-time perspective. So a SWOT analysis done six months ago may not reflect the same conditions if done today. And, even when considering that all four elements should be viewed on balance, the reality is that those conducting the analysis or using it for decisions may choose to weigh the factors differently. As a consequence, Strengths may be overestimated; Weaknesses may be discounted; Opportunities not understood; Threats may be unimaginable and/or one area may be over-emphasized over another.

What my SWOT analysis of Cempra looks like

Again, recognizing that it is not possible to capture all elements, here is what I can offer.

Strengths - Based on a review of the Cempra website, financial reports, news stories, including a December 5th article in The Street, as well as its webcast at Jefferies 2016 London Healthcare Conference, November 16-17, 2016, we can see CEMP possesses key capabilities that can promulgate business success:

• Management has strong industry experience and knowledge.

• Possesses valuable intellectual property, patents.

• Strong financial position - $248 million in cash or equivalents as of September 30, 2016, which is sufficient for development of Soli and Taksta and support a commercial launch through 2017. Additionally, BARDA revenue consistent per quarter while YOY Q net loss is decreasing per share

• Solithromycin - A highly differentiated product, with proven efficacy and stronger than Azithromycin, Ceftriaxone, Levofloxacin or Moxifloxacin, with fewer side effects than Azithromycin, to address Community Acquired Bacterial Pneumonia (CABP); using oral and IV routes, has multiple therapeutic targets (urethritis, gonorrhea, anti-inflammatory - NASH, COPD) that offer the potential for future submissions for separate FDA approval. It has patent life to 2032.

• Licensee relationship with Toyama. Toyama Chemical Co., Ltd., has initiated a Phase 3 study in Japan evaluating Solithromycin compared to Levofloxacin in patients with community-acquired bacterial pneumonia and other respiratory infections. Toyama owns exclusive development and commercialization rights to Solithromycin in Japan. Cempra has received $40 million in upfront and milestone payments to date from Toyama and can earn an additional $30 million in milestones in addition to tiered royalties if Solithromycin is approved for sale there. Soli's success would mean more than might meet the initial analyst eye, as Toyama has developed a relationship with China's major pharmaceutical company, Zhejiang Hisun Pharmaceutical and created a licensing agreement with China Resources Pharmaceutical Group, which has a diverse retail network.

• Taksta/Fusidic Acid - Antibiotic for acute bacterial skin and structure infections (ABSSSI). Completed enrollment, ongoing P-3; exploring bone & joint infections; potential additional NDA for second ABSSSI.

• Backup API supplier: Uquifa, Mexico - FDA audited & certified manufacturing facility.

• Established relationships with experts to offer guidance on safety & efficacy.

Weaknesses - Were identified from a number of sources, including an analysis of its financial reports, its webcast and slide presentation at Jefferies 2016 London Healthcare Conference last month, from which we can see there are a significant number of weaknesses that place Cempra at a distinct disadvantage. These are both the result of poor internal choices and the nature of the safety issues with antibiotics, as noted by Merck (NYSE:MRK) on Moxifloxacin and Pfizer's (NYSE:PFE) labeling for Zithromax. Finally, a comparison of companies in early-stage commercialization was used to identify and understand the weakness inherent in Cempra's nascent process, which includes:

• Strategic decision making by management that suggests issues with manufacturing might have been preempted.

• High R&D costs, though this will be reduced with an approval of Solithromycin.

• A nascent commercialization structure: While it has a chief commercial officer, it does not have the level of structural management leadership for sales & marketing seen in companies of similar size and, while indicating it was developing a sales/marketing group, it appears the management leadership is limited and the function would have no long-standing relationships representing Cempra to consumers.

• Antibiotic side effects, including hepatotoxicity; though these are not uncommon, the issue of perceived concern remains. In P-3 in CABP, Grade 3 ALT elevation was 4.6% in Soli arm vs. 2.1% in Moxifloxacin. Grade 4 ALT elevation was 0.5% vs. 1.2% in Moxifloxacin. It is important to note that no patient in the study developed treatment-emergent elevation of ALT or bilirubin. Observed ALT elevation was reversible and asymptomatic. Azithromycin, the blockbuster antibiotic, has this mild liver enzyme elevation effect. Similar to Azithromycin, Solithromycin is also likely to be used for a short period for the CABP treatment.

• Weak brand image - Cempra is a small, little known company with no brand reputation known to prescribers or patients.

• Pipeline & product diversification is limited while Solithromycin has multiple focus indications and Taksta two, there is little beyond preclinical candidates.

• Variability of revenue from Toyama, based on milestones.

• Manufacturing - Perception there are API production limitations.

• Planning - Concerns of API manufacturing noted in August 2016 might have been avoided. Also, concerns due to perception of toxicity raised by AdCom did not seem to be fully answered.

• G&A expenses of $50 million per quarter are stable YOY, but they do not take into account the impact of the newly established commercialization capabilities (200-300 people) that will add to future P&L expenses.

Opportunities - From a number of sources, including the Cempra website, its webcast and slide presentation at Jefferies 2016 London Healthcare Conference, as well as 2016 Grandview Research, 2014 CenterWatchNews, and 2010 Global Industry Analyst report. These sources make it clear that Cempra has a number of opportunities to develop its business through its capabilities; however, it will require effective planning and strategies for execution. The most obvious of the opportunities is the first listed:

• PDUFA date near term, within days.

• Further collaborative development on commercialization.

• Global market size and competitive opportunity - Currently about $40 billion, with the year 2024 market projection of $60 billion; no new antibiotics in years.

• Annually 5-10 million cases of CABP with 1.1 million hospitalized (with incumbent costs & fatalities).

• More deaths from pneumococcal infections in US than breast or prostate cancer; simple infections are becoming more deadly (according to the CDC).

• Current macrolides are becoming increasingly ineffective, as resistance is increasing; with resistance becoming striking in Asia (+70%) and USA (+49%), making clear the need for new antibiotics.

• Approximately 1.2 million drug resistant infections in US annually; 19,000 hospitalizations; 7,000 deaths - old and very young most afflicted.

• CABP leading cause of pediatric mortality globally.

• CABP leading cause of hospitalization globally.

• CABP leading cause of death globally.

• Demographic shifts - Aging of global population has led to increasing susceptibility to CABP.

• Increasing surgical procedures globally, with hospitalization and increased risk exposure for infections.

• Use in treatment of CAPB limited to 5-7 days, minimizing liver risk.

• Treatment failure for antibiotics is regionally dependent. In US, states in Southeast continued to consume more than twice the amount of antibiotics per person than did those in the Pacific Northwest and New England.

• Education of all healthcare workers, laboratory staff, veterinarians, and the public on appropriate antibiotic use and antibiotic resistance.

• Favorable perception of Solithromycin by clinicians.

• Clinical reviews by large national healthcare plans to expand market opportunity.

• Pricing & reimbursement discussions with payers (after post-approval).

• Competitive barriers to market entry are favorable.

Threats - There are a number of uncontrollable external factors that may jeopardize the ability of Cempra to take advantage of the opportunities and, in fact, threaten the very viability of the company. These were gleaned from many of the same sources, including Cempra's October 27th Third-Quarter Conference Call, all of which served to identify the various strengths, weaknesses and opportunities previously discussed. So it is the threats are perceived to be as follows:

• Development of resistance to antibiotics is more than 10-fold since 1990s.

• Companies with existing product market leadership desire to maintain share will seek to develop or acquire their own antibiotics, increasing competition.

• Acquisition of small developer at clinical state by big pharma with antibiotic therapeutic line or desire to enter the product market would seek to apply developmental and FDA approval capabilities to enter the product market quickly before Cempra is able to ramp up full commercialization.

• FDA AdCom decision on safety question of potential toxicity for Solithromycin leads to need for additional costly trials. Questions remain about ALT levels that the company says are reversible. The AdCom appears unclear on that point.

• FDA AdCom "expert" made an argument for a larger database. However to accommodate such a demand would be a major economic impediment for the company.

• FDA leadership and decisional environment has become less accommodative. Under the new leadership of Commissioner Robert Califf (February 2016), approvals have been reduced by more than 40% from the average of the previous three years; with safety & manufacturing issues increasingly cited as reasons for CRLs. Further, FDA resource constraints may be a major factor contributing to CRLs being used to buy time for a more thorough review of submissions.

• FDA decision on Solithromycin could potentially be influenced by past safety issues with other antibiotics.

• FDA July 2016 boxed warning (FDA strongest) and limitations on use of oral and injectable fluoroquinolones may have a generalized, negative influence on approval of Solithromycin.

• FDA decision on manufacturing API quality at Wockhardt.

• Competition from unsanctioned providers (ex-US) exacerbates competitive pressures.

The verdict, short-term

In considering my analytical perspective, it is important to note I am neither a scientist nor a medical professional. However, as a former executive with a Fortune 50 firm and the holder of a doctorate degree in business, I can still offer a critical, business focused view as to how these elements interrelate and reflect on the prospects for the company and its Solithromycin NDA.

If we believe what we hear from Cempra, it is working hard to get all the decisional data to the FDA to allow for approval by the upcoming PDUFA dates. While this is possible, one must factor in certain realities, recognizing the FDA is under-resourced and appears to be using CRLs to buy time to engage in more thorough new drug application reviews. We can see this in the manner in which the FDA has handled some cases, where it asked for more information without, seemingly, to have looked at what was given to it. We even have one case I found where the FDA issued a second CRL that made it clear it has not reviewed the response to the first CRL. So it is that, given the manufacturing API question, I believe the FDA will issue a CRL for Solithromycin and, consistent with the FDA approach in CRLs of providing direction, Cempra will be offered guidelines and suggestions for how to fix the manufacturing issue and thereby enabling approval.

As to the inherent problem posed by the AdCom statement that safety questions have "not been adequately characterized" the FDA may use the CRL as an opportunity to ask for clarity. The safety related question may be addressed by a label, a post-approval trial or both, that is possible. But, what would remain is the manufacturing question. Still, in neither of these issues does it seem the point of efficacy should be lost. In fact, the very AdCom vote (however narrow) to approve makes this clear. If we look at the FDA approval rate based on positive AdCom voting, we would see that AdCom support for approval translates into a corresponding eighty-eight percent (88%) rate of FDA approval for the NDA. This suggests a bet for approval upon the current PDUFA dates is statistically sound. But, I think Soli and Cempra will be among the 12% and receive a CRL because we are dealing with the FDA and it is easier for them to kick the can down the road on anything but a slam dunk (unanimous or near unanimous AdCom vote on all questions) or in the face of intense public support, as noted in the Sarepta (NASDAQ:SRPT) NDA decision. But a CRL is not a rejection. It is merely the FDA playing for time to allow a more thorough review that will enable it to meet one of its stated goals, the approval of new drugs. For Cempra and its shareholders, that means the approval of Solithromycin. Just not in December 2016.

The verdict, longer-term (not that anyone was asking)

Having been part of a due diligence team for a company that made numerous acquisitions, I think the future suggests Cempra is not long for the world as a stand-alone business. How so? With what will be an approval of Solithromycin, in consideration of Taksta as a value added portfolio proposition, the forecasted 50% increase in global markets through 2024, the company's relatively small market cap, what should be a return to industry consolidation (M&A) once the New Year arrives and, of course, the new presidential administration that suggests the opportunity for the repatriation of funds earned overseas that will shore up the coffers of big pharma, we should see Cempra as a strong acquisition target in 2017. It does not mean that a formal offer would be made or that the Board and management would approve a deal (that small companies over-value themselves is proverb). However, with acquisition the growth strategy of choice for big pharma, it is likely that prospectively Cempra would offer greater economic value to a major pharma firm with the established capabilities to ensure a more robust global commercialization effort.

Disclosure: I am/we are long CEMPRA.

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.

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