Why Buy Cempra? Cash, Europe, Japan, NASH, Gonorrhea, Taksta, Pediatric CABP, Trump

| About: Cempra, Inc. (CEMP)

Summary

Despite the likely re-iteration of the very negative FDA CRL provided in late December, solithromycin and Taksta still have significant value.

The company has stated multiple times that they aim to seriously conserve cash.

Often, the rest of the world does not have the FDA's "concerns" about new drugs.

As described in my article Cempra's Solithromycin And The Great FDA Echo Chamber, Cempra (NASDAQ: CEMP) has significant value outside of the indication of CABP for adults in the US. What is that value? Let's do a back-of-the-envelope calculation.

1) Cash - likely approximately $200-210m at present, with debt of only about 10m. Letting the sales team go (for the moment) will reduce cash burn significantly. At present, it has been about $30m a quarter. With only small trials running currently, and the 2nd Taksta trial likely in the planning stages, future cash burn will be between maybe $10-15m.

Cash should last another 13-21 quarters. With the business rule of having to finance 6 months (2 quarters) before cash runs out, the company can last between 2.75 and 5.25 years before running a follow-on offering.

Japan and Europe will likely start to generate revenue next year. Thus, a harmful follow-on offering is off the table.

2) Europe and Japan. The company has an application to the EMA (European Medicines Agency) and based on past presentations, they anticipate an initial opinion in November and thus approval next year. With CABP for adults out of the way, the company may shift resources towards answering CHMP questions (essentially all companies get these questions in the middle of a review) faster, and thus allowing for a faster turnaround for the EMA application.

I anticipate that the EMA will approve solithromycin for the treatment of adult CABP in Europe. As I show in my article, the FDA has acted irrationally and incompetently in the solithromycin debacle, and telithromycin is approved with fewer restrictions in Europe and worldwide. Examples abound: from PTCT in 2016 to Esbriet in 2010 - where the FDA went against the advisory committee's decision and once again killed people who did not wish to travel to Europe (where it was approved) to get the drug.

Similarly, we can say the same for Japan. In Japan, bacterial resistance to azithromycin is running at about 80%, and thus the older population is forced to use drugs that cause harmful side effects (like Qt prolongation). These side effects are especially harmful to older people. Japan will welcome solithromycin with open arms.

Japan is the second-largest antibiotic market in the world. Fujifilm, in its December 8 presentation on page 15, identifies solithromycin as a 68B yen ($603m) opportunity. Based on Cempra's agreement with Toyama in 2013, we can expect another $30m in milestone payments (up to approval and first sales), plus tiered royalty payments between 20% and 29% ("low-to-high first double decimal digit percentage of net sales"). At 25% of revenues (if I understand the slide in the Fujifilm presentation correctly), this means about $150m peak sales, maybe a few years after Toyama finishes its Phase 3 trial and gets approval, which may be early/mid-2018.

We don't know much about Europe, but resistance there is lower than in the US or Japan (about 25%), so it will be a smaller market. The company will likely find a partner for Britain/EU.

Back-of-the-envelope calculation: EU has a population 6 times bigger than that of Japan. If the antibiotic consumption is even 1/3rd the size of Japan, assuming solithromycin adoption is proportionate to antibiotic resistance, same pricing and a similar deal, we get $150m * 6 / 3 * 25/80, or $94m peak sales.

With a rough (conservative) estimate of valuation at 2x peak sales and a 15% discount for ~1 year of waiting for that initial sale, we get maybe a $415m valuation for Japan and Europe.

3) NASH. This one is a huge wild card. A total of $1.65B consideration was paid for Tobira, which failed its endpoint and had the same kind of Phase 3 trial design as Cempra's Phase 2. The first several patients already had good success in reducing their NAFLD scores - by 1.3. If their initial scores were 6 on average, that is a reduction of 21.7% in severity.

If the reductions were consistent, the predictive value of the drug passing a Phase 3 is high. There are hints of that in the data: so far, each of the first 6 patients had their AST levels reduced except one (whose AST was already normal). A successful Phase 2 of a total 15 patients (data should be coming soon) would begin to validate solithromycin for NASH.

As a bonus, the division that reviews the drug for the NASH indication would not be the anti-infectives division, and it will likely come under a new company-friendly, Trump-appointed commissioner. Thus, there is reduced regulatory risk for NASH versus other indications.

If we give a Phase 3 chance of success even at 25%, based on what Tobira was bought for, NASH is worth $412.5m.

4) Gonorrhea. Since this one has some FDA risk due to it being a single yet large 1000mg dose, we will discount by 20%. Notably, single-dose patients were not included in the safety database in the FDA advisory committee briefing document.

Peak sales can come fairly quickly for the gonorrhea indication, as adoption is quick once a regimen becomes recommended, per this CDC chart:

Per the CDC, 400K cases were reported in 2015. However, the CDC also estimates actual rates to be double this, at 800K. (The drug is also effective against chlamydia - 1.5m reported cases per year. Worth further study.) Modeling $150 a dose for 80% of the gonorrhea market, we get $96m peak. If we double this value to take into account Europe and the rest of the world, we get $384m at 2x peak revenues. Subtracting development and sales costs of another $35m and 15% COGS, we get a $291.40m value.

5) Taksta (fusidic acid). Per FDA guidelines, there is one more trial needed after the initial successful Phase 3 read-out only a few days ago. (A new commissioner may change this, since the drug [with one change; see below] has already been used for decades in the rest of the world.)

For a primer on Taksta, I would recommend the highly engaging "Efforts to Support the Development of Fusidic Acid in the United States."

Taksta is different in the US versus the rest of the world, in two ways. (1) First, there is no bacterial resistance to it, as fusidic acid has never been used in the US. (And the company plans to keep it that way by not selling fusidic acid-based cream, which it blames for a large part of that.) (2) It has a higher loading dose, which was hypothesized to boost efficacy, quickly kill bacteria and prevent a development of resistance in the US.

In 2013, Cubist Pharmaceuticals (NASDAQ:CBSTZ) paid about $800m for Trius Therapeutics, which developed a competitor to linezolid called tedizolid. Tinezolid had fewer GI effects and "4-to-16-fold more potent against staphylococci and enterococci compared to linezolid."

Likewise, Taksta can differentiate itself from linezolid in some other ways: (1) some bacteria are resistant to linezolid, but not Taksta. (2) Refractory bone and joint infections (currently in P2).

I will defer to Bhavneesh Sharma's article on the ABSSSI and joint infection revenue estimate - with one slight adjustment: with the latest Phase 3 success, I will apply an 80% probability of reaching the market, instead of 67%, to get $252m peak revenue. At a conservative 1.5x peak sales, and subtracting $50m for development and sales costs, with 15% COGS, we get a valuation of $271.3m.

6) Pediatric CABP. Per the last update, this one is enrolling fairly slowly, but fully paid for by the government. Given the adult CABP CRL, there is no feasible way to price this indication.

7) Trump. As I explained in my very long solithromycin article, if we get a commissioner who is like Joseph Gulfo, or actually is Joseph Gulfo, we could see the FDA reverse course on CABP.

So:

Japan + Europe: $415m.

NASH: $412.5m.

Gonorrhea: $291.40m.

Taksta: $271.30m.

Subtotal: $1,390.20m.

Subtract 15% management overhead (options, salaries): $1,181.67.

Cash: $205m.

Total: $1,386.75m.

With a basis of 54m shares, this amounts to ~$25.68 a share.

(Note: The author has slightly updated these figures at 9:30 a.m. 2/28/2017.)

Disclosure: I am/we are long CEMP.

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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