Inotek Looks To Sell Itself After Eye Drug Failure; No Value Left

Summary

• Company failed a phase 2 trial in patients with glaucoma which makes it a great short opportunity
• Prior monotherapy failure was not a good indication for the combination trial
• Company looking to sell itself if after recent failure
• Financials show an accumulated deficit of $249.5 million

Inotek Pharmaceuticals (ITEK) announced on Friday that it had failed a phase 2 trial with its drug trabodenoson. This was a huge blow for the company and now it has decided that it would be best to explore strategic options. Although, that is easier said than done. With these trial failures on hand it will prove to be quite difficult to obtain a buyer that is willing to acquire the company's assets.

Phase 2 Trail Failure

The phase 2 trial was a fixed dose combination -- FDC -- trial. It was a randomized, double-masked trial, to observe the benefit of treating the eyes with a combination treatment of trabodenoson and latanoprost for the treatment of glaucoma. The trial enrolled 201 glaucoma patients that had intraocular pressure -- IOP -- greater than and equal to 25 mmHg and less than or equal to 34 mmHg. Patients were first given a period of receiving placebo only, then were given the combination treatment to both eyes over an 8-week period. The primary endpoint of the trial measured IOP reduction from diurnal baseline for a two month treatment period. One thing to note was that the trial was divided into two four week periods. One four week period was for AM dosing, and the other for PM dosing. The trial over the entire period failed, but Inotek noted that the first 28 days was positive. Still, the primary endpoint failed at the end and that's all that matters. The first 28 days of AM dosing saw a statistical significance of the combo treatment compared to latanoprost alone. However, at day 56 with PM dosing there was no statistical significance observed. The culprit could have been the fact that latanoprost improved by 1.3 mmHg from day 28 to day 56.

Previous Failure

The phase 2 trial combination of trabodenoson and latanoprost failure is devastating but not all that shocking either. That is because Inotek had run a phase 3 trial with trabodenoson as a monotherapy with no success. The phase 3 trial, known as MATRIX-1, recruited up to 303 patients with glaucoma. The primary endpoint of the study was the mean intraocular pressure over a 3-month period compared to placebo. The monotherapy trabodenoson was also being compared to timilol as well, but not for statistical significance. That was a comparison added just for validity of Inotek's drug. The reported results showed that the highest dose did outperform placebo at only a few time points in the study. Which is why the trial failed. Patients that took the highest dose of trabodenoson achieved an eye pressure reduction of 4.25 mmHg compared to placebo with 2.38 mmHg. That was not statistically significant. To make matters worse, the timilol drug which was just there for a validation purpose, scored better than trabodenoson as well. Patients on timilol lowered their eye intraocular pressure by 5.29 mmHg.

Next Step

With the failure of both of these trials, the company is evaluating its next steps on the trabodenoson programs. Inotek does have a pre-clinical candidate using trabodenoson in patients with optic nueropathies. The problem is that such a compound is many years away from entering any type of a mid-stage study or near approval. In addition, considering that trabodenoson has already failed twice there is no guarantee that another study in a different indication can be successful. What Inotek has done is retained Perella Weinberg Partners as a financial adviser to assist in any possible strategic alternatives. What that means is that the company may choose to sell itself instead of continuing on with trabodenoson. The issue with that is if any company would buy Inotek after two trial failures. It's not like Inotek has another drug to fall back on. Trabodenoson is the only drug, and the last shot is if it is successful in other eye diseases. However, the drug has shown poor efficacy to date.

Financials

According to the most recent 10-Q SEC filing, Inotek has cash and cash equivalents of $114.7 million as of March 31, 2017. The company anticipates that it has enough cash to fund operations until 2019. A major problem is that it has an accumulated deficit of $249.5 million. The company has enough cash for now if it is to continue with its pipeline. It might have to run with that cash for awhile, because it will be hard to sell itself after failing two big trials with its trabodenoson product.

Risk

There is a risk for those thinking about shorting. That risk is that it might find a potential suitor. The big question is how much will such a suitor end up paying if it is acquired. Still, there is a risk to be short and that should be kept in mind before entering a short position. The stock closed at $1.72 in Friday's trade session Although, it tanked by 45% in after hours to $0.95 cents per share. With these types of moves a biotech typically falls for a few days after a drop due to results. That is where there is a trade potential to explore to the downside. Of course, eventually there is risk for a reversal upon a possible merger or buyout. On Monday July 10 it will likely close lower which creates a nice short opportunity.

Conclusion

Inotek has suffered two trial failures that make trabodenoson a total failure in glaucoma. The only other program left is in the drug treating optic neuropathies. The financials give it some run way, but the accumulated deficit it still an overhang for the company.

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