Paratek Pharmaceuticals: The Realistic Case For Omadacycline
Summary
- Omadacycline has considerable medical advantage over linezolid.
- It will almost certainly be approved this year in ABSSSI and in CABP.
- The question is, how much pricing power will it have given the price of generic zyvox.
Paratek Pharmaceuticals (NASDAQ:PRTK) has a lot going for it in 2018 with two NDAs, phase 3 trial results and so on…and yet the stock is depressed and trading right near its 52-week and all time lows. Its next generation tetracycline antibiotic omadacycline has proven to be non-inferior in efficacy and superior in safety in ABSSSI to linezolid, the current standard of treatment in this indication. Omadacycline has both oral and IV formulations that are equivalent to one another, making it useful in both hospital and community settings. And yet the market does not seem to recognize the company’s strengths.
Why is that?
Despite a very high chance of approval after having met all relevant endpoints in its SPA-backed pivotal trial, it appears that the Market isn’t sure of omadacycline’s market potential. Linezolid, generic Zyvox from Pfizer, costs only about a hundred dollars (that’s a ballpark figure; there are many variations in IV and oral and strength; in India it costs about five bucks) and is very effective against ABSSSI despite everything we hear about antibacterial resistance. So Omadacycline’s pricing power is limited by Zyvox price.
Now, omadacycline has the following advantages over linezolid (source: summarized by an excellent comment in an earlier SA article, some of the data verified by the author, for example bullet 3 is on page 26 of Corporate Presentation linked below):
“1) Once daily oral vs twice daily oral
2) More effective – higher clinical success rates for both the mITT and CE-PTE populations (96.3% vs 93.5% clinical success rates in the P3 trial for the clinically evaluable population)
3) Broader – potentially more effective against some ABSSI pathogens than Zyvox, based on the P3 study
4) No known resistance mechanisms vs multiple for Zyvox
5) Fewer serious TEAEs: less serious nausea and diarrhea, limited impact on liver function”
However, these advantages are minor. None of these necessitate making omadacycline a first line treatment bypassing zyvox. Pricing is going to be key here given the relatively similar efficacy profile for both drugs. As for resistance mechanisms, this is an emerging problem, but the present incidence of the problem is very, very low. As research shows, in 2014 only “<1% of S. aureus and 2% of CoNS are linezolid resistant.” So a prescribing physician will have no incentive to prescribe omadacycline first if it is more expensive than linezolid. They will use linezolid, and since it is a highly effective medicine, it will probably treat the indication quite well in most cases. Only in those rare instances where linezolid resistance comes into effect will we see omadacycline being used, as a second line therapy. That drastically limits the market, and this is the bear thesis.
The bull thesis is twofold. One is the base case; here we assume omadacycline is priced very competitively to linezolid and not like how linezolid itself was priced when it got approved. If the pricing is competitive, the bull case is that there’s absolutely no reason for doctors who understand the comparative efficacy and safety profiles of omadacycline to not to prescribe it over linezolid. So in the US in 2017, zyvox itself had about $400mn in sales, and that number doesn’t include generic data. That number is more or less equal to Paratek’s current market cap - ergo, there’s considerable upside potential for the stock. This is the baseline bull case.
[quick note: On page 19 of their recent Corporate Presentation, Paratek puts the per tablet cost of omadacycline at $300. We base this on their statement that the $3000 treatment cost is based on…”10 day course of therapy and cost of branded Zyvox therapy as an analogue.” This seems a little optimistic. Those numbers are 2028 figures, and Zyvox cost will probably be much less than. Even today, generic zyvox is cheaper than that.]
The very optimistic bull case says that the various advantages of omadacycline over linezolid are more critical than we think. There are at least two known resistance mechanisms for zyvox. These are mutation of 23S rRNA and ribosomal proteins L3 and L4. Not just in efficacy through subserving these resistances, but also through its cleaner safety profile, omadacycline is a much better medicine than linezolid is at present, and deserves to be priced higher than generic linezolid. Bulls think that physicians will easily understand this, as will patients - and that the drug will be a blockbuster just like zyvox was in its heyday.
Our own view lies somewhere between the bear case and the baseline bull case. Although this article does not claim to cover the various aspects of omadacycline, we see solid potential here, but we are wary about the effect of generic linezolid on omadacycline sales. The company has enough cash to see it through approval, although some sort of dilutive fund raising between now and then is a distinct possibility given the cost marketing and sales. Overall a decent if somewhat cautious buy at these prices.
This article was written by
Avisol Capital Partners is made up of a team of medical experts, finance professionals and techies, all of whom invest their own money in the picks they share. They aim to help readers find the middle ground between value and growth investing, as they demystify the biopharma industry.
They lead the investing group Total Pharma Tracker where they offer a monthly updated catalyst database, an investability scoring system for quick reference ideas, and direct access in chat for dialogue and questions. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (36)
forget the sell-side. Have you seen their models? They simply project x% of market share and then extrapolate. But if share was not 1.2% but 0.9%, everything would change.
Fun fact: after Louise Chen had left Guggenheim for Cantor, her price targets increased. Hmm.
I have done a lot of modeling on PRTK myself and if you project uptake to be fast or slow makes a huge difference on capital needs, dilution etc. - even if peak sales remain the same in all your models. It's tricky.
Models can only help you identify sensitivities, but it's almost stupid to use them to justify price targets.
did not no about the linezolid and SSRI god only knows how many people are on that stuff
Add in the use in UTIs, especially given its efficacy in ESBL Gm negative infections, and a reasonably compelling case can be made for owning the stock.
FWIW, I appreciate the "bearish" angle the author has taken, I would much rather read something that challenges my assumptions for owning a stock, and reiterates the risks involved. I am long PRTK but haven't bet the farm on it.
Zyvox can be used for CAP, but wouldn't be likely initial monotherapy for a patient ill enough to be hospitalized-which is really the target for O.
But your point is taken, for proven Gm+ pneumonias, Zyvox would be totally appropriate.