The Long Case for Targanta Therapeutics

Includes: INVA, MRK, TARG
by: Andrew Waight

This is the third part in a series of analysis of Targanta Therapeutics:
part I part II

IPO Date: 10/9/2007
Raised in IPO: $58million
Lead Underwriter: Credit Suisse
Burn Rate: $52.2million (nine months ended 08/30/07)
Cash: ~$49million

Targanta expects to file a NDA for oritivancin in the first quarter of 2008. Even still this is cutting it a bit close, as at the current burn rate I would expect them to run out of cash sometime in March. In addition, the press release stated that most of the increase in spending was related to R&D expenditures for their lead candidate. I feel that this burn rate is unacceptable, especially for a therapeutic supposedly to have met phase III primary endpoints 5 years ago. From the prospectus, Targanta has purportedly been rigoriously performing in vitro potency tests, but literature searches don’t reveal much in the way of the fruits of these labors. At any rate, it doesn’t seem the money is going to executive compensation.

Oritavancin History

Oritavancin was originally discovered in the mid 90s by Eli Lilly research laboratories. In 2001, Lilly licensed the glycopeptide antibiotic to Intermune who subsequently finished the phase III studies, but delayed filing the NDA in 2004 because of adverse side effects including injection site phlebitis. In 2005, Intermune divested itself of oritavancin, citing a business focus on pulmonary and hepatology therapies, by selling the worldwide ownership rights to Targanta.

Targanta has apparently negotiated an undisclosed, but signifigantly lower, royalty rate with Lilly. They have already paid out $1 million and may owe up to $35 million more in regulatory and sales milestones. As of April 15, Targanta had paid $4 million of the $9 million in cash and $17.5 million of the $25 million in convertible debt it owes to InterMune.

Targanta FDA Interactions
From the prospectus:

When we acquired the world-wide rights to oritavancin in 2005, we developed and implemented a comprehensive strategy to gain a better understanding of injection-site phlebitis. We concluded that the risk of phlebitis was no higher with oritavancin than with equally potent doses of vancomycin. We first presented the data from our effort to characterize the risk of phlebitis to the FDA at a meeting on July 20, 2006. At our FDA meeting on January 31, 2007, the FDA agreed to remove the clinical hold on oritavancin.

In addition, the two phase III trials have both been non-inferiority designs compared with vancomycin. Targanta has cited multiple communications in which the FDA has confirmed that this design would be acceptable for the desired cSSSI NDA indication, despite the fact that the required delta (cure rate difference) is now 10% and the 2003 trials were conducted using the previous accepted delta of 15%. Approval of the NDA however is strongly contingent upon information describing the benefits of oritavancin (over vancomycin).

Targanta To Buy or Not?
Theravance has been spotlighted significantly over Targanta mainly because of the upcoming February 27 FDA review concerning the telavancin NDA. In October, Theravance recieved a letter from the FDA requesting additional information prior to approval consideration. As such, investors aren’t particularily bullish on THRX and as of writing this article short interest stands around 8%.

Targanta appears to be timing its proceedings around telavancin, which makes sense in one regard as the FDA has been described as fickle with respect to antibiotic approvals, and management is probably waiting to see how telavancin gets treated by the regulatory bodies. On the other hand, its pretty clear that Targanta doesnt have the finances to perform many more clinical trials (or experiments of any kind for that matter) so its unclear which recourse they might take if the FDA comes down hard on glycopeptides.

In evaluating TARG, I think its safe to say that the market timing is very favorable. I have been interested speculative portfolio exposure to infectious disease biotech niche markets, and this fits that bill perfectly. From a scientific perspective, I think that oritavancin, and indeed telavancin are sound, not necessarily groundbreaking new methods of bactericidal activity but improvements on vancomycin without a doubt. That vancomycin retains 80% market share is a testament to the potential utility of antibiotics which are vancomycin 2.0. It is from the management perspective, where I draw some hesitation on Targanta. It is clear from the FDA correspondence that clincal data and supplementary science is going to make or break this NDA, and while I can see the astronomical burn rate what I cant find is the scientific results. Because of this opacity, we need to trust that the money spent in the last five years has gone to building a mountain of evidence to throw at the FDA. I would be suprised to find $100million had been spent elsewhere, nevertheless this remains the weak point in the investor thesis.

I am going to go ahead take a favorable stance on both Targanta and Theravance. This is based on the thesis outlined in both part I and part II. There is a frightening medical need for new antibiotic therapies, and the science of telavancin and oritavancin is very sound (see the chart in part II). I’m not sure what effect approval, or disapproval of telavancin will have on TARG, but if we assume it to be sympathetic, the play would be to wait until the end of next month to move on Targanta. For those in an extremely speculative mood, based on the differential science one could double-dip this market and playing both THRX and TARG immediately. Otherwise, for my father-in-law, or anyone else who would like a less risky exposure to stocks positioned to benefit from potential ’superbug’ outbreaks, I greatly favor the daptomycin (Cubicin made by CBST) play, proper timing withstanding.

Disclosure Statement: I have no position in any of the stocks mentioned above.