Monday, January 23, 2012

Buying Opportunity In Trius Therapeutics

By Jason Napodano, CFA

On January 12, 2012, Sofinnova Venture Partners VII, L.P. (SVP) distributed 3,615,572 shares of Trius Therapeutics (TSRX / $5.63 / share) common stock without consideration to its partners pro rata pursuant to its partnership agreement and a Rule 10b5-1 Distribution Plan between Sofinnova Venture Partners VII, L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. In the simplest terms, SVP is a venture capital firm that has been with Trius since before they were public. SVP has a previously agreed upon distribution agreement (AKA - an exit plan) for the shares. As a early investor / venture capital firm, SVP executed its business model perfectly with Trius, i.e. get in early for cheap, and then get out after the IPO lock-up period at (significantly) higher prices. From their point of view, it's time to move on.

With an average daily volume of only 150k shares, working through 3.6 million will take some time. That amount of stock hitting the market caused a meaningful sell-off in the shares, down from $7 before the news to a low of $5.25 last week. Volume over the past week has totaled about 3.0 million shares. This leads us to believe the bulk of the SVP shares have been sold, and are now in the hands of new shareholders. SVP owned over 12% of the stock, so the shares being distributed into the active market is a good thing. It should help increase liquidity for new investors.

...Use Pull-Back As Entry Point...

We remain big fans of Trius. Investors that agree should use this pull-bank on "non-fundamentals" as an entry point. We remind investors that On December 19, 2011, Trius Therapeutics announced results from the company’s 1st phase 3 trial (Study-112) studying 200mg once-daily oral tedizolid (TZD) for 6 days versus 600mg twice-daily oral linezolid (Pfizer’s Zyvox) for 10 days in patients with acute bacterial skin and skin structure infections (ABSSSI). The trial was a non-inferiority design (90% power to detect a 10% non-inferiority margin between the two arms). The trial enrolled a total of 667 patients across sites in North America.
The primary endpoint was cessation of lesion spread and resolution of fever at 48-72 hours after initiation of study drug on an intent-to-treat (ITT) analysis. There were also key secondary endpoints, including sustained clinical response at end-of-treatment (EOT) in the ITT and clinically evaluable (CE) populations and an investigator’s assessment of clinical success in the ITT and CE populations.

The data above look very good. We did not expect tedizolid to achieve superiority to linezolid. To achieve superiority, tedizolid drug would have had to have posted a primary endpoint >7% versus linezolid. Truth be told, linezolid is a highly effective drug. Pfizer would not have sold $1.2 billion of Zyvox in 2010 if the drug didn’t work. We note the rates of methicillin-resistance Staphylococcus aureus (MRSA) infection and outcomes were similar between both arms.

We are surprised that the primary outcome was so close, but we note that the primary endpoint is a composite of both cessation of lesions and absence in fever. According to management, tedizolid offers up numerically better results on the cessation of lesions endpoint – approximately 87% vs. 85%. Both drugs lost efficacy points due to missing temperature data. It becomes difficult to prove in a clinical setting the rapid onset of efficacy when clinicians are not always following the exact FDA guidelines with respect for registration of a new drug application. We think these data are consistent with the clinical profile of the drug demonstrated in early trials.

That being said, what did show a positive trend in the favor for tedizolid was the tolerability. Treatment emergent adverse events were higher for linezolid. Gastrointestinal disorders, which include nausea, vomiting, and diarrhea, were statistically significant in favor of tedizolid. Tedizolid also had less of a detrimental effect on platelet count. Besides better tolerability, we noted the significant administrative and convenience advantages of tedizolid versus linezolid, including a shorter course of treatment (6 days vs. 10 days), once-daily dosing, and bioequivalence between the oral and IV dose.

We think the drug can gain market share from linezolid based on these advantages. With the above marketing advantages on safety and convenience and a superior efficacy claim, we think tedizolid could have best-in-class. Based on the top-line data from Study-112, we still think tedizolid will be a very nice drug for Trius. Paramount is that Trius gets the drug on the market before Zyvox loses patent exclusivity in mid-2015. 
…Second Phase 3 Ongoing… 

We remind investors that Trius is also testing tedizolid is second phase 3 trial, Study-113, also under a U.S. FDA SPA. Stuyd-113 is an IV-to-Oral step-down trial that will compare the efficacy and safety of 200mg QD tedizolid for 6 days to 600mg BID linezolid (Zyvox) for 10 days. All patients will be initiated on IV dosage form for a minimum of one day and be transitioned to the oral dose form at the discretion of the clinical investigator. We note that having both an IV and oral dosage formulation is a key differentiator to Cubist’s Cubicin (daptomycin). We expect data from this program in early 2013.

…Commercial Potential Is Very Attractive…

We see a significant commercial potential for tedizolid in the U.S. If the second phase 3 program goes as we expect, the drug has peak sales in the $300 million to $350 million range in North America. The current market is dominated by vancomycin and linezolid. The therapeutic window on both is closing. Key for Trius is to gain the cleanest and widest label possible. Expanding the indications into HAP/VAP, pneumonia, and bacteremia provide meaningful upside to our forecast.
This is clearly a large market. U.S. sales for Zyvox, Cubicin, Tygacil, and generic vancomycin eclipsed $1.5 billion in 2010. Vancomycin prescriptions grew by 6% CAGR between 2005 and 2010. Yet, despite the presence of generic vancomycin, branded sales of Zyvox, Cubicin, and Tygacil grew by 20% CAGR. The market is shifting to more effective drugs, and price is becoming less of a factor.

In fact, initial market research conducted by management on formulary acceptance shows that with a non-inferior profile to Zyvox, tedizolid will see broad (~90%) Tier-2 coverage at parity pricing per course of treatment (roughly $1,500) to Zyvox. This includes a range of indications, including skin, HAP/VAP, Bacteremia, and MRSA. 

The Trius R&D day in December 2011 offered perspective from two leading physicians with significant experience in treating patients with MRSA: Dr. Ralph Corey, Profession or Medicine and Infectious disease at Duke University and Dr. Jeff Kingsley, CEO of the Southeast Regional Research Group. Both doctors concluded that despite the availability of generic vancomycin and expensive branded products such as Zyvox, Cubicin, and Tygacil, a void remained in the market for a highly effective drug that met all the requirements for success. 
Based on data above from the first phase 3 trial and non-clinical history of tedizolid, we see the drug is poised to be “Best-in-Class” with a full label. We are expecting a new drug application (NDA) around the middle of 2013, with FDA approval in 2014. Additional applications for HAP/VAP, pneumonia, and bacteremia should follow in 2014 and beyond. The biggest near-term catalyst for the shares is a deal for the European market, perhaps in 2012. We remind investors that Bayer licensed the Asian rights to the drug in July 2011 for $25 million upfront and $69 million in potential milestones plus double-digit royalties on sales and 25% global development expense reimbursement. Bayer has already paid Trius an additional $7 million in milestones since the initial $25 million upfront last summer.

…Quick Financial Snap-Shot…

We forecast that Trius exited 2011 with roughly $60 million in cash and investments, enough to fund operations through the current phase 3 program. We note the company received a $5 million milestone payment from Bayer in January 2012 for completion of the -112 study. For 2012, we expect Trius will actively seek a European partner for tedizolid. We think this could bring in similar, if not more, cash to the deal done with Bayer in July 2011 for the Asian rights.

Conclusion

In January 2011 we initiated coverage of Trius Inc. with an Outperform rating. We are confident in the outcome of the company’s ongoing phase 3 program testing tedizolid vs. Pfizer’s Zyvox (linezolid) for the treatment of acute bacterial skin and skin structure infections (ABSSSI). The first trial, Study-112, offered positive top-line data in December 2011. This trial was run under a U.S. FDA special protocol assessment (SPA). The second trial, Study-113, also under a U.S. FDA SPA, continues on plan, with data expected early 2013. Management is seeking a third SPA for a lung study in 2012. A study in bacteremia could begin in 2013. All-in-all we are very confident in the development program for tedizolid. We believe it represents one of the lowest risk phase 3 assets in biotech.

We see meaningful market share gains for tedizolid over the three market leading products, Zyvox, Cubicin, and Tygacil. The current market cap of only ~$160 million undervalues the story in our view. We think the stock is worth $10 per share based on discounted cash flow (DCF) analysis. Our U.S. peak sales forecast is $350 million. Our global peak sales forecast is $750 million.

2 comments:

  1. Seems like it might be an uphill battle getting Tedizolid on hospital formulary with generic linezolid available unless I'm missing something?

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    Replies
    1. Good question. Management has conducted some preliminary research into this area. They have data from 10 HMO/PBMS and 10 Formulary Directors - so not a huge sample size, but a good initial representation.

      The research shows ~90% Tier-2 coverage at parity pricing to branded Zyvox. As long as Trius can get tedizolid on the market before linezolid goes generic (mid-2015), I think they are fine.

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