By Jason Napodano, CFA
This article was originally posted on PropThink. To read it there, visit:
http://propthink.com/big-catalysts-approaching-for-trius-therapeutics/3461
I believe fundamentals at Trius Therapeutics (NASDAQ:TSRX) remain solid. I see the development of tedizolid, currently in its second phase 3 trial, as low risk. Data from the first phase 3 trial met all primary and secondary endpoints. Management has present impressive safety and efficacy data from this trial at recent medical meetings, including the IDWeek2012 meeting in October and ICAAC in September. I highlight some of this data below.
The company has secured a strong partner for the Asia/Pacific and emerging markets in Bayer Pharma AG. I suspect that Bayer is keen on licensing the European rights to tedizolid as well. Data from the second phase III trial, dubbed TR701-113, is roughly two months away. I think the company can secure a deal for the EU rights to tedizolid during the first half of 2013. Between the impeding data and the subsequent deal for the EU rights, Trius has two major catalysts on the horizon. The shares are meaningfully undervalued in our view, presenting investors with a low-risk / high potential return opportunity.
First Phase III In the Bag
On December 19, 2011, Trius announced (press release) results from the company’s 1st phase 3 trial (TR701-112) studying 200 mg once-daily oral tedizolid for 6 days versus 600 mg twice-daily oral linezolid for 10 days in patients with acute bacterial skin and skin structure infections (ABSSSI). Linezolid is sold as Zyvox by Pfizer (NYSE:PFE).
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 (design below).
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.
Full data from this trial was presented in poster form at the 52nd annual Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC) in September 2012. The primary endpoint was response rate, defined as cessation of spread and absence of fever at 48-72 hours. The main cause of clinical failure was missing or out of window temperature measurements. Based on these results, tedizolid was non-inferior to linezolid for the primary efficacy analysis of early clinical response.
A number of secondary analyses of the data were performed. These include looking at the responder analysis solely based on a greater than 20% decrease in lesion area at 48-72 hours, as well as investigator assessments of clinical success at the post-therapy evaluation (PTE) based on the ITT and CE populations.
There is a greater than 80% concordance between the primary outcome at 48-72 hours and the investigator assessments of clinical response at PTE. Considering the majority of clinical failure was due to missing or incomplete temperature data, Trius performed a secondary analysis of the data excluding assessment of fever. According to management, tedizolid offers up numerically better results on the cessation of lesions endpoint – approximately 87.5% vs. 85.4%. 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. Missing temperature data or failures at 48-72 hours on temperature were carried forward to the end-of-treatment. This protocol has been rectified for the second phase 3 trial (TR701-113) currently enrolling patients. Additionally, management expects this will be the finalized endpoint for approval based on FNIH recommendations to the FDA (ABSSSI Docket ID:FDA-2010D-0433).
The data above look good. Management 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 $1.3 billion of Zyvox in 2011 if the drug did not work. Investors should know, the rates of methicillin-resistance Staphylococcus aureus (MRSA) infection, at around 42-43%, and outcomes were similar between tedizolid and linezolid.
These data are consistent with the clinical profile of the drug demonstrated in early trials. That being said, the safety and tolerability profile of tedizolid surprised to the upside.
Any drug related treatment emergent adverse events (TEAE) were higher for the linezolid group (31.0%) vs. tedizolid (24.2%). Separation between the two drugs was primary the result of improved GI tolerability for tedizolid. Gastrointestinal disorders, which include nausea, vomiting, and diarrhea, were statistically significant in favor of tedizolid (16.3%) vs. linezolid (24.4%).
Tedizolid also had less of a detrimental effect on platelet count (-9.2% for tedizolid vs. -14.9% for linezolid), including percent consider abnormally low (
The data suggest that tedizolid also had less of a detrimental effect liver function. ALT above the normal limit was 27.7% for tedizolid at EOT versus 33.0% for linezolid.
One final assessment management made on the -112 data was based on the current European regulatory guidelines. Currently, the EMA assesses utility based on the clinical cure at days 17-21. Tedizolid was numerically superior to linezolid based on the EMA endpoint, 98% vs. 91%. I think this data plays nicely into the company’s strategy to partner the drug in Europe in 2013.
Besides better tolerability, investors should consider 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.
I think tedizolid can gain market share from linezolid based on these advantages alone. Couple in the non-inferiority generated by the -112 study, which I expect to be confirmed in -113, and tedizolid is looking more and more like a best-in-class agent. Paramount is that Trius gets the drug on the market before Zyvox loses patent exclusivity in mid-2015.
…Second Phase 3 Ongoing…
Trius is currently testing tedizolid in a second phase 3 trial, TR701-113, also under a U.S. FDA SPA. TR701-113 is an IV-to-Oral step-down trial that will compare the efficacy and safety of 200mg QD tedizolid for 6 days to 600 mg 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. Clearly, that having both an IV and oral dosage formulation is key differentiation to Cubist Pharmaceuticals (NASDAQ:CBST) Cubicin (daptomycin). Data from this program is expected in early 2013.
Trius is also planning a third phase 3 trial in HAP/VAP (lung infection) to start sometime during the first half of 2013, and a fourth phase 3 trial in bacteremia (systemic infections) in 2014.
Commercial Potential Is Very Attractive
I forecast 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 $350 million to $400 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 my forecast.
This is clearly a large market. U.S. sales for Zyvox, Cubicin, Tygacil, and generic vancomycin eclipsed $1.7 billion in 2011. Vancomycin prescriptions grew by 6% CAGR between 2005 and 2010. Yet, despite the presence of generic vancomycin, branded sales of Zyvox, Cubicin, and Pfizer's Tygacil grew by 20% CAGR. The market is shifting to more effective drugs, and price is becoming less of a factor. Prescribing habits are changing thanks to growing MRSA resistance to vancomycin. Use of Cubicin and Zyvox is up 40-50% over the past twelve months versus a near 50% decrease in use for generic vancomycin.
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 (~$1,500) to Zyvox. This includes a range of indications, including skin, HAP/VAP, Bacteremia, and MRSA. I estimate 1% market share of the U.S. hospital market is $50 million in sales, and 1% of the outpatient market is $25 million in sales.
Trius held an R&D day in early December 2011 that 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.
It is clear to me that this is a large and growing market, and tedizolid has enough differentiation and advantages to gain meaningful market share.
Based on current timelines, I expect a new drug application (NDA) around the middle of 2013 in ABSSSI, 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, which I am hoping can be completed sometime during the first half of 2013. I think Bayer Pharma AG is the likely partner, but with a solid cash position I believe Trius feels little pressure to get a deal done until all roads have been explored.
Trius currently owns unencumbered rights to develop, commercialize or separately partner in the U.S., Canada, and the EU. The company has reported entering into confidential disclosure agreements (CDAs) with several interested parties. That being said, Bayer would be an outstanding commercial partner for Trius in any market. Bayer has expertise in anti-infectants including Cipro and Avalox, and Bayer has the financial strength and experience to launch Tedizolid in Asia, including China, and Europe, as well as potential emerging markets across the Africa, Latin America, and the Middle East. Look for Bayer to commence clinical work in China / Japan shortly. And note, Bayer is currently paying for 25% of the global development costs on tedizolid.
Valuation
As I noted above, the therapeutic window for vancomycin is clearly closing. Use is down nearly 50% over the past year and use of branded medications are picking the sizable share. Based on the superior usability and tolerability of tedizolid, along with non-inferior efficacy, I think tedizolid can capture at least 5% of the U.S. hospital day share, with potentially up to 10% if Trius can expand the label to include HAP/VAP and bacteremia.
At 5% share of the U.S. in-hospital market, Trius is an estimated $250 million drug. Double the share and you double the sales. The opportunity outside the U.S., mainly in Europe and Asia/China, is equally as large, albeit at potentially a lower price level. That being said, on a global basis, I suspect that tedizolid is a $750 million drug with a full and clean label.
Trius already has a commercialization deal for Asia/China with Bayer (press release). The deal netted Trius $25 million upfront, with 25% of the development costs paid for and up to another $69 million in development, regulatory, and commercialization milestones. A deal for Europe, which I'm optimistic on for 2013, should be of similar size, if not bigger considering the second phase III trial will have offered day by then. Assuming the data is positive, I think Trius can net another $25 to $50 million upfront, along with back-end milestones and royalties on sales.
In the U.S., I get the sense that Trius would like to commercialize tedizolid themselves. Investors can look toward Cubist or Optimer Pharmaceuticals (NASDAQ:OPTR) as a model. With an estimated $400 million in U.S. sales, and royalties and milestones on another $300 to $350 million in sales outside the U.S., I see Trius worth $12 per share based on discounted cash flow modeling. That's over 100% upside from today.
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