|Synthetic Biologics Under The Radar With Upcoming Multiple Sclerosis Data Catalyst|
|By Scott Matusow|
|Thursday, 20 February 2014 08:29|
Similar to how a blue-chip company might have an increase in stock price before an earnings call, small-cap developmental biotechs often increase in price before important clinical data releases, Advisory Committee Meetings (ADCOM), and U.S. Food and Drug Administration (FDA) drug approvals.However, some of these developmental biotechs can actually decrease in price based on poor company financial position, (subsequently leading to cash raises) management ability, and other factors.
Synthetic Biologics (SYN) is one company that we believe could see significant stock appreciation from drawing trader and investor interest before its Phase II Multiple Sclerosis (MS) clinical trial data release in April.
Synthetic develops biologics for the treatment of serious infectious diseases including multiple sclerosis and C. difficile infections. For a company with a market capitalization a little over $100M, any positive developments with these programs could lead to a large increase in speculation investment. With some recent large insider buys and an important data release coming for its patent held combination drug treating MS in April, we think the company's stock should see significant appreciation.
MS is an autoimmune disease that attacks the central nervous system and disrupts our body's most critical functions. People with this disease have immune cells that erroneously attack the Myelin sheath. When the Myelin sheath is destroyed it disrupts the transmission of nerve signals. This disruption can cause symptoms that range anywhere from limb numbness, to paralysis, to even blindness.
Although there is no cure for Multiple Sclerosis, several companies are working on developing treatments. Synthetic Biologics is testing Trimesta (oral estriol) in conjunction with Copaxone for its effects on Multiple Sclerosis. Estriol is a hormone released during pregnancy and has been documented to help women with autoimmune diseases, including Multiple Sclerosis. In small doses, some researchers believe that Trimesta can be used as a treatment for Multiple Sclerosis. Although Trimesta has been used in Europe and Asia for over 40 years, it is not currently approved for use in the United States. In a small trial done at the University of California at Los Angeles when only using Trimesta alone, researchers found the following:
As compared with pretreatment baseline, relapsing remitting patients treated with oral estriol (8mg/day) demonstrated significant decreases in delayed type hypersensitivity responses to tetanus, interferon-γ levels in peripheral blood mononuclear cells, and gadolinium enhancing lesion numbers and volumes on monthly cerebral magnetic resonance images. When estriol treatment was stopped, enhancing lesions increased to pretreatment levels. When estriol treatment was reinstituted, enhancing lesions again were significantly decreased.
The results of this Phase I trial were not overtly impressive, but it did spark the interest of Dr. Rhonda Voskul, a well-respected researcher in neuroimmunology to further investigate Trimesta's potential to treat MS.
Based on the Phase I results, Synthetic and Dr. Voskul believe that Trimesta combined with Teva Pharmaceutical's (TEVA) Copaxone should garner significantly positive results for patients with MS.
Trimesta is currently being utilized in combination with Copaxone in a randomized, double-blind, placebo-controlled Phase II multi-center clinical trial involving 164 women for the treatment of relapsing-remitting multiple sclerosis in women.
Copaxone is Teva's trade-marked name for glatiramer acetate, a random polymer of four amino acids; glutamic acid, lysine, alanine, and tyrosine, and may work as a decoy for the immune system. Glatiramer acetate is approved by the FDA for reducing the frequency of MS relapses, but not for reducing the progression of the disability.
Investigators at the multi-centers are administering either Trimesta (8 milligrams orally per day) in combination with Copaxone (20 milligrams per day), or a placebo plus Copaxone to patients enrolled in the trial.
The primary outcome measure for the study is the rate of relapse between the placebo and treated groups at two years, which is the generally accepted FDA-approvable endpoint in MS.
The completed Phase II clinical trial was supported by grants exceeding $8 million, which was been awarded by various MS institutes across America.
Top-line data results from this trial will be presented April 29th and April 30th at the American Academy of Neurology's (AAN) 66th Annual Meeting in Philadelphia.
The design of the Phase II trial here is as good, if not better than most Phase III trials, so successful data could mean the company can by-pass a phase III trial, and directly move to file a New Drug Application (NDA) with the FDA.
About 2.3M people worldwide have Multiple Sclerosis and about 400,000 of those people are in the United States. The Multiple Sclerosis market is fairly large, with Copaxone generating $4.3B in revenue for Teva in 2013. Teva generated $20.3B in total revenue in 2013, so Copaxone was a large portion of that total.
Synthetic Biologics holds the exclusive worldwide license to U.S. Patent 8,372,826 and 6,936,599 and pending patents for multiple sclerosis and other autoimmune diseases covering the uses of its drug candidate, Trimesta. Patent 8,372,826 covers the use of the Trimesta in combination with Copaxone.
We find the fact that Synthetic holds the license to this patent as very significant if the Phase II data proves to be positive. With Teva losing patent protection with Copaxone, it might consider partnering or even acquiring Synthetic if data is positive in April. This could allow Teva a way to extend its Copaxone patent, and potentially offer a better solution for Copaxone in a combination, patent-protected MS treatment. With Copaxone coming off patent protection this year, this potentially puts Synthetic in a strong business leverage position.
Obviously, all of this speculation is moot if data in April does not show to be positive.
As we can see from above, Randall Kirk *bought 2.5M shares from the offering the company engaged in December of last year. Additionally, Mr. Kirk indirectly purchased over 3M shares before the offering in October of last year.
Randall Kirk has become somewhat known in the developmental biotech space from his active purchases of Halozyme (HALO) over the last year. Mr. Kirk holds nearly 4M shares of Halozyme, and we believe his investment with the company will pay off in a big way.
We have been bullish on Halozyme for some time now, mainly for the potential of its PEGPH20 program.
PEGPH20 is a very novel approach to potentially treating cancer. Certain cancers have been shown to accumulate high levels of hyaluronan (HA). Halozyme believes that certain
Halozyme hopes to demonstrate in clinical trials the dismantling of the HA component of the tumor architecture and tumor microenvironment. This would open previously constricted vessels which may increase blood flow to the tumor -- in turn making the tumor much more treatable.
If Halozyme can ultimately prove PEG does what the company says it will, the treatment could potentially be worth $100B or more. Cancers such as pancreatic for an example, which normally means a death sentence, could now be treated, shrunken, and offer real hope for patient survival where none existed prior.
This possibility, along with Halozyme's already approved drugs in Europe leads us to believe that Mr. Kirk could be sitting on a ton of money in time with Halozyme.
The catalyst with Synthetic reminds us of Prana Biotechnology Limited (PRAN) in some ways.
In November of 2013, Prana was trading right around $4 a share, and in July of 2013, around $2. When the general market became aware of the company's 2 major catalysts approaching, the stock rallied very hard, to $13.29 in January, 2014, representing a gain of over 200% in a little over 2 months. To date, Synthetics has mostly been under the radar, and is trading around as similar market cap to what Prana had before investors became aware of its potential.
Yesterday, the company reported debated positive results for one of its catalysts, data from a Phase IIa for HD.
Some investors I have personally spoken with note that the trial did not show significant improvement over placebo in actually restoring cognitive function. However, it seems the endpoint was not intended to do so. In this regard, we need to keep a close eye on this developing situation, notwithstanding the upoming data release in Q2 for the AZ indication.
Concerning the AD indication, testing in mice did produce a restoration of cognition, which is interesting to say the least, but will it produce similar and even better results in humans? The AD chances certainly seem a bit better after the HD data was released.
I have personally seen how AD affects people, as my grandmother suffered from it before her passing. Any drug that is clinically proven to treat AD would be very significant, just as any drug clinically proven to be successful treating MS, would also be very significant.
While this certainly does not mean Synthetic will see such a price run, we believe the case is made here on why the stock is currently very under speculated, and could see similar stock price appreciation before the end of April because MS is also a very large and lucrative monetary indication.
Prana is one of but many examples of developmental biotechs that get hot speculation on their potential. However, investors and traders should be aware of the huge risk some of these developmental biotechs carry.
If Prana's HD was poor, the stock might have sold off to under $5 a share, which would have represented a 30% loss from its last closing price of $7.25 from Friday of last week. The data for Synthetic's Trimesta/Copaxone trial is due in late April, so investors and traders have a decent time frame window before this data is released.
We feel there is a big reward with Synthetic if the data release in late April turns out to be positive. However, if negative, the stock is likely to fall back to under $2 a share. Because the company has a deeper pipeline, inherit value would remain, but it would be hard for Synthetic to secure the needed financing at a good price if such a failure was to occur. Still, because the company has a deeper pipeline for high monetary value indications, we feel as long as the other products are successful, the company would not be in dire straights.
However, in regard to risk factor number five, we read the following from an article written in 2010,
In 2008, the FDA launched a crackdown on compounding pharmacies, demanding they stop making such "false and misleading" claims about the hormones. Since estriol was unapproved, the FDA also ordered the pharmacies to stop making it altogether "unless they have a valid investigational new drug application." [NDA]
The above shows us how the FDA takes seriously those who make unproven claims who also manufacture and sell these drugs without an NDA and/or official approval from the organization. While in 2009, Congress tried to enact legislation to reverse this, but as of late, the FDA has been cracking down even more on pharmacies that sell certain drugs and make claims that these drugs can treat ailments which they have not been approved for.
The time might be very soon for an NDA here as the FDA requires if the upcoming data for Trimesta/Copaxone combo is shown to be positive.
It's likely the company raises cash if Phase II data is good for several reasons; the possibility of engaging a Phase III trial, money needed to ramp up sales and marketing, and costs of submitting an NDA to the FDA. Additionally, the extra cash would allow the company flexibility in developing its other products in its pipeline, along with leverage in any partnership/acquisition talks, should they arise.
We would find such a raise as a positive sign and would fully support it, and believe it's likely many institutions and the overall market will as well.
If this occurs, we think the stock would likely appreciate above $6 a share on positive Phase II data. We feel an offering at $5 would be reasonable and fully supported, and would also give the company additional leverage to advance the rest of its pipeline.
With Synthetic holding a patent to a Trimesta/Copaxone combo treatment for MS, the company would have considerable leverage on its side to command either a strong partnership or acquisition if positive data is announced in April. Some might believe that if the FDA eventually approved the drug, doctors will simply off-label prescribe Trimesta and Copaxone separately, and instruct patients to use it. However, with Trimesta not being FDA approved for any indication, this would not be possible.
Copaxone is FDA approved for the treatment of MS. As mentioned earlier, Copaxone is going off patent protection this year, allowing generic companies to sell Copaxone. If Phase II data is successful with the Trimesta/Copaxone patented combination, we think Teva might have strong interest in either partnering with Synthetic, or flat out acquire the company.
In September 2013, Pozen (POZN) signed an exclusive license agreement with Sanofi US (SNY) for the commercialization of PA8140/PA32540, which are combination aspirin and Prilosec that can be purchased over the counter separately at any drug store with a prescription.
The PA licensing agreement came with $15 million in upfront cash. Pozen is also eligible for $20 million in pre-commercialization milestones, which we assume corresponds to U.S. FDA approval in late January 2014 and the transfer of the NDA to Sanofi (split evenly).
The above represents a very significant monetary deal for a Prilosec/aspirin combination product, that which can be purchased by consumers without a prescription, and over the counter separately.
Pozen expects to hear an approval decision for the above mentioned PA products from the FDA on April 25th of this year.
The key for Pozen is the patent it holds for its combination, much like Trius held a combo patent for Cubicin, made by Cubist Pharma (CBST), with its proprietary drug, tedizolid phosphate.
Seeing tedizolid phosphate potential, and a way to extend its own drug Cubicin, Cubist acquired Trius in July of 2013 for $13.50 a share, or $707M with contingent value rights consideration for Trius shareholders.
Trimesta is not FDA approved for any indication, but Copaxone is FDA approved for the treatment of MS. As mentioned earlier, Copaxone is going off patent protection this year, allowing generic companies to sell Copaxone. If Phase II data is successful with the Trimesta/Copaxone patented combination, we think Teva might have strong interest in either partnering with Synthetic, or flat out acquiring the company.
As stated prior, Trimesta is not FDA approved for any indication, and because of this, doctors are very reluctant to prescribe it currently for any indication, let alone MS. Additionally, the drug hard to come by as demonstrated in an article written in 2010 that is linked earlier in this write-up.
As we can see above, Synthetic has some other interesting drugs its currently working on. The company's longer-term focus is the
We believe the chances for positive data are good here. Although prior clinical testing was not exactly overwhelmingly positive, it was not terrible either, and just included Trimesta alone. We feel the combination of the patented Copaxone/Trimesta synergy should provide positive results that meet the acceptable endpoints. These results would have to show a clear advantage of the dual use of Copaxone and Trimesta together. An equal result from Trimesta against Copaxone alone would be seen as a negative result. Positive data here would give the company the needed leverage to increase its long term chances.
If the Phase II data release is positive, and if management sails the Synthetic ship on a correct course, a 1 year target price of $9 is within range. We feel the catalyst trading that should come into the stock might push Synthetic stock over $4, provided the company does not foolishly engage a secondary cash raise, which is always something to consider with a developmental biotech, although we do not think it's likely here before the data release in late April.
*Indirectly purchased through Mr. Kirks company, Intrexon where he serves as Chairman and Chief Executive Officer.
Disclosure: I am long SYN.
Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.