Biotech Values

[mcbio]

TSRX risk-reward

genisi (or others): I'm very curious to hear any thoughts you may have on the risk-reward of TSRX at this level ($75M market cap). I am strongly considering a position in the stock at the current level with the intention of holding up to, but before, Phase 3 results are released in early 2012 on its 2nd-generation oxazolidinone. I'll present below what I see as the big pros and cons to owning the stock right now. I appreciate anyone that can add anything to any of my points below to help me see any additional risks I may be missing.

Pros

1. TSRX is developing torezolid phosphate, a 2nd generation oxazolidinone antibiotic targeting gram-positive bacteria, seeking to improve upon PFE's 1st gen drug in this class (Zyvox). Per slide 6 of TSRX's presentation at Stifel on 9/15/10 ( http://files.shareholder.com/downloads/ABEA-43S70D/1040841912x0x402807/728cb717-d4ff-4360-8953-820a11960d31/Trius%202010%20Presentation%20at%20Stifel%20Conference.pdf ), Zyvox had 2009 U.S. sales of $695M. Per genisi's prior post, Zyvox's 2Q10 sales were nearly $300M (assuming that's a worldwide number), which suggests a large market for Zyvox (that projects out to an annual $1.2B run rate) and a large market for any drug that can improve upon Zyvox. TSRX touts potential advantages for torezolid phosphate over Zyvox as it is a once-daily treatment, more potent, a faster acting/much shorter course of treatment, active against resistant MRSA, fewer drug interactions, and safer for LT dosing (see slides 7 and 8 from the Stifel presentation). There are also potential advantages noted over CBST's Cubicin, including the fact that Cubicin is not oral, has a longer course of treatment, and is not active in lung infections.

2. Actual efficacy results to date - See attached poster for detailed Phase 2 results: http://www.triusrx.com/pdfs/L1-335-2009poster.pdf . Also, slide 15 from the Stifel presentation shows an 88% cure rate for the torezolid phosphate 200mg QD arm versus a 69% cure rate for a similar Zyvox arm in Zyvox's Phase 3/4 studies. Also torezolid phosphate had a 91% cure rate at 48 hours, which appears to show the potential for the drug to offer quick results.

3. Market cap looks pretty darn cheap to me at $75M given that torezolid phosphate is now in Phase 3 and given the market opportunity for the drug.

4. TSRX holds core patents covering torezolid phosphate out to 12/2024 and expanded patents covering the drug out until 2030 (slide 17 of Stifel presentation).

5. Cash/shares outstanding - after raising money from the IPO, TSRX had $56M in cash as of 6/30/10 and it looks like they retired all of their debt with a portion of the IPO proceeds. Burn rate was $5M last quarter but that is sure to go up with the start of Phase 3 trials for torezolid phosphate. However, their last amended S-1 indicates that they expect proceeds from the IPO to fund the company through mid-2012. There are about 23.5M shares outstanding and it looks like a potential additional 5M shares that could be issued as a result of warrants, options, and an equity incentive plan (pg. 7 of the amended S-1). So, it appears TSRX has about 28.5M shares on a fully-diluted basis.

6. Although Phase 3 trials have already commenced, due to the large market opportunity and advanced stage of the drug, is it possible big pharma could be interested in a partnership (or even a buyout given TSRX's $75M market cap)?

Cons

1. Risk of failure in Phase 3 trials, including the fact that the drug won't replicate Phase 2 results and won't otherwise demonstrate its theoretical advantages over Zyvox. Also, torezolid phosphate accounts for the bulk of TSRX's pipeline so Phase 3 failure would be devastating to the company, so there's increased risk here (again, though, I plan to be out of the stock by the time Phase 3 results are announced in early 2012.)

2. Actual safety results to date - per the prior post I linked to above, 5 patients in the Phase 2 trial experienced an SAE, but only 1 was considered possibly drug-related (acute cholecystitis in an obese 57 year-old female). Is that an SAE that could be something to worry about? Note that the poster doesn't disclose what dosing group this occurred in (TSRX is just moving the 200mg QD dose forward, although 400mg QD and 600mg QD were also tested in the Phase 2.) In terms of AEs, it's noted in the poster that no patients discontinued the Phase 2 due to an AE (not sure if the patient with the SAE discontinued). It looks like the 200mg QD arm had just under 2% of patients that experienced abnormal ALT and creatinine lab values. I imagine this may be common for this type of drug and indication, but if anyone knows otherwise or if this looks questionable compared to Zyvox's safety, please post.

3. TSRX has a SPA for its Phase 3 trials (comparing torezolid phosphate to Zyvox) with the primary endpoint being the cessation of spread of infected lesions and absence of fever at 48 to 72 hours following initiation of treatment. Despite the SPA, is there increased risk given that these are new Phase 3 endpoints for an antibiotic?

4. Lock-up period for the stock ends in February 2011 (I'm assuming all lock-ups end after 6 months from IPO). Any studies done to confirm there is truly a negative effect on a stock once a lock-up period ends and the magnitude of such effect?

5. Torezolid phosphate was not developed in-house by TSRX, but rather was in-licensed from Dong-A Pharmaceuticals in 2007 (http://www.redorbit.com/news/health/853941/trius_therapeutics_enters_into_license_agreement_with_donga_pharmaceuticals_for/ ). Normally I'm skeptical of drugs that are in-licensed, but this skepticism is geared more towards drugs that small biotech in-licenses from big pharma, because my typical line of thinking is that if a drug is so promising, why would big pharma license away the rights? In this instance we are talking about a smaller/more obscure? foreign company in Dong-A that presumably had to license the rights away for further development in the U.S. I guess one could question why big pharma didn't get involved here and do a deal directly with Dong-A so that presumably warrants some skepticism. In terms of fees/royalties due Dong-A, TSRX has $13M remaining in milestone payments and will owe mid single-digit tiered royalties.

6. Are the Phase 3 trials being run against ABSSSI just a small subset of the sales noted in the piechart on slide 6 of TSRX's Stifel presentation? TSRX is planning on reporting Phase 1 data in 2011 from three additional trials looking to expand the indication for torezolid phosphate beyond advanced skin infections. If ABSSSI is just a small subset of the potential market, then this would obviously be a bit of a drawback since the other indications are much earlier stage in development.

7. Potential competition: Aside from drugs on the market now, Pg. 4 of the amended S-1 lists competitors in or about to enter Phase 3 as ceftaroline (FRX/AZN), ceftobiprole (Basilea), CEM-102 (Cempra), dalbavancin (Durata Therapeutics), delafloxacin (Rib-X), NXL-103 (AZN), oritavancin (MDCO), PTK 0796 (Paratek/NVS), and radezolid (Rib-X). Not sure if any of these competitors offer the potential advantages of torezolid phosphate, namely the oral once-daily dosing and potential for much quicker treatment. Either way, I'm sure there's plenty of room for a few of these drugs.

Summary

All told, I think the pros outweigh the cons, especially in light of the market cap, and I'm quite tempted to add here with the hopes that the stock can appreciate nicely from the current level in anticipation of Phase 3 results in early 2012. Anyone else agree?