Synthetic Biologics: A Compelling Biotech With A Low Valuation

Overview

With major advancements in its drug pipeline over the last two years, Synthetic Biologics (SYN) has propelled itself onto the radar of retail investors, philanthropists and major institutions. Only a year ago, Synthetic's average share volume stagnated around 50,000 in what seemed to be a lack of awareness on Wall Street. This year, however, the stock has seen exponential increase in volume and enormous PPS volatility. This is largely centered around the Phase 2 topline readout of the Trimesta/Copaxone study for Multiple Sclerosis (MS). The results were promising in that relapse rates improved up to 47 percent in the first 12 months, but saw a significant drop-off to 32 percent in the second year. This prompted a sharp drop in PPS and a subsequent return to pre-catalyst levels.

SYN Chart

These historical events have placed Synthetic on the forefront of reinvigorating treatments for life threatening under-treated diseases, including Pertussis and Clostridium difficile (C. Difficile or C. diff). I will write a followup article on Synthetic's novel anti-infective treatments. For now, however, I will focus on Trimesta, Synthetic's most developed novel treatment. Trimesta has proven efficacy in slowing the symptoms of Multiple Sclerosis. I will examine its potential to compete with Teva Pharmaceutical's (TEVA) Copaxone, Biogen's (BIIB) Tecfidera, and Novartis' (NVS) Gilenya.

What is Trimesta?

Mr. Riley's esteemed approach to developing "sexy drug candidates"(that is, innovative drug candidates that seek to revamp the treatment of infectious and genetic diseases) complements the fact that Synthetic's primary drug candidate, Trimesta, has proven efficacy when implemented in conjunction with Teva's Copaxone drug. Summarizing the clinical findings of Dr. Rhonda Voskuhl, Clinical Director of Synthetic's Trimesta trials, there is no longer a question of whether Trimesta is effective in reducing symptoms of MS in conjunction with Copaxone.

Through extensive trials, Dr. Voskuhl has proven that the drug is capable of restoring estriol in women who may lack optimal levels after taking contraceptives. It also helps that Trimesta has been used for four decades, but simply has never been approved by the FDA. Moreover, Dr. Voskuhl's examination of subjects treated with Trimesta/Copaxone combination demonstrated its effectiveness in slowing the progression of MS symptoms in women, with a calculated 80% reduction of brain lesions. It will be interesting to see how management harnesses this benefit in a future clinical study. Following is what management stated on the subject in Synthetic's Q3 Earnings Report:

Cognition and disability improvement could be a totally new indication for an MS drug. We look forward to updating shareholders on investigators continued analysis as we continue our discussions with potential partners and await the results in the full analysis of the MRI scans due early next year. In the meantime, a separate Phase 2 trial focused exclusively on cognition utilizing Trimesta with a variety of currently marketed MS drugs, including Copaxone, Avonex, Betaseron, Extavia, Rebif, Gilenya, Aubagio and Tecfidera, is enrolling patients at four sites in the United States

In addition, Dr. Voskuhl found that the drugs possess healing components which help regenerate the myelin sheath. For those who are not aware of the significance of this unexpected finding, it is imperative to note that MS is induced by damage to the myelin sheath. Therefore, the capacity of the drugs to regenerate the myelin sheath (a process known as remyelination) is paramount since it may indicate that a potential cure for MS is within reach.

In layman's terms, picture the myelin sheath as the wire of a power cord. When the rubber protecting the wire gets stripped, the wire cannot conduct as well. Likewise, deterioration of myelin (the protective outer-layer of the myelin sheath) inhibits neurological functions such as cognition and motor control. The regeneration of myelin reverses this debilitating process.

Competing Drug Profiles

Biogen's Tecifidera is on the verge of blockbuster status and has left Novartis' Gilenya and Sanofi's (SNY) Aubagio competing for sales scraps. Nevertheless, there are important reasons for this sales disparity among oral MS drugs:

  1. Gilenya has side effects ranging from liver enzyme elevations--which may lead to liver disease--and heart rate reduction. In fact, some patients taking the drug abruptly died upon its entry to market. In response, Novartis relabeled the drug after these patient deaths created an unwavering stigma among physicians. Ever since, the drug's market share has been limited by that stigma despite the company's relabeling efforts and the fact that it is not prescribed to patients with specific heart conditions or those taking certain heart medications.
  2. In respect to Sanofi, patients taking Aubagio are encouraged to practice contraception because the drug may lead to birth defects and adverse affects on the sperm. While the drug's side effects have not prompted a similar stigma to Gilenya, uptake of Aubagio remains muted due to a "stable disease-modifying therapy (DMT)-treated patient population and safety concerns related to its pregnancy Category X label and hepatotoxicity risks," according to BioTrends Research Group Senior Business Insights Analyst Emma Williams, Ph.D.
  3. Tecifidera holds a clear advantage over both drugs due to its active ingredient, which has nearly a 20-year history of treating psoriasis in Germany. As a result, physicians are more inclined to prescribe it over Aubagio and Gilenya at a rate of 65%, versus 33% and 53%, respectively. In terms of cost, Tecifidera fairs well against its competitors, and has quickly become the preffered DMT treatment among some neurologists due to its favorable risk-benefit profile.

Although Aubagio costs less than Gilenya and Tecifidera--$45,000 compared to $60,000 and $55,000, respectively--its sales are hindered by the risks associated with taking it while practicing contraceptives. Also, the efficacy of Aubagio does not rival Tecfidera, which some predict will acquire two out of every five dollars of sales outside of the US market. Nevertheless, all three oral MS drugs are expensive, and while there is significant cost variation among them, it is arbitrary relative to other non-oral applications.

Competing Drug Advertisement Campaigns

The success of a drug is often dependent upon large-scale advertisement campaigns to convert patients from standard care. Failure to sustain optimal media coverage of a drug can lead to sales stagnation regardless of how effective it is in treating a disease. MS drugs are no exception to this principle. I found an interesting article on Treato that discusses patient reception of marketed MS drugs (click here). According to the article, Biogen seems to have a massive lead when it comes to patients spreading the word about Tecifidera. Extracted from a April-May 2013 sample, 600 patient posts expressed interest in Tecifidera. Teva's Copaxone follows in second with over 500 posts, while Novartis' Gilenya trails at the 200-post mark. These figures suggest that Tecifidera attracted significant patient interest last year. The rising sales of Tecifidera in 2014 corroborates my belief that patient interest in the drug remains strong.

Since Trimesta is still in clinical trials and far from a regulatory decision, it's difficult to project how patients will receive it. But given the fact that the already-established drugs in the MS space are somewhat homogenized in terms of how they're administered and frequency of treatment, patient interest in Trimesta could be greater than some might expect. On the one hand, Trimesta is oral estriol, which does not require weekly or monthly injections (or infusions) on a continuing basis. Used in conjunction with Copaxone, which is administered via injection, Trimesta would join only three other oral MS drugs, Tecifidera, Gilenya, and Aubagio. And with more patients converting to Tecifidera (yielding a market share of 4% as of last year), compared to both Gilenya and Aubagio (which stagnate around 1% market share), I expect there to be plenty of room for a competing oral MS drug in Trimesta. The question, however, is whether Synthetic can succeed in a late stage study and receive regulatory approval. And if one thing is for certain, it is that the company has a long way to go before Trimesta reaches those milestones.

Synthetic's Potential Outlet

Regardless of partnering with a major player (e.g., Teva), I suspect Synthetic will not have a hard time garnering support for Trimesta among healthcare providers. While Trimesta has been used for as long as four decades, Copaxone, Teva's non-oral MS drug, thrives with over 25% market share in MS. Of course, Copaxone is on the verge of a sharp decline in sales following its loss of patent protection earlier this year. As it stands, Teva is safe from genericization of Copaxone as no generic has yet launched. This is largely due to the fact that Teva has threatened generic makers that if they launch and the court rules against them, Teva would stand to collect two times their sales in damages. Nevertheless, with deadlines looming, Teva is expected to lose its leverage. Put simply, it is only a matter of time before Copaxone goes generic.

For Synthetic, however, the loss of patent protection for Copaxone represents a unique opportunity. In my opinion, Teva will continue to exhaust all of its resources to protect Copaxone from genericization. Thus, licensing and/or acquiring Trimesta, which is administered in conjunction with Copaxone, are viable routes for Teva. Synthetic holds numerous patents (U.S. patents 8,658,627, 8,372,826 and 6,936,599) that claim Copaxone in conjunction with Trimesta for MS. The theory behind this proposition is that, since Trimesta significantly improves the relapse rate for MS at the 12-month mark (and likely at the 24-month mark following a higher-powered clinical study) as compared to Copaxone alone, licensing and/or acquiring Trimesta would mitigate the impact of genericization. And given the more favorable risk/benefit profile, I suspect patients would opt for the Trimesta/Copaxone combination over generic Copaxone.

The Risk

The risks to developing Trimesta are extensive. Synthetic has a serious disadvantage to its aforementioned Big Pharma competitors in its ability to develop, advertise, and commercialize. First, Synthetic would need additional funds to advance Trimesta to a late-stage trial, considering its small cash position (see Synthetic's Q3 Earnings Report). This would either be accomplished by market financing, or by establishing a partnership to lower research and development costs. In my opinion, however, shareholders should expect some combination of the two. Synthetic has already stated that it is in talks with multiple suitors. And of course, there is the risk of clinical failure. Should Trimesta fail to achieve the primary endpoints of a late stage study, catastrophic shareholder depreciation will likely ensue.

Shareholders should also consider the potential that the amount of patients transferring over to Teva's 40 mg, thrice-weekly Copaxone drug is of relevant concern to any talk of a potential Synthetic buyout or partnership. I found an interesting report that suggests an approximated 40% of patients will transition from the original Copaxone drug to this new third-generation product. If true, Synthetic's Trimesta/Copaxone therapy might not detract from the sales of Teva's new product. Consequently, Synthetic may end up having to grab the bull by the horns in terms of facing off against pharmaceutical giants within the MS space. This is an extremely difficult task for a company that has never marketed a drug. Then again, a more recent report contends that uptake of Teva's next-generation Copaxone is slowing.

Lastly, shareholders should consider the fact that generic developers (e.g., Momenta Pharmaceuticals (MMNTA)) will add to the competition in the MS market. It is expected that a significant percentage of patients will immediately convert to generic Copaxone in the near future. Whether or not patients would convert from generic Copaxone to Trimesta/Copaxone remains unseen.

Bottom Line

Ultimately, I believe that Trimesta has the potential to claim a significant percentage of MS market share from Teva, Novartis and Biogen. While a future late stage clinical trial will likely determine the drug's future, Synthetic's outstanding management team, extensive pipeline, and strong institutional support should, to some extent, mitigate the risk of the program's failure.

Nevertheless, biotech investments have inherent risks. While I hope this article enables readers to make a more informed decision regarding whether or not to initiate a position in Synthetic Biologics, readers must also determine whether taking a contrarian approach is financially sound. As for me, I continue to accumulate shares in Synthetic because I am confident in the company's long-term prospects.

Disclosure: I am long SYN. The information presented is for entertainment purposes only, and in no way should it be construed as investment advice. I am not receiving any ...

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Comments

Trevor Lowenthal 9 years ago Contributor's comment

Hi Duke, according to nationalmssociety.org,

"Based on data in animal studies, the prescribing information also contains a boxed warning indicating that Aubagio may cause significant birth defects if used during pregnancy. Aubagio should not be taken by women who are pregnant or by women of childbearing age who are not using effective birth control. Women taking Aubagio who wish to become pregnant should stop taking the medication and undergo an accelerated elimination procedure to decrease the level of Aubagio in the blood to a safe level (less than 0.02 mg/L)."

To sum things up, patients are encouraged to practice contraception while taking Aubagio due to the risk of birth defects.

Thanks,

Trevor

Kole Mup 9 years ago Member's comment
review "patients taking Aubagio are deterred from practicing contraception because the drug may lead to birth defects and adverse affects on the sperm." Clarify or edit what you say, as this seems illogical; The possibility of birth defects DETERS (?) Aubagio users from taking birth control?? otherwise thanks for the review [TM editors have revised the article to read, patients taking Aubagio are encouraged to practice contraception because the drug may lead to birth defects]
Trevor Lowenthal 9 years ago Contributor's comment

Hi Kole, you are certainly right. That was a misstatement: it should read "patients taking Aubagio are [encouraged]...

Trevor Lowenthal 9 years ago Contributor's comment

I will reach out to the editor to make corrections. Thanks for pointing this out to everyone.

Best, Trevor

Trevor Lowenthal 9 years ago Contributor's comment

Hi Kole, thank you for pointing that out. Let me check my sources on that and I'll get back to you ASAP. I'll make edits accordingly. Best, Trevor.

Duke Peters 9 years ago Member's comment

Wondering what your sources had to say about this. Still waiting for a follow-up, thanks.

Liz Cabbage 9 years ago Member's comment

You misinterpret the Trimesta phase 2 trial results. Trimesta results did not see "a significant drop-off" in the 2nd year of the trial; rather, the Copaxone-alone arm saw an improvement--as was expected--Copaxone doesn't kick-in until year two. The Trimesta+Copaxone arm performed consistently across year 1 and 2. Remember, this trial was not against a placebo, it was against an ACTIVE arm. The Trimesta+Copaxone arm outperformed Copaxone alone arm both years. The trial wasn't powered to reach statistical significance year two. Year 1 results suggest that Trimesta may not need Copaxone to be effective.

Trevor Lowenthal 9 years ago Contributor's comment

Hi Liz, Thanks for the followup. I completely agree with you on that. I apologize for not emphasizing that point. I myself was adversely affected by the misconception about the Phase 2 readout. I have been an SYN holder for roughly 3 years. Thanks so much for clarifying. I encourage you to write an article on SYN discussing the confusion surrounding Trimesta etc.

Best wishes,

Trevor

Liz Cabbage 9 years ago Member's comment

Thanks Trevor! I enjoyed your article, especially the numbers you have about patients "spreading the word" on the various drugs. That was interesting. I think Trimesta would practically market itself--no need for the company to explain anything complicated about monoclonal antibodies or cellular pathways, as with other MS drugs. The simple fact that pregnant women with MS go into remission explains, and will sell, Trimesta. Keep up the in depth analysis.

Trevor Lowenthal 9 years ago Contributor's comment

Hi Liz, I appreciate your insight. I am well aware of the reasons for the improvement, but I don't believe I misinterpreted the results at all. I stated in the article that the trial was not powered to reach significance in year two. I did mention a drop in improvement because that is what management stated in the readout. However, I do believe that the lack of significance at year two irrespective of the lack of power to reach significance in year two is the reason for the sharp drop in PPS following the readout(s). That is what a late stage study is for, correct? I am no scientist, but I am very familiar with clinical trials and interpreting trial results. Thanks for reading.

Best,

Trevor

Liz Cabbage 9 years ago Member's comment

Hi Trevor, you're right, and I agree, that the ph2 results might have lead to the fall in PPS--but I think the market misinterpreted the ph2 results. As a SYN shareholder, I sure would like to see that misinterpretation rectified: Trimesta+Copaxone arm OUTPERFORMERED the Copaxone alone arm by 47% the first year, and it OUTPERFORMED Copaxone alone by 32% the 2nd year. Those are fine, fine results. They needed a larger trial to show that *only* a 32% improvement over Copaxone was significant. Trimesta's relapse-rate did not drop between yr1 and yr2--it was constant.

Alexis Renault 9 years ago Member's comment

Thanks for tipping me off to this stock.

Trevor Lowenthal 9 years ago Contributor's comment

You bet!

Dick Kaplan 9 years ago Member's comment

Great analysis. I'll be eagerly awaiting your followup article. I added you to my watch list so I won't miss it. Thanks.

Trevor Lowenthal 9 years ago Contributor's comment

Thanks!