Trius Therapeutics: The Next Big Small-Cap Biotech Mover?

Normally, I write about biotech companies with near-term catalysts I feel offer traders good long based trade opportunities heading into these catalysts. Every so often, I find a small cap biotech where I feel a speculation investment is truly warranted. This year, a few small cap companies have realized strong and steady stock appreciation long after their respective catalysts events have come and gone.

Trius Therapeutics, Inc. (TSRX) is one such company I strongly believe is a great speculation investment which could see strong stock appreciation after its positive catalyst has come and gone. Also, I feel it's likely the company will be acquired soon based on some factors I will mention in this article, notwithstanding the strong buzz I have been hearing in this regard.

Company Treatment Platform:

• Methicillin-resistant Staphyloccus aureus

Strong antibiotics have become of increasing importance as bacteria mutate to become resistant to current treatments. Even though an antibiotic can kill a majority of the bacteria and rid a patient of symptoms, stronger and more resilient bacteria survive. Over time, that bacterium replicates and becomes the majority of that population. To combat a new strain, scientists are continually developing newer and stronger antibiotics.

Methicillin-resistant Staphyloccus aureus (MRSA) is one pathogen that has become a prevalent problem because it is responsible for several difficult to treat infections. MRSA is any strain of Staphylococcus aureus that has developed, through the process of natural selection, resistance to beta-lactam antibiotics, which include penicillin. MRSA is especially troublesome in hospitals, prisons and nursing homes, where patients with open wounds, invasive devices and weakened immune systems are at greater risk of infection than the general public.

MRSA is on the rise, with infections doubling in just the last 5 years. Chicago scientists say the new estimate might even be low-balling the disease's pervasiveness because the database they use tends to under-report instances of MRSA if patients were hospitalized for some other ailment. When the researchers went back to correct for the statistical inaccuracy, they discovered that the insurance claims had missed between one-third to one-half of actual MRSA cases as recorded by the hospitals' own records.

The continual need of a newer and stronger form of antibiotic has sparked several biotechnology companies to develop drugs to combat MRSA, and Trius might be on to one that could be a multi-billion dollar solution.

• Oxazolidinones

Trius largely works with a class of compounds called oxazolidinones, which are mainly used as antimicrobials. Oxazolidinones can be used as an antibacterial by working as a protein synthesis inhibitor that can target an early step involving the binding of N-formylmethionyl-tRNA to the ribosome. Some of the most important oxazolidinones are the last generation of antibiotics used against gram-positive pathogens, including super-bugs such as MRSA. These antibiotics are considered as a choice of last resort where every other antibiotic therapy has failed.

Examples of antibiotic oxazolidinones include:

• Linezolid - Is available for intravenous administration and also has the advantage of having excellent oral bioavailability.
• Posizolid - Appears to have excellent, targeted bactericidal activity against all common gram-positive bacteria, regardless of resistance to other classes of antibiotics.

• Tedizolid - Is in phase-II clinical trials.
• Radezolid (RX-1741) - Has completed some phase-II clinical trials.
• Cycloserine - Is a second line drug against tuberculosis.

The market to treat MRSA with oxazolidinones is a very large one, with some products bringing in billions of dollars in revenue. As strains mutate and science advances, several companies are in the market to capture a share of the profits. Trius is in development with its top product tedizolid, which has the potential to generate huge profits if eventually approved.

Company Pipeline:

• Tedizolid

Tedizolid (TR-701), formerly Torezolid phosphate, is an IV and orally administered second-generation oxazolidinone for the treatment of serious gram-positive infections, including methicillin-resistant Staphylococcus aureus (MRSA). As a second-generation oxazolidinone, Tedizolid phosphate is chemically differentiated from the first generation of clinically developed oxazolidinones and is designed for improved potency, resistance, and spectrum of activity. There is only one approved first generation oxazolidinone, linezolid, which is currently the leading branded antibiotic for serious gram-positive infections. Pfizer markets linezolid under the brand name Zyvox and reported worldwide sales of $1.35 billion in 2012.

Currently, vancomycin, daptomycin and linezolid (Zyvox) are the leading drugs used for the treatment of infections caused by gram-positive bacteria, most of which are hospital-acquired infections. Tedizolid has been studied and evaluated for the treatment of serious gram-positive infections, including those caused by MRSA.

Tedilozid is being developed to treat multiple clinical indications including ABSSSI and other important indications involving infections of the lungs and blood, such as commonly acquired bacterial pneumonia (CABP), hospital and ventilator acquired pneumonia (HAP and VAP).

• Tedizolid vs. Linezolid

Zyvox (linezolid) treats the same indications as tedizolid and has found a niche treating Vancomycin resistant enterococci (VRE). Additionally, off-label use of linezolid is becoming more popular also. Since it was approved in 2000, linezolid has proven to be extremely successful due to its safety profile and general bacterial resistance. However, positive results from the ESTABLISH-2 Phase III clinical trial shows that tedizolid shows significant advantages over linezolid. The company provides a very accurate and thorough description of the advantages of tedizolid over linezolid:

• Greater Potency.
  The potency of tedizolid is four to eight times greater than linezolid against linezolid-susceptible strains and up to 16 times greater than linezolid against linezolid-resistant strains. The greater potency of tedizolid phosphate should enable a shorter course of treatment as compared to linezolid. We believe that this enhanced potency may result in improved clinical outcomes, significant savings for hospitals and payor organizations, faster eradication of the pathogen and earlier discharge from the hospital.

• Shorter Dosing Regimen and More Convenient, Once Daily Dosing.
  Tedizolid Phosphate is administered once daily for six days for the treatment of cSSSI (now termed ABSSSI), as compared to twice daily for 10 to 14 days for linezolid. We believe this shorter and once daily dosing regimen will contribute to improved patient compliance, decrease the risk of drug induced adverse events and limit the emergence of resistance.
• Bactericidal Activity In Vivo.
  Tedizolid Phosphate (TR-701), unlike linezolid, concentrates to a high extent inside certain white blood cells, which engulf pathogenic bacteria and concentrate at the site of infection. This feature of Tedizolid phosphate (TR-701) contributes to its in vivo bactericidal activity, or killing of pathogenic bacteria in the body, which is thought to yield a higher degree of efficacy and faster eradication of the pathogenic bacteria than is achieved with bacteriostatic antibiotics, which are antibiotics that arrest the growth of bacteria.
• Activity Against Key Gram-Positive Drug-Resistant Strains
  and Select Atypical and Gram-Negative Bacteria.
  Tedizolid phosphate is active against all clinically relevant gram-positive bacteria tested to date, including organisms resistant to linezolid and other antibiotics. Tedizolid phosphate is also active against strains of the gram-negative bacterium Legionella and strains of the atypical bacterium Chlamydia, and thus may have utility in treating lower respiratory tract infections involving these bacteria.
• Low Intrinsic Frequency of Resistance.
  The frequency at which MRSA evolves resistance to Tedizolid phosphate is 16 times lower than the frequency at which it evolves resistance against linezolid. We believe that this may enable wider use of Tedizolid phosphate and limit the emergence of resistance.
• Favorable and Predictable Pharmacokinetics
  There is little patient-to-patient variability in the concentration of tedizolid phosphate in blood, as compared to linezolid. As a result, we expect that tedizolid phosphate will have more predictable drug exposure which may lead to a more uniform efficacy and safety profile across different patients when compared to linezolid.
• Fewer Drug-Drug Interactions.
  Unlike linezolid, tedizolid phosphate has not been shown to inhibit the monoamine oxidase system which mediates the metabolism of tyramine, SSRI's and vasoconstrictors.

• Improved Safety Profile for Longer Term Dosing.
  The results of our comparative 21-day Phase 1 clinical trial show that a 200 mg daily dose of tedizolid phosphate had less impact on hematological parameters indicative of myelosuppression than the labeled dose of Zyvox (600 mg twice daily). Based upon the results of this clinical trial, we believe that Tedizolid phosphate may offer a safer alternative to linezolid for infections requiring longer term dosing, such as bacteremia.

With these advantages, doctors should be more inclined to prescribe tedizolid over linezolid. Since Zyvox (linezolid) brings in over $1 billion in revenue each year, it is clear that developing a better drug would be extremely profitable. With evidence building that some strains of bacteria are becoming resistant to Zyvox, there is always room for a newer and more effective antibiotic. As a newly developed antibiotic, tedizolid may be a better pick by doctors over its competitor as bacterial resistance becomes even more prevalent.

From an economic standpoint, tedizolid provides additional advantages over linezolid. Given that it costs about $115 per pill and a 10-day course consists of taking a 600mg pill taken twice daily, linezolid would cost about $2,300. Contrastingly, tedizolid only has to be taken once a day for a 6-day course. This conservatively puts tedizolid at $700 for one course. The cost difference is a huge advantage over current treatments and given similar drug profiles, tedizolid seems to be the better choice.

If eventually approved by the Federal Drug Administration (FDA), analysts have speculated that tedizolid could reach peak sales of up to $900 million. With a current market cap of only $367 million, Trius Therapeutics is grossly undervalued. With positive Phase III data in hand, I expect shares to increase in value as investors begin to realize the potential of this company.

We have seen a few small-cap biotechs with potential blockbuster treatments move a lot higher and attract heavy institutional support this year after their positive catalyst events have occurred.

Sarepta Therapeutics (SRPT) traded under $3 a year ago as it worked through a Phase II trial for eteplirsen, indicated for the treatment of Duchenne Muscular Dystrophy (([DMD)). Since the company reported promising data late last year for its drug eteplirsen, its stock price has been on fire. In one trading session alone, the stock rallied from around $14 a share to a parabolic price of $45.

Sarepta now trades at over $35 a share ahead of the company expecting to hear from the FDA on accelerated approval for eteplirsen soon. I believe the FDA will grant accelerated approval for many reasons, one being strong political pressure from advocates of the drug like Jenn McNary, mother of a child who suffers from DMD.

Arena Pharma (ARNA), after Belviq received a positive FDA advisory committee recommendation last year, rallied to over $10 a share, before falling back to under $6. At that time, the company engaged in a public offering at $5.50 a share, and the stock rallied back to over $10 before receiving marketing approval from the FDA. Afterwards, the stock sold off a bit, but has rebounded to near $9.

Belviq is intended for weight management, including weight loss and maintenance of weight loss. There are currently limited pharmaceutical treatment options to help patients lose weight, so the drug is seen as somewhat of an unmet need. Belviq became the first FDA drug approved to treat obesity in over a decade. Arena's public offering was a big success as the company attracted a lot of institutional interest then and in the last year. I believe Arena will be a full fledged successful pharma -- in 5 years or so.

Acadia (ACAD) began 2013 trading around $4.60 a share. Just in the last few months, the stock has nearly tripled on both positive data for its lead drug pimavanserin, indicated for the treatment of Parkinson's disease psychosis (PDP), and allowance of an expediated New Drug Application (NDA) filing from the FDA.

PDP is an unmet need with a potentially huge market, and the company deserves its current speculation valuation. ACADIA is another company I strongly feel will likely be acquired in the next year or so.

I feel once institutions like Baker Brothers LLC (who have a substantial stake in ACADIA) fully study Trius and its enormous speculation value, I am confident they, along with other institutions will take a substantial stake in the company, which should further drive Trius stock considerably higher.

Buyout Speculation:

With studies showing a better safety profile and patient compliance than current drugs on the market, Tedizolid is primed to not only get approved by the FDA, but also potentially grab a majority market share. However, Trius may never get to bring its drugs to market because there is a solid chance big pharmas are interested in acquiring its assets. Recently, investors have speculated that Trius will be bought out because the company just announced a notice of allowance of U.S. patent application related to tedizolid phosphate combination with daptomycin.

Daptomycin is marketed as Cubicin by Cubist Pharmaceuticals (CBST) and should pull in near $1 billion in 2013. Cubist has turned Cubicin into a blockbuster antibiotic and its continued revenue stream is integral to the company's success. The allowance of this patent makes Trius an even more prime target for a buyout for the several following reasons.

• Reduce Resistant Bacteria

Adaptation and evolution are two of the most troubling problems when it comes to developing antibiotics. For example, if scientists are able to develop a drug that kills 99% of bacteria, that 1% will survive and become the genetically most prevalent form. How long this takes depends on several factors including how rapidly the bacteria can adapt and replicate. In order to kill stronger or different strains of bacteria, scientists are always creating newer and more powerful drugs.

The prevalence of these mutant strains has become an increasing problem for daptomycin. Although daptomycin has been a successful drug in treating patients in the gram-positive bacteria market, it is slowly losing its effectiveness as the bacteria are becoming more resistant.

Dr. Ralph Corey, Professor of Medicine and Infectious Diseases at Duke University, stated:

MRSA bacteremia is a potentially fatal disease with limited treatment options. As a clinician who treats bacteremia patients, I am concerned by the growing resistance to one of our last effective treatment options, daptomycin, and welcome this news that tedizolid phosphate may prevent daptomycin resistance when used in a combination therapy.

Trius found that when a low dose of tedizolid phosphate is combined with daptomycin, the amount of bacteria resistant to daptomycin is significantly reduced. This is significant because it would increase the efficacy of daptomycin and extends its life as an antibiotic. In the same press release, it stated:

As detailed in the patent application, tedizolid phosphate, at concentrations substantially below its current therapeutic dose to treat skin infections, unexpectedly prevents the formation of daptomycin resistant mutants of Staphylococcus aureus. Tedizolid appears to be unique in this mutant prevention activity given that seven other medicines tested, including linezolid, the only other drug of the same class as tedizolid, failed to show the same mutant prevention activity.

The allowance of this patent is of extreme importance to both Trius and Cubist. From a scientific standpoint, Cubist would be interested in the combination of tedizolid and daptomycin since the combination of the two would solve the problem daptomycin has with resistant bacteria. This would extend the effectiveness of daptomycin and keep that revenue stream steady for Cubist. Also, as previously mentioned, analysts have speculated that tedizolid could reach peak sales of up to $900 million - how much more in sales can be realized with the combo tedizolid phosphate/daptomycin that was just issued a patent allowance? With a market cap of $367M, Trius is ridiculously undervalued and under speculated in my strongest opinion.

• Extend Exclusivity

The allowance of this patent could also provide Cubist with an opportunity to extend the exclusivity period of Cubicin. Until 2018, no company can create any generic forms of Cubicin and Cubist has been able to bring in large revenues because of that. After 2018, generic drug companies could create a cheaper alternative and grab some market share away from Cubicin. Obviously, it would be in the best interest of Cubist to extend the period of exclusivity for as long as they can do so, notwithstanding the potential for potentially significant additional revenue from tedizolid phosphate combination with daptomycin.

The combination of tedizolid and daptomycin would be a way for Cubist to extend and realize revenue from a patent exclusivity period by an additional five years. With guidance this year of near $1 billion in revenues for Cubicin, exclusivity from a more effective combo solution could easily realize $5 to $8 billion in revenues before any generic potentially comes to market. Long-term Cubist shareholders should encourage and support a buyout or partnership with Trius because it should provide a huge revenue stream for several additional years.

• Broaden Profile

With a buyout, Cubist would gain the rights to tedizolid, along with the newly patented combo drug, plus the other drugs in the Trius pipeline. As stated previously, Trius reported positive Phase III data for tedzolid, meeting all primary endpoints when compared to Pfizer's Zyvox. However, tedizolid also appeared to have a better safety profile and dosing schedule. Cubist also could complete Trius' scheduled Phase III program for the treatment of pneumonia in the second half of 2013. In the pipeline, Trius also has an array of products ranging from preclinical to Phase III trials that would add additional value to Cubist.

Additionally, in the latest 8k from Trius, we read the following:

On May 21, 2013, our 2010 Equity Incentive Plan (the "2010 Plan") was amended to, among other things, increase the total number of shares of common stock authorized for issuance under the 2010 Plan by 5,100,000 shares.

I saw similar activity with Obagi Medical Products before it was acquired recently. When considering the fundamental reasons why Cubist might acquire Trius, it makes sense that management would want "extra shares" to be awarded themselves upon an acquisition. This is an indicator to me that a buyout may be in short order for the company.

Much has been made lately about a few insider sells the last month. I would point out that these sells were "automatic sales" under rule 10b5-1, which in the case of Trius insiders, they were on schedule to sell the shares regardless of the price action or any other factor. I'm always a little surprised just how many traders and investors are unaware of what automatic sales are.

Additional leverage from the Gain Act:

Realizing the ever-growing problem of treatment resistant infections like MRSA, in October 2012, Congress passed and President Obama signed into law the GAIN Act legislation (Generating Antibiotics Incentives Now Act).

The legislation encourages companies like Trius to develop new antibiotics, allowing them to streamline certain regulatory processes for commercialization. Perhaps the most important aspect of the GAIN Act for Trius is that it offers companies 5 years of market exclusively, which would give Trius additional leverage if it chooses to partner tedizolid, (and even more leverage with its newly patented combo drug) and/or sell the company.

Financial and Share Structure

Trius is burning roughly $12.5M a quarter, with roughly $84M in cash. The company has nearly 2 years of cash reserve to fund operations.

*52.97M shares potentially outstanding assumed when factoring in management's recent 8K to add 5.1M shares to the authorized shares for compensation under its equity incentive plan (assuming what I speculate to be a clear sign the company will be acquired soon).

Above, we see good insider ownership, and plenty of room for new institutions to come aboard. I also like the decent size short interest here. Too much short interest sometimes is indicative of possible negative issues with a company, but too little short interest usually means it takes a ton of actual investors to significantly move a stock price upwards.

Conclusion:

Trius is a small-cap biotech with a developing potentially huge story, with a transitional market cap of $360M. According to recent media reports, Cubist reportedly made an unsolicited $1 billion bid for another company in the segment, that was not accepted. With the timing of the patent grant along with Trius upping its authorized share count for the purpose of incentive rewards, it's likely in my opinion that the company will be acquired soon by Cubist for at least double its current price.

As mentioned above, we have seen a few small-cap biotechs lately move a lot higher and attract heavy institutional support after their positive catalyst events have occurred -- Acadia, Sarepta and Arena are but a few examples. I am confident Trius will do the same and move into the double-digit stock price range very soon. At the very least, Cubist could partner with Trius, and any such deal would be a lucrative one for Trius. However, Cubist would be better served buying Trius straight out for the reasons I have mentioned here in this article.

Additionally, there has been a lot of news about multi-drug-resistant organisms (MDROs), such as MRSA, vancomycin-resistant enterococci (VRE) and Carbapenem-resistant enterobacteriaceae (CRC).

NBC ran a story in February this year which stated that there has been a sharp jump in the number of rare but potentially deadly types of super-bug bacterias resistant to nearly all last-resort antibiotics. As mentioned, Congress took action passing The Gain Act, to incentivize companies to develop new treatments to combat this problem, as new strains become more resistant to current treatments on the market.

Considering all these factors, my one-year price target opinion for Trius is $20 a share, which would roughly equate to a $1B market cap - or what was reportedly offered by Cubist for another company in the segment. As already stated, I believe the stock will cross over the $10 mark soon.

Disclaimer