October 24, 2007

Staph infections bring biotechs into spotlight

Staph infections have been sprung into the spotlight lately with several school closures and reports of infections all over the country from schools in New York and Virginia to the University of Colorado. Along with the recent news coverage came yesterday's FDA decision to issue an approvable letter to biotech company Theravance (THRX) for its drug Telavancin, which treats methicillin-resistant Staphylococcus aureus (MRSA). The Centers for Disease Control (CDC) estimates that Staph infections kill more people every year than HIV. And after reading a Forbes.com article on this topic, I thought I would take a look at the biotechs that compete in this area.

Staph infections fall into the $26 billion per year market for antibiotics. That market is estimated by the Stanford Group to reach $40 billion by 2010. There were approximately 95,000 cases of MRSA in 2005, which resulted in nearly 19,000 deaths. Pfizer (PFE) has been a leader in antibiotics, with Zithromax netting $2.03 billion in revenues in 2005. Zyvox, also made by Pfizer, has overtaken the lead as the world's best seller for bacteria infections, with $782 million in sales in 2006.

However, the market is so big that there is plenty of room for competition. Cubist's (CBST) drug Cubicin has sold $257 million in the past year. And there are several drugs nearing approval. Telavancin is one, while Pfizer has been trying to get Zeven approved since 2004.

As investors, the best way to play the breakout in Staph infections would be either Cubist or Theravance, as I see it. Pfizer is too big for one health problem to make its stock move, and its got other problems (like the pulling of Exubera). On the other hand, Cubist's only marketed product is Cubicin, and Theravance had only $19 million in revenue in 2006. Of course, that means we're working with much riskier stocks.

First, I have to be a little worried about the approvable letter from the FDA to Theravance. Encysive (ENCY) received three approvable letters from the FDA, never conducted new clinical trials, and now its drug Thelin is probably going to be left for dead in the United States, even though it is approved in Europe. The FDA asked Theravance to resolve issues with good manufacturing practices compliance at a third-party manufacturer, as well as asked the company to revise its labeling for Telavancin. Lastly, the FDA asked the company for more clinical data or to re-analyze its current clinical data. However, the company is downplaying the data part, saying that it believes the current data is sufficient. This worries me. Based on what I've seen in cases like Encysive's, I don't know if Telavancin is going to get approved. Investors are obviously worried as well, as the stock has tanked to 52-week lows. A play here would be highly speculative if investors want to be long.

As for Cubicin, it is already approved and Cubist has a good chance to seize some market share. The company believes that Cubicin could reach $750 million in sales annually in the U.S. alone, and if that were to happen, I believe Cubist is undervalued. However, with competition from Pfizer, potentially Theravance, and others, those sales numbers might not be met.
Regardless, with the extra attention this market is receiving right now, I like Cubist. I think the stock has a fair value around $30, thanks to Cubicin's expected growth over the next two years. However, I do want to keep an eye on its competition, and its pipeline. Cubist just reached an agreement with Illumigen Biosciences to buy a pre-clinical Hepatitis C drug, but there is not much else currently in the pipeline. If Cubicin were to falter, Cubist does not have much to keep investors happy.

If you feel compelled to play the current Staph infection outbreak, I think Cubist is the best play. There is too much uncertainty with Theravance, and Pfizer has problems beyond just its problems with Zeven. Cubist, on the other hand, is profitable, growing strong and well positioned to gain market share in a growing market.


Disclosure: I do not have positions in the stocks mentioned

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