What’s Bonner’s “FDA Fast Tracks $6.8 Billion Miracle Antibiotic” pitch about?

by Travis Johnson, Stock Gumshoe | April 28, 2020 1:01 am

Checking into Jeff Brown's "July 1st Approval" teaser pitch -- he says that " I believe this tiny company is sitting on the biggest medical breakthrough in over three decades. Possibly since the discovery of penicillin in 1928."

The latest teaser pitch from Jeff Brown[1] has gotten a lot of attention from Gumshoe readers… so let’s dig in and get some answers (and yes, some readers already posted their findings in our discussions area[2]… so we’ll see if they got the right answer).

The ad is all about a microcap biotech stock that owns a “breakthrough antibiotic” — with the tease being that when “Phase 3 Approval is announced” the stock “could jump 12X in a matter of hours.”

Which is always possible, of course, there are a few past examples from history of little biotechs that surged dramatically higher because of a surprisingly good clinical trial result or an unexpected FDA[3] approval or a huge takeover offer (there has to be some surprise, though, at least for short-term gains… if most followers of that stock expect approval, then approval does not lead to 1,000% gains).

So what’s he looking at this time? This is the lead-in to the ad, which is a pitch for Brown’s pricier newsletter (Exponential Tech Investor[4], $2,000/yr, no refunds):

“The most powerful antibiotic in history is on the verge of approval.

“And not a moment too soon.

“Already this year, we’ve seen the outbreak of COVID-19 – the latest in a string of potentially deadly epidemics.

“And antibacterial infections are killing people at a rate similar to the Middle Ages.

“Yet we’re currently using antibiotics[5] made in the 1980s.

“And these drugs are proving less effective by the day.”

We’ve been seeing teases for the “next great antibiotic” for as long as Stock Gumshoe has been publishing (we just had our 13th birthday in March, in case you’re wondering)… and there have been a few successes in that area, though most of the drugs that have been teased as solutions to the “superbug” problem or as ways to fix the scourge of “antibiotic resistance” haven’t become blockbusters.

Partly that’s because some of them failed in clinical trials, or ended up with very limited indications that weren’t big enough to generate revenue, but mostly it comes down to the fact that the development and use of new antibiotics has not been very well incentivized by the US healthcare[6] system over the past few decades. Our medical writer Michael Jorrin (Doc Gumshoe) noted the problems that pharmaceutical companies face in antibiotic development, and the reason why so many of them have essentially abandoned that business, in a piece for us about antibiotic resistance back in December[7]… here’s part of what he said:

“Pharmaceutical companies are simply not lavishing large amounts of money, nor yet large amounts of time and energy, on the development of new antibiotics or antimicrobials. It is not good business to do so. As by now you are aware, bringing a new drug from the earliest research into the active molecular agent all the way through to regulatory approval and market launch is extremely expensive. A usually cited price tag is $1.5 billion. Billion, not million.

“Yes, a billion and a half or so is an okay amount to bet on a drug that addresses a disease form for which most existing treatments are less than adequate – for example, one of the many cancer variants which so far have not responded to existing treatment. One would think that a new antibiotic, which successfully managed infections that don’t respond to any existing antibiotics, would be a pretty good bet.

“But that’s not how it works. Let’s say that Company Alpha has developed and brought to market an antibiotic that effectively resolves hospital-acquired pneumonias that have not responded to any other drug in the hospital’s armamentarium. That drug, which we will call AlphaBeta, has the capacity to save the lives of a certain number of patients that develop similar nosocomial pneumonias, and would otherwise have died in the hospital. You could call it a “miracle drug.”

“However, even though it is a “miracle drug,” chances are that it will not make a whole lot of money for Company Alpha. The reason for that is that, chances are, AlphaBeta won’t be used much. Most patients that develop nosocomial pneumonia will be treated successfully with existing drugs, of which there are many. The physicians in charge of the patient’s care have several drugs at their disposal, and they will use those first. AlphaBeta has to be kept in reserve for those cases that don’t respond to the existing drugs. The medical establishment wants it that way. It’s best to hold the big guns in reserve until you need them. That way, you always have the ultimate weapon available.”

That’s the primary reason why antibiotics have been “less than blockbuster” investments in recent decades, though overseas generic competition (and pirating, then overuse) of new antibiotics is also an issue.

But, yes, antibiotic resistance is still a major problem, as pathogens mutate and existing antibiotics begin to fail against some of the worst bugs, and the government is still actively trying to encourage the development of new antibiotics, and lots of smaller companies have ushered new drugs through clinical trials in the past five or ten years. So which one is this that Brown is touting?

Some more clues…

“… the FDA just fast-tracked the approval of this breakthrough antibiotic….

“Desperate for this miracle cure to hit the market, the FDA allowed the tiny company that makes it to skip Phase 2 trials completely.

“Now, Phase 3 approval is due early in the third quarter. Perhaps as soon as July 1st.”

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And Brown thinks that approval will create a huge market for them (we’ll see what the stock is and you can make your own call… I’m guessing Doc Gumshoe might be a little more skeptical about the market size)…

“When the final approval is granted, this $180 million microcap will grab a lion’s share of the $6.8 billion antibiotic market.”

Other hints about this little fella?

“They already have the exclusive right to sell this cure in the US and Europe….

“The Department of Defense[8] invested over $15 million into this company.

“Tech giant Google is also a big investor. Bill Gates[9] is also involved through his foundation.”

Anything else? Not really, though the ad presentation drones[10] on for ages as they cite past biotech winners (always easier to find than future biotech winners, naturally), and repeat the tidbits over and over about the military connection, or Bill Gates’ involvement, or the vast size of the “superbug” problem.

More hype, though:

“The last breakthroughs in this field were antibiotics called Monobactam and Daptomycin. That was back in the late 1980s.

“That’s right.

“The antibiotics we’re using today – in 2020 – were made back in the 1980s.

“It’s why the federal government is practically begging this tiny biotech company to put its breakthrough on the market.”

And in case you want to get to drooling some more…

“Right now, this microcap biotech is just steps away from what could be the biggest antibiotic breakthrough in decades.

“The market for this antibiotic is worth $6.8 billion. And as an early mover, this tiny biotech is set to capture a lion’s share of it.

“And yet, the company’s market cap is just $180 million right now. Only weeks from the imminent FDA approval.

“It makes for a perfect buyout target for big pharma companies.”

So what’s the stock we’re being teased with today? Thinkolator confirms that a few Gumshoe readers who posted their answers were correct, this must be Spero Therapeutics (SPRO), a little antibiotic developer with a small pipeline of antibiotics led by Tebipenem HBr, which is currently in Phase 3 trials with the expectation of “topline data” being released in the third quarter (they also have a couple other anti-infectives on Phase 1, but Tebipenem is the big one… and the relatively safer one, since it’s been approved in Japan[11] since 2009 – Spero effectively went public on the strength of some venture funding and the US license for this drug, which they bought cheap[12], in late 2017).

And yes, it’s a tiny company that matches all of Brown’s clues. The market cap was about $180 million before Brown’s tease, though his attention did send it over $200 million yesterday.

They do have a partnership with the Bill and Melinda Gates Foundation, as of last year they were collaborating on a license for the Foundation to develop their SPR720 as a tuberculosis treatment[13], and with the US Department of Defense, which gave them a grant for development of SPR206 (for gram-negative bacterial infections, now in phase 1 trials). They do also have other government funding specifically for development of their lead drug Tebipenem HBr (formerly called SPR994), including a total of up to $46.8 million from BARDA and $10 million from the Defense Threat Reduction Agency.

And yes, they did get venture backing from GV, the Google Ventures arm of Alphabet (GOOG)… though that was well before the 2017 IPO[14], and I don’t know whether they’re still a Spero investor.

Here’s a summary quote that CEO Ankit Mahadevia, M.D. shared in the press release on March 16 [15]about their operating results and their pipeline progress:

“In 2019 and continuing into 2020, we have made significant clinical progress with positive clinical data reported for all of our pipeline programs, all of which are designed to address serious unmet needs and to treat multi-drug resistant infections. We have a solid cash position heading into 2020 bolstered by proceeds from our $30 million rights offering that closed in early March 2020, and we look forward to an eventful 2020 that includes top-line data from our pivotal Phase 3 clinical trial of tebipenem HBr in complicated urinary tract infections (cUTI) expected in the third quarter of 2020.”

And that’s true — they just raised a bunch of money, so they should be fine until they get through those Phase 3 results and find out whether they’re on the cusp of FDA approval or have more work to do. What the results will be, of course, I have no idea. The Independent Review Committee did evaluate some of the data from the first 70 patients back in October and recommend that the trial continue without modification, so that’s hopeful. Here’s what the CEO said at that time[16]:

“The Phase 3 trial is designed to evaluate whether an oral-only regimen of SPR994 can achieve an outcome similar to that observed with an intravenous antibiotic therapy in patients with complicated urinary tract infections. If SPR994 achieves this outcome and is ultimately approved, we believe it would represent a critical clinical and economic value proposition for the more than two million patients resistant to oral therapies currently used to treat such infections.”

Spero was reportedly able to in-license this pivotal drug, which has been approved in Japan since 2009, for only $600,000 plus possibly $3 million in milestone payments… which tingles my antennae a little bit, since it seems you’re then assuming that they pulled a fast one on Meiji Seika, (which sells the drug in Japan as Orapenem). Meiji does reportedly also get a “low single digit” royalty if Spero gets US approval, so maybe a cheap deal was worthwhile for them after watching so many US antibiotic developers disappoint or go bankrupt… or maybe, as Spero’s CEO puts it in a blog post[17], the collaboration with Meiji and Spero’s hard work at finding a needle in the haystack in the data for that underappreciated drug created some real value that’s just now about to be realized. (Meiji, if you’re curious, is a Japanese dairy, food and pharmaceutical product conglomerate — dairy products are their biggest business, but they do also say they own the biggest market share in Japan for systemic antibacterial drugs.)

Maybe this will work out fantastically well, maybe not — but part of my role is to meet the hype of the newsletter-meisters with a bit of skepticism, and give another angle from which to look at these stocks… so I do want to share a few examples of past antibiotic breakthroughs, many of them similarly hyped by different pundits and newsletter writers, and what they did for their publicly traded owners.

Jeff Brown is misleading us a bit with those “we’re still using antibiotics from the 1980s!” comments — which kind of implies that there have been no new antibiotics developed in the last 30 years… it’s probably fairer to say that most of the new ones that have been developed since then aren’t used all that much.

One was Nuzyra, approved as an exciting new antibiotic for some community-acquired bacterial pneumonia (CABP) and acute skin infections (ABSSSI) on October 2, 2018… and the news was gleefully shared by its developer, Paratek Pharmaceuticals[18], which at the time was a small biotech.

How about now? Well, now it’s a smaller biotech — they had a $300 million market cap before approval (though it spiked as high as $800 million in pre-approval enthusiasm in the prior months), and now it’s down below $200 million. I went back to see what happened to the stock price, and we’ll go back to a week before that FDA approval so we can incorporate any “pop” it got on the news — here’s what the stock has done in roughly 18 months since then:

[19]

At the time, the need for drugs to fight antibiotic resistance was high… as it is now… and investors were estimating huge sales for the small companies who could beat these superbug problems. At least one analyst was forecasting peak sales for Nuzyra of about $500 million, and while it wouldn’t be fair to expect it to hit that peak in year one, one would assume that the actual sales Paratek has generated in the past year are a disappointment — so far they’ve had revenue of about $17 million in the four quarters since the drug was approved, though sales are still growing.

Others? Back in the Spring of 2015 a teaser pitch led me to[20] Tetraphase Pharmaceuticals (TTPH)[21] with one Phase 3 trial under their belt for their eravacycline antibiotic, and sitting on a billion-dollar market cap as investors awaited their payday, hopefully a buyout from big pharma. What happened?

Well, that stock popped higher for a little while, too, awaiting more clinical trial results for eravacycline… and here’s how it went after that initial enthusiasm wore off:

[22]

In this case, the disappointment came in their final Phase 3 trials and the FDA telling them to go back to the drawing board for more clinical trials before they could get the drug approved — and it did eventually get a name (Xerava) and was approved for at least one indication, in 2018. The company is still alive, albeit barely (partly because they raised so much money in 2015, in anticipation of approval and at a nice high share price), but Tetraphase has still never posted more than $20 million in revenue in a year.

Another? There are unfortunately plenty to choose from… Achaogen (AKAO)[23] was an early favorite of Dr. KSS[24], who wrote about biotech stocks for our members for a couple years, and it was a young and promising biotech in the Spring of 2014, with a market cap of just under $300 million and an exciting antibiotic called plazomicin (now called Zemdri) which was just beginning Phase 3 clinical trials in the Spring of 2014. Here’s what happened after that:

[25]

The stock certainly had a nice run for a while, when optimism was high in 2017 and the Baker Brothers bought a big stake and they were granted Breakthrough Therapy designation by the FDA to speed approval. And Plazomicin did eventually get partial approval in one of their indications, in mid-2018[26], but that wasn’t nearly enough for the drug to make business sense, it posted less than a million dollars in sales (after analysts had anticipated $300-500 million in peak annual sales), and Achaogen eventually declared bankruptcy.

Cempra was another “hot” antibiotic name a few years ago, merging with Melinta Therapeutics largely on the strength of their flagship novel antibiotic, Baxdela, which was approved for some indications in 2017 and has continued to get approval for new indications as recently as last fall… but that wasn’t enough to keep Melinta Therapeutics afloat, they declared bankruptcy in December[27]. Melinta has a pipeline of other new and approved antibiotics as well, but still nobody was willing to bid more than $140 million for the company’s assets in the bankruptcy auction.

There have been some successes, too — Durata developed a drug called Dalvance, another new antibiotic that was approved in 2014, and they were bought out by Actavis for a nice premium (about 70% over where the stock was trading, for a total a cost of ~$675 million) not long after that approval was granted. (Actavis was the generic division of Allergan, and was later sold to Teva — which generated tons of headaches for Teva, but that was a $40 billion acquisition and we can’t blame Teva’s problems on that one one little product that was hiding in the Actavis portfolio at that point — though I’m sure they were hoping for Dalvance to have peak sales well above the $88 million they generated in 2019).

And the big one that led off so much of this excitement was Cubist Pharmaceuticals, which was a market darling thanks to the success of Cubicin in 2003, the highest-profile new antibiotic launch I can remember, and that led to the company being bought by Merck in 2014 for $9.5 billion. Reports I’ve seen are that Cubicin hasn’t generated tons of profits for Merck to get them a return on that purchase price, but it has continued to generate revenue, as has the follow-on Cubist drug Zerbaxa… and certainly Cubist shareholders came out OK with the buyout. Big pharma companies have also acquired several other antiobiotic developers along the way, and have come out with a few antibiotics of their own that have achieved some market success, like Pfizer’s Zyox, but many of the biggest-selling antibiotics have been generically available for years now.

And perhaps there have been some other big winners in the antibiotic space recently, but I haven’t noticed any — the drugs do keep getting developed, and approved, and released with attempted commercialization, and there are a half dozen or so smallish antibiotic and anti-infective stocks that cross my screen from time to time… but the problems that Doc Gumshoe and many others[28] have called attention to in the past decade are still with us. Cheap and generic antibiotics still kill most infections and suck up most of the billions of dollars of spending that go into antibiotics each year… and the new therapies are held back both for “stewardship” reasons and for financial reasons. If older antibiotics will work, often several different ones tried in sequence, then doctors get to avoid creating yet more antibiotic resistance… and perhaps as importantly, they get to better manage costs: prescribing a $10,000 drug when a 50-cent one might work is never a hospital’s goal, and that’s especially a big issue if a hospital is working with Medicare bundled reimbursement that might be fixed at $15,000 for the entire treatment regimen — drugs, doctors, nursing, hospital stay and all — for a particular infection.

Antibiotic development is crucial and important, and the FDA knows this and tries to help those companies get approvals with things like “breakthrough therapy” designations or other regulatory “skip the line” help… and other government agencies have invested in or issued hundreds of millions of dollars worth of grants toward novel antibiotic development to help boost the industry, as we see with Spero’s several appealing funding deals… but still, the basic marketplace, driven partly by profit concerns and partly by the need to “protect” novel antibiotics so superbugs don’t develop resistance to them, too, just doesn’t seem to work for these drug developers.

Will that change? That’s a question that’s well above my pay grade, I’m afraid, and maybe the most recent wave of bankruptcies and commercial failures will bring a new reimbursement system or regulatory regime that rewards these novel antibiotics in some other way (or maybe it already has in some quiet way)… but the past history of antibiotics that failed economically (despite their effectiveness or therapeutic success) is enough to keep me from making bets on any of the “next antibiotic” ideas that cross my desk. I should note, though, that being skeptical in this area is pretty easy for me, since I am generally not interested in investing in the murky risk/reward setup offered by clinical-stage biotechs… so maybe, if you’re being optimistic, you can daydream about Spero hopefully becoming the next Cubist.

To be fair, Spero has been thinking about the problems of the antibiotics market all along — I don’t know if their ideas will work, or they’ll be able to tread a different reimbursement path than others before them to earn the “rewards” that they feel are deserved for a “blockbuster” drug (assuming it’s approved), but they do have a strategy that they posted on their website a couple years ago[29] for how it could work (or their history of antibiotic development and the fight against antibiotic resistance here[30]). And you can consult their latest Investor Presentation here[31] to see how they’d like you to think about the company… and their CFO even posted his analysis last year[32] of how he thinks the company is undervalued.

Perhaps you’ve got an answer to that bigger picture question of how to fix the antibiotic market, though, or maybe a reason why this next antibiotic will meet a happier end than the many that have generated enthusiasm for investors but led to huge losses in the last five years… or a different favorite that you think will do better than Spero. If so, feel free to shout out your thoughts with a comment below… thanks for reading!

Disclosure: of the companies mentioned above, I own shares of and/or call options[33] on Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.

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