Anacor Pharmaceuticals (NASDAQ:ANAC)

CAPS Rating: 1 out of 5

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Player Avatar zzlangerhans (99.75) Submitted: 2/3/2012 2:12:16 PM : Underperform Start Price: $7.54 ANAC Score: +17.13

Is the amazing upward move in baby biotech so far this year for real? Maybe for some like Medivation and Regeneron it is, but my experience with these stocks over the last five years has taught me to maintain a healthy skepticism. On the other hand, I'm trying to avoid the mistake I've made in the past of red thumbing stocks just because the share price exploded without carefully re-evaluating all their prospects - see Pharmasset, Achillion, and quite a few others.

I'm thumbing through my list of 2012 runners on a regular basis trying to separate the wheat from the chaff. One company that's looking decidedly chaffy is Anacor, the subject of a GBMB recommendation just six months ago. I suggested buying below 5.5, and the share price dropped as low as 4.33 in the midst of last August's decline. I never bought, since Anacor was one of my more speculative picks and I was fearful of a much more severe broad meltdown. The share price is now flirting with 7.5 after a 2011 replete with somewhat flimsy phase II data and I'm just not buying it.

As I've previously written, phase IIb data for AN2728 in psoriasis was decidedly weak. Best results were seen at day 42 showing 26% success with AN2728 vs 18% with placebo. By the end of treatment on day 84, the difference was only 17% vs 14%. The trial was not powered to detect statistical significance. The FDA has given the company clearance to proceed with phase III trials, but they have not yet stated if they will do so.

In 12/11 the company announced positive preliminary results of the phase IIa trial of AN2728 and AN2898 in atopic dermatitis. After 28 days of treatment the ADSI score was improved in 64% lesions treated with AN2728 vs 24% lesions treated with vehicle, and 71% receiving AN2898 vs 14% with vehicle. Lesions treated with AN2898 showed a 68% mean improvement in ADSI score compared to a 45% mean improvement in ADSI score for lesions treated with vehicle. However, if only 14% of patients receiving vehicle showed any improvement, it is hard to see how the mean improvement could have been 45%. All results were stat sig but groups were very small. The company will complete the trial analysis in early 2012 and then decide on subsequent development plans.

Meanwhile, phase III trials of tavaborole (AN2690) for onchomycosis have progressed with both trials having likely completed enrollment. Data from phase IIb trials of GSK2251052 (formerly AN3365) in cUTI and cIAI is expected later this year.

There is certainly potential for me to be wrong about this pick and pay a heavy price in CAPS points. Taken together, the pipeline has potential. However, I'm not seeing any one candidate that is likely to become a strong revenue driver in the near future, given the weakness of the dermatologic data and the questionable commercial potential of antibiotics. I expect that if this counterintuitive pharmaceutical bull market turns, Anacor's share price may be one of the first victims.

Anacor (ANAC) - market cap 164M, share price 5.84. Cash 77M, debt 9M, quarterly burn 8-14M. This company only IPO'd eight months ago which makes them a little easier to analyze, yet more difficult to predict. I liked what I saw the first time I checked out the pipeline of novel boron-based small molecule drugs, but the stock has flailed while IPO peers Pacira, Endocyte, and Ventrus have soared. Compounds in clinical trials include topical PDE4 inhibitors AN2728 and AN2898 for plaque psoriasis and atopic dermatitis, fungal tRNA inhibitors AN2690 and AN2718 for onchomycosis, and GSK2251052 anti-Gram negative antibiotic. Upcoming catalysts include phase II data for AN2728 and AN2898 in mild-to-moderate atopic dermatitis and completion of enrollment in two phase III trials of AN2690 in onchomycosis in H2 2011. Meanwhile, Glaxo has initiated phase IIb trials of GSK2251052 in UTI and intra-abdominal infections. I expect the most recent weakness in the stock relates to unimpressive phase IIb data for AN2728 in psoriasis, which was discouraging but not a death blow for the compound. The Glaxo compound alone would seem to justify the 100M enterprise value I expect to see when earnings are next reported. I would consider a GBMB buy below 5.5, as long as we're also seeing stabilization in the share price and the broad market.

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