Expert Financial Analysis and Reporting

 

I am reiterating my buy recommendation on Trius Therapeutics (NASDAQ: TSRX). This note is follow-up to a 35 page report called "Trius Therapeutics' Tedizolid has Blockbuster Potential for MRSA Infections" which was issued on May 30, 2012 when Trius closed at a price of $5.01. I laid out my thinking on why I thought tedizolid could reach $1 billion of sales in 2020 and why I thought that Trius could potentially sell at $60 per share in 2020. I would urge investors to refer to that report for a more comprehensive analysis, but in this note I want to briefly update and refresh investors on my thinking regarding the stock. The full report on Trius can be found with this link.

Since my initial  report was issued, Trius has been in a trading range of $4.87 to $6.49 per share. I think that the stock can break out of this range on the upside following the potential release of data from a second Phase III early in 2013. This IV-oral switch study is intended to confirm the positive results of the earlier oral Phase III trial for acute bacterial skin and skin structure infections (ABSSSI). I would buy the stock before the release of that data. Success in this Phase III trial, which I am expecting, will give investors the confidence that tedizolid will be approved. It is important to note that investors often anticipate that companies will do a financing off of a successful trial result and this can cause the stock to trade down on the good news. However, Trius has its financial house in order with $84 million of cash on its current balance sheet so that concern for a possible equity offering should not be a drag on the stock price.

I think that after this event, Trius will also clarify which path to commercialization it will take. It has retained all product rights in the US, Canada and the European Union, giving the company great flexibility and control. It may choose to launch the product on its own or with a partner in the US, but because of daunting infrastructure needs, it will almost certainly choose to partner in Europe. Because of its financial strength, Trius does not have to bring on a partner until after the results are announced. The "go it alone" in the US is the strategy that I prefer and believe would lead to the greatest shareholder value in the long term. However, Trius also has the option to partner the product in the US as well as in international markets or to just sell the entire company.

Investors usually prefer the partnering or outright sale options as they take away a significant part of the launch risk and produce a quicker immediate return. I would expect a significant increase in price if an acquisition occurs. In December 2006, Forest Laboratories (FRX) paid $594 million (including $494 million upfront) to acquire Cerexa Inc. The company was just about to enter Phase III trials for ceftaroline, an intravenous cephalosporin antibiotic for use against MRSA and certain gram-negative bacteria. Ceftaroline operates in a somewhat different setting than tedizolid; I consider tedizolid to have more commercial potential. A takeover value of $594 million for Trius translates into $15 per share.

The decision to go it alone in the US might result in a more modest move in the stock in the near term as investors would be concerned about launch risk; I would estimate a price move to $7+ with this option. However, I think this would be the best outcome for long term shareholders as my analysis leads me to project a $60 target price in 2020. A worldwide partnering deal might produce an in between outcome on the stock price of perhaps $7 and $12. All of these estimates assume successful results in the upcoming Phase III trial.