- SCYNEXIS is a misunderstood candidate where the market is only beginning to understand its valuation.
- We explain the history of their drug’s departure from Merck.
- We discuss invasive Candidiasis occurrences and resistance rates.
- We formulate the “low-hanging, FDA-required fruit” hypothesis.
- Finally, we discuss the future moves of SCYX.
First – we want to cover everything you need to know about SCYNEXIS for the next 8 months – given a linear trajectory.
We explained that the market response to phase 2 IV+Oral step-down would likely mimic the phase 2 response to that of the VVC/rVVC. Thesis was confirmed – the stock hardly moved on positive data, and we maintained that this would be an excellent buying opportunity.
Coincidentally, SCYNEXIS’ recent Qualified infectious disease product (QIDP) status, an orphan drug/fast track, and a bullish Guggenheim initiation on the stock have propelled the stock up around 50% from its low $2.00 levels which it was trading at from June – August leading up to their second Phase II trial.
Here we are going to build for you what we call the “Affordable Low-Hanging Fruit“ hypothesis of SCYNEXIS.
That is, a buy-out scenario – primarily weighted on data that is equivalent or superior to fluconazole – but also largely leveraged by federal and World Health Organization (WHO) pressure for their drug to exist.
We believe the following points and we will succinctly outline each of these points to help illustrate to you a company largely oversold and misunderstood (we’ll retract ‘oversold’ if it maintains this upward trend). Here’s what we’re going over:
- Merck dropped SCY-078 at its prospective “low” in terms of future risk adjusted market value in their opinion, and SCYNEXIS swooped it up because they knew the fundamental value
- The GAIN act will pave an easy ride for SCYNEXIS as long as efficacy remains similar (or better) to previous data from trials
- Resistance is a problem – but it’s not being realized yet. It will materialize, but fungi resistance is not as clear cut as one may think on the surface.
- EU is a potentially lucrative target in crosshairs. We explain unique pricing differentials and also completely different and surprising fungi behaviors observed in the EU.
- The current (new) Phase 2 trials – vaginal yeast infection (VVC) and invasive candidias (IC) – results
- Combination therapies
- Most importantly, this drug is required to exist in clinics
- Finances – SCYNEXIS is well funded. We discuss shift to Cantor Fitzgerald, ATM shelf, and interest from strategic entities and parties whom will begin holding shares tightly, after the recent offering.
1) Lets begin with how SCYNEXIS started and why Merck abandoned the drug.
We spoke about it before in our other article and likened it to Merck realizing that although the drug had shown efficacy – there were likely more lucrative pipeline candidates that could use the extra funding and effort. So they dropped MK-3118. [If Merck ever came up with a drug termed Ultra… nevermind]
Recently, we’ve come across more solid information about MK-3118. During a large meeting, likely with multiple pipeline directors involved, the fact stood that
Merck’s drug Caspofungin was holding steady in sales around $500-700 Million.
In 2013 – after a slight uptick from the previous year of sales onCasponfungin (“Cancidas”) – Merck gave the rights of MK-3118 to SCYNEXIS, now SCY-078. This came in time of losing patent rights to Cancidas/Capsofungin in the US and multiple litigations involving Merck to follow.
Merck’s perspective was likely multisided:
- Resistance to azoles was increasing in strains, but not in patient populations.
- Echinocandin resistances were growing too.
- Global sales of “Cancidas” remained relatively strong.
These three facts likely gave Merck the impression that pooling more money into MK-3118 (SCY-078) was not worth it. With decreasing incidences of total reported resistant outbreaks, echinocandin resistance increasing, and global sales staying relatively constant, Merck likely wanted to move money elsewhere.
So how did SCYNEXIS even begin in acquiring the drug? Real pivotal point here – extremely important – SCYNEXIS developed it in the first place.
SCYNEXIS was actually contracted to develop an echinocandin-derivative that would be orally available, and they succeeded. There were actually multiple lead candidates, but the optimal drug seemed to be MK-3118/SCY-078. The company itself, began as a CRO-like entity.
Thus SCYNEXIS had access to all the data of this special antifungal evenbefore Merck did. They were as informed, if not more informed about its properties from the beginning, thus in acquiring the drug, they knew exactly what they were getting into.
2) The GAIN act, the WHO and the CDC are indirect, if not hidden, leveraged entities of the eventual success of SCY-078.
No need to beat around the bush. Here’s from wikipedia:
The GAIN Act was passed to incentivize the development of new antibiotics in response to the growing threat of antibiotic resistanceand a lack of antibiotic products in pharmaceutical manufacturers’ pipelines.
This was done in 2012 through the FDA, making it easier for a smaller spin-off or start-up to gain traction, momentum, and speed for developing products in the field of antibiotics and antifungals.
We can side-track a bit to explain this problem in a more fundamental sense.
Antibiotic use, albeit extremely effective in most cases, does put evolutionary (mutational) pressure on micro-organisms to gain resistance to chemicals and bio-agents that we have developed to kill them. Such is life in parasitic co-habitation – a catch-22.
Thus “Super-bugs” are born. Clostiridium difficile is one of the major issues in this area (not a fungus, though). We’ve written a bit on that in our Seres Therapeutics article, may god have mercy on that stock. (Mr. Pomerantz: if you are reading this please save your company or just return the money to investors and sell the assets.)
This problem is even more prevalent in agriculture, where “super-weeds” are a real issue on farms now, due to the over-use of specific herbicides. This is especially the case in Holland. Please read: The Rise of the Super Weeds. Thus we have the fundamental issue, which there is no “correct” solution for, but can be summed as:
The use of chemical agents which threaten survival put pressure on mutational advantages to benefit survival.
Although you can make the case that SCY-078 is just another chemical and does not get around the fundamental issue, it’s a difficult stance to take in face of patient mortality with proven efficacy in resistant strains. Thus it’s a common ideology to adopt “the bigger the arsenal, the better”. We’ll get into this in the end of the article.
Back to the GAIN act – this is similar to fast track, but specific to antibiotic/antifungal/anti-infective drugs. SCYNEXIS now has this supportive advantage in multiple indications, and we can expect this advantageous labelling to continue with new pipeline candidates, if they show up. Good!
3) Resistance is known, but it’s not really understood.
The big misunderstanding about resistance, specifically in the field of invasive candidas is that resistance isn’t growing exponentially.
First we have to look at the amount of Invasive Candidas occurrences:
These are reported cases of invasive candidas in the US in selected cities. As you can see – looks to be decreasing. We explain this in the other article.
But this isn’t the bigger picture, and actually, these numbers are likely explained by something even more fundamental – simple practitioner changes.
It’s highly likely that after the GAIN act, there has been increased awareness of the dangers of antibiotic/antifungal resistance, and the over-prescribing of antibiotics has likely diminished.
In fact, some market research analyses indicate that Fluconazole will be completely wiped out some time shortly after 2022. Personally, we believe this is an over-reaction, and keeping azoles at a minimal level in the treatment of these indications is important. But sometimes biotech and healthcare don’t run on logic.
Here’s some older resistance level data:
While resistance levels seem to be stabilizing in the US, this is likely not a result of evolutionary/mutational slow-down.
This is likely due to institutional/clinical setting changes. This will onlytemporarily decrease resistance incidences, as the evolutionary pressure is still there, as anti-fungals and anti-biotics will continue to be used. We will see a resurgence of resistance.
Let me repeat: We will see a resurgence of resistance.
And here is how we explain this:
Due to the recent changes in infrastructure and general practice that have lead to massive declines in infection rates (bacterial & fungal) we believe that 2016-2017 are the inflection points where we may see one of three scenarios:
- Continuous decline or stagnation of infection rates going forward thanks to good practice.
- Sudden resurgence tied to resistance and a relaxation on general practices.
- Gradual increase or reversion to mean of incidence with an exponential increase in resistance.
What is most likely to occur is actually (1), which I will try to sum up in two graphs:
(Source: National interventions aimed at reducing MRSA BSI)
The above figure indicates MRSA (Methicillin-resistant Staphylococcus aureus), a very dangerous bacterial infection, incidences over the years and describes the steps taken that dropped occurrences. But let’s take a look at before any of these steps were taken:
As can be seen, if gone unchecked, MRSA occurrences are exponential in prevalence.
What we predict is likely to happen is that while infections have largely been diminished to a great extent thanks to CDC guidelines, we’re going to see that even these changes will still lead to a new exponential growth of fungal and bacterial infections. Albeit starting from extremely low levels. Thus the timeline of when SCY-078 becomes an exceptionally important asset to have is of paramount importance. We’ll get into this at the summary.
Even though SCY-078 is derived from echinocandins, the structure is sufficiently differentiated from them that it’s binding orientation to the respective target is most assuredly different, thus importantly, different mutations giving rise to resistance in the strains can have differential responses to SCY-078 and other echinocandins. I.E. SCY-078 can (and has demonstrated to) have superior activity on echinocandin-resistant strains.
4) The EU market is more lucrative for antifungals than the US
Strange, isn’t it?
A feather in the cap for SCYNEXIS is that they’ve gained SME status in the EU. Although not fireworks and champagne, it’s good.
What’s more important is that the EU generally has a higher premium for anti-fungals and anti-biotics. This is largely due to a stronger stance against infectives as a whole in comparison to the US.
One of the frightening statistics that is currently positioned to leverage companies like SCYNEXIS in the EU is Candida auris. This species and strain can have extremely high mortality rates and is already multi-drug resistant. There are reports of this entering Europe now. Although I’m unaware of any data of 078 on C. auris it will be incredibly important if they show any effectiveness.
We expect SCYNEXIS to move into the EU at an appropriate time, likely soon and we also expect this to improve shareholder value in the short and long-term. Why? Because as with Pieris, a company can potentially leverage EU’s pricing command as a way of a testing the water, if it wishes to prove points to a potential partner/buyer or otherwise.
5) The Newest Trial Data From IV+Step-down Phase 2 Report
Again, no beating around the bush, we’ve pulled this from the company slides:
What we want to see here is these points in comparison to Fluconazole:
- Was SCY-078 efficacy equal or superior ✓
- Was SCY-078 safety equal or superior ✓
- Was SCY-078 PK good ✓
That last point isn’t extremely obvious from the above, however, there is plenty of evidence in the literature and previous data that pharmaco-kinetics (NYSE:PK) are favorable. PK is one of the most telling properties of efficacy for anti-fungals – i.e. linear increase in concentration should lead to linear increase in efficacy, which we have seen before.
Again – from our previous article we stated that if the drug shows equivalency (and not a dramatic increase in efficacy) the share price will go flat in response. It did. That was a fantastic buying opportunity.
What about VVC/rVVC, which is the biggest potential market?
The market value of VVC and rVVC is huge, really huge. L.E.K. Consulting primary research has shown that the cost to healthcare providers for both VVC and rVVC is upwards of $4-5 billion. There are approximately 2.3 million unique person-cases per year, and double that for total cases due to recurrent events. What’s interesting is that while fluconazole (and other azoles & topical treatments) do work for VVC, they don’t seem to be effective for rVVC:
- Most cases of rVVC are ironically susceptible to Fluconazole
- Fluconazole is primarily a fungistatic which means it only stops candida from replicating, it does not always kill it
- SCY-078 is a fungicide
If SCYNEXIS were to produce a new clinical trial for VVC or more importantly for rVVC, and if they included a 4-month follow up for reoccurrence, and if that reoccurrence was superior to Fluconazole, they would capture the entire market for rVVC since there is no other approved therapy.
6) Combination Therapies
This is where that catch-22 of how ‘increasing your arsenal can increase the resistance’ comes into play.
While using combinations of antifungals (i.e. SCY-078 + Fluconazole) seems like a no brainer on the surface level of things, a simple reiteration of our quote from above will tell us that we may be increasing the rate of multi-resistant strains.
In short, although we may increase our efficacy in the short-term, and cure more people, in the longer term we could increase the prevalence of strains of Aspergillus/Candida that are resistant to SCY-078 & Fluconazole simultaneously. Not good.
The FDA, WHO, and CDC – although extremely supportive of novel antifungals/antibiotics – do not like combination therapies because they will speed up the spread of resistant strains.
So, SCYNEXIS is likely presented with a very fragile road to walk down with respects to combination therapies and likely will not test these waters unless in a substantially safe financial position in which they can risk the loss of a trial due to FDA/CDC concerns.
However, keep in mind for the years down the road, this may become an important, viable option and could present a new SoC if the CDC and general literature is able to make a safe claim for this paradigm. We view combination therapies as coming onto the table as experimental trials after approval for dealing with unknowns and new strains or anomalies which may arise, and beyond the current scopes of the company.
7) This Drug Is Required To Exist
This is our outlook on the company, without getting into financials and other valuations:
Because of the exponential nature of micro-organisms, the increasing threat of resistance, the possible paradigm of combination-step-down therapy, SCY-078 has to exist.
The drug’s efficacy is plain to be seen and it performs in the clinical setting seemingly similar to that of the standard of care.
Although investors would have loved to see superior efficacy (which may still be the case down the road), the fact remains that preclinical data has demonstrated it’s effective against resistant strains of both echinocandins and azoles.
This is the most important statement, in my opinion, within the article:
Thus, in the perspective of the CDC/FDA, what we see is now anaddition to the arsenal in which to fight a growing threat of invasive infections. It doesn’t have to be better for every strain, it just has to be better for some.
In the perspective of SCYNEXIS itself we should be sitting quite comfortably in the knowledge that federal and global health initiatives should be supportive in paving the way to market this drug and the company’s needs for financing further trials & research.
SCYNEXIS currently has an enterprise value of $18.1 M. This assumes for no warrants @ 2.97. At over $3, warrants will dilute basic shareholders to the effect of 23.438m to 23.784m basic shares and the EV would sit at ~27.7 M.
After we wrote our first article, SCYNEXIS tanked to near the 0 EV zone. Something which was the product of mis-digestion of data by Wall Street as we explained above, and redemption of a few funds such as Visium, combined with bad liquidity. On a back-of-the-envelope basis, the company commands a BVPS (Book value per share) of roughly, conservatively $1.87.
We think book value should be taken with a hint of salt and that investors should adjust down mentally by deducting Merck’s milestone fees, because it is fair to assume that in the very near future, the company will have moved forward and as a result have to pay Merck for their next trial and other covenants.
The company is expected to be funded to Q3 2018, in an interview with the CEO Marco & CFO Eric. We see Q2 2018 as being a better adjustment. We see the final trials for SCY-078 encompassing multiple indications with check-ins for rVVC arms (preferably) to analyze durability of drug. Keep in mind, VVC remains present in some women after attempts at treatment, therefore a little extra expenditure may go a long way for shareholders and we believe the company may choose this route as well.
With current cash on hand, we see a required financing by 2Q 2017 (safe) or 3Q 2017. However, with three Phase II trials to be finished this year, we agree with Guggenheim that burn rate will decrease from in the following years of 2018-2020, largely due to lowering of R&D expenses. However, we believe that the Guggenheim estimate burn rates should be adjusted up by 15% from 25.7/13.9/18.1/27.3 for 2017/2018/2019/2020 as this burn rate assumes only a single phase 2 followed by a single 3. We believe at least two phase 2 trials are going to be required and that a single phase 3 is also unlikely to encompass all three branches of their pipeline.
However, at this stage we would not be surprised to see non-dilutive financing such as private placements with warrants for the downside, or large grants. In a dilutive move, prudent usage of the shelf is a possibility as SCYNEXIS develops into maturity. The company has currently used roughly 62.5M of its 150M shelf. This shelf is enough to fund the company for at least two years.
Before we leave the cash discussion, we would like to point out that the payments to Merck could actually occur on an stock-option basis. From our own research and discussions with professionals we identified that big pharma has been flip flopping on the prospects of antifungals and their respective market opportunity in the past years.
Therefore, although we rate it in low probability, we believe that it’s possible Merck may opt for some optionality in stock option and/or out-of-the-money warrants of SCYNEXIS as both SCYNEXIS and Merck wait to see new data on incidence and resistance of fungi. If this were to occur, we would rate this extremely bullish.
We strongly believe that the current market valuation of SCY078 is significantly depressed given its almost fully-derisked nature, and the fact that it is a needed and new class of drug, for our (really, humankind’s) war chest against fungi.
When we at Altum tried to work out a fair rNPV of SCY 078, we found that IC data is sparse and that the current state of IC and rVVC is really at an inflection point which makes a fair and honest valuation or trend analysis difficult. We do hope that government bodies, or SCYNEXIS, Cidara, Basilia, Perrigo, Matinas Biopharma, Viamet, and Medinova release some fresh 2016 data sets for at least the VVC opportunity and accurate future trends in IC.
This would give investors a better picture of whether IC total incidence is resurging, if resistance is building, or otherwise. As pointed out previously, this would also influence big-pharma’s perspective on the field.
The deal-seeking nature of sell-side has netted SCYNEXIS price targets of:
- Guggenheim: $15.
- JMP: $10.00
- Brean: $16.00
- RBC: $15.00
Please note: Some sell-side analysts keep population/incidence stable for IC throughout. This could wildly skew market potential if 2016-2017 IC research shows rates decreasing further (bearish), or increasing exponentially (bullish). Our view is that, like in Holland with the agricultural case study, the resistance will very slowly increase, before surging. A paper linked earlier discusses this phenomenon.
There are a lot of assumptions to be made. We have an internal price target range, but wild assumptions on low data lead to violating Occam’s razor.
We will publish our model when we are equipped with more data.
A small note on competition: We believe SCYNEXIS’ only real competitors are Viamet and Matinas (non Azole, orally available), with Cidara behind those. We do not see Cidara as a major threat due to recent corporate events as well as no oral availability.
But the CMO leaving after a recent IPO, might just have to do with his own shift of interest to CRISPR / CAS9. Cidara insiders have bought stock with IBB’s decline. We will dive the competition’s technology in depth, later on.
Not much needs to be said about SCYNEXIS insiders, other than that they are confident.
9) Summary & Future
Before wrapping up, let’s look at the most direct bear/bull scenarios
The most likely bullish scenario here is the first three points – news of outbreaks, increased resistance, or increased incidence of invasive fungal infections. We’re already seeing this news spread in Europe about C. auris. The other bullish case most pressing is the IV+Step down phase I due November 2016. We’re bullish on this, but have worries on liver toxicity which has been seen in previous P1 trials.
For the most likely bearish scenario, aside from Hillary tweets, would be any success in the early Phase trials of Cidara or Viamet. Although Cidara is not oral, its success would hurt SCYNEXIS due to its longer half-life. However, even with good results from Cidara, an oral echinocandin antifungal is still a lucrative market, as I hope we’ve outlined.
So where will SCYNEXIS go from here?
Notice that they have so far not targeted any specific strains or even general resistance in their IC trials.
This is important – they want to go for the whole market. It also makes sense because isolating strains and trying to confirm their resistance, species, or strains takes time and money. If SCYNEXIS can go without treating a specific subset of Candida, they will take that opportunity.
Unfortunately, I’m not sure how the FDA will take this.
- On the one hand, the FDA generally wants superiority to approve a new standard of care.
- On the other hand, the FDA is pressured by the GAIN act and CDC to approve this drug as quickly as possible for the general indications.
So SCYNEXIS (which knows much more than I) has a fork in the road (optionality as well):
- Redesign phase 2 trials to pursue resistant cases of IC
- Proceed on to one general Phase 3 step-down which will help with time constraints as it could cover multiple indications.
This is what they have on paper at the moment
Personally, we think SCYNEXIS has the whole market in the cross hairs and will not try to target “resistant strains” or specific species and instead shoot for the IV/Oral step-down of SCY-078 for all cases.
It’s risky, we think the FDA will be between a rock and a hard place when it comes time to approval, but we like it. We like it a lot. The reason the FDA may give in with weakened happiness is comparison to SoC will likely not show superiority as long as SCYNEXIS doesn’t target a specific resistant strain. It’s choppy waters, with a good chance at a jack pot, in our opinion.
One of the last points to make is the timeline. As specified above, we’re at very low levels of blood line infections in comparison to a decade ago. This is why Merck dropped MK-3118, but it’s also why SCYNEXIS picked it up – it was affordable and resistance isn’t going to go away.
What is incredible is we believe that the exact timing of completion of Phase 3– somewhere around 2019 for any method addressing IC – is the exact range of timing that resistance will show up as a serious issue again with new methodologies and antibiotics being required to exist (2019-2022).
With that, we’ll open the floor to comments and valuations of your own.
Disclosure: I am/we are long SCYX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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