Sector Watch: An apple, or pill, a day
Bette Davis once said “old age is no place for sissies,” and to a degree, she was right. Old age not only brings wrinkles, but serious diseases such as Alzheimer’s and diabetes. Two drug companies that want to make the transition into your golden years a bit more tolerable are Transition Therapeutics Inc. (Nasdaq:TTHI) and Sirtris Pharmaceuticals Inc. (Nasdaq:SIRT).
Both companies have ample cash for funding further development efforts and have made noteworthy progress over the last year advancing lead compounds. While Transition and Sirtris are likely several years away from commercial sales, their drug candidates address huge, growing markets, estimated at hundreds of millions of patients worldwide, and have significant future revenue potential.
Transition is developing novel drugs for treating Alzheimer’s disease and Type 2 diabetes. Its lead compound, ELND005, for the treatment of Alzheimer’s disease, works by breaking down neurotoxic fibrils in the brain and allowing certain peptides to clear the body before they can form plaque. Alzheimer’s disease is the fourth leading cause of death among U.S. adults and has no cure; it begins with memory loss and eventually progresses to overall loss of cognitive function. Most Alzheimer’s patients die within eight years of diagnosis. More than 30 million people worldwide currently suffer from the disease and their numbers are expected to increase dramatically as the number of seniors grows.
The company is partnering with Elan Corporation (NYSE:ELN) to develop and commercialize ELND005. Phase II clinical trials of the drug involving some 340 patients with mild to moderate Alzheimer’s disease began last December and are expected to last approximately 18 months. To help fund the trials, Transition received milestone payments from Elan totaling $7.5 million last October and $5 million this January.
Transition is also developing TT-223 for the treatment of Type 2 diabetes. TT-223 works by regenerating the body’s insulin-producing cells. Diabetes is the world’s fastest-growing disease; there are more than 200 million diabetics worldwide and it is estimated one in 10 patients will eventually die from complications of the disease. Type 2 diabetes accounts for 90% of all cases and usually develops in adulthood. Transition is partnering with Eli Lilly & Co. (NYSE:LLY) to develop and commercialize the diabetes drugs in Transition’s pipeline. As part of a deal signed in March, Lilly will pay Transition $7 million initially and up to $130 million if the drug achieves certain development and sales milestones. Transition will also receive royalties on TT-223 product sales from Lilly. Pre-clinical studies of TT-223 have been completed, as have Phase I studies to determine dosage ranges. Phase II clinical trials with Type 2 diabetes patients are anticipated to begin soon.
During the first half of FY 2008, Transition generated licensing fees of $1.6 million from a terminated licensing agreement with Novo Nordisk, spent $5.2 million on research and development and posted a six-month net loss of $5.7 million, or $0.25 per share. The company has $60 million in cash and alliances with leading pharmaceutical makers that support its product development efforts. My $18 price target for Transition is about 60% above Tuesday’s closing price of $11.21. Shares have ranged between $8.73 and $16.21 over the last 52 weeks.
Also treading in the biopharmaceutical pond is Sirtris Pharmaceuticals, a developer of therapeutics for treating Type 2 diabetes. The company’s drug candidates are based on a recently discovered class of enzymes called “sirtuins” that work by mimicking health benefits associated with calorie restriction without requiring a change in eating habits. Studies have shown that calorie restriction (i.e., 30% to 40% reduction in normal calorie intake) can extend healthy life spans in many species. In addition, calorie-restricted animals showed improvement in glucose levels and insulin sensitivity. Sirtris has licensed over 180 patents relating to sirtuins and their use in treating diseases of aging.
During 2007, Sirtris reported positive Phase I clinical trial results with its lead candidate, SRT501, with Type 2 diabetes patients. The company also advanced its program of new chemical entities (NCE) containing sirtuins that are chemically distinct from and much more potent than SRT501.
Sirtris anticipates commencing Phase I clinical trials of new NCE compounds in the first half of 2008. NCE compounds potentially represent a new frontline therapy for Type 2 diabetes that can be administered orally and doesn’t cause weight gain, a side effect of most existing diabetes drugs.
The company received its first patent covering sirtuins in March. In addition to applications in treating Type 2 diabetes, sirtuin enzymes have potential applications in treating metabolic and cardiovascular disease, neuron-degeneration, inflammation and cancer. A Phase I study with SRT501 in an oncology indication is scheduled for mid-2008. In addition, Sirtris is initiating pre-clinical studies with SRT501 and NCEs in collaboration with the National Cancer Institute.
Sirtris spent $29 million on research and development activities last year and reported a 2007 net loss (including stock-based compensation) of $31.1 million, or $1.74 per share. At year-end 2007, the company had $118.1 million in cash that will be used to fund estimated R&D spending of $48 million in 2008. Sirtris also plans to find a strategic partner over the next new months that can assist the company with clinical trials and product commercialization. My $17 price target for Sirtris represents a 31% premium to Tuesday’s closing price of $13. Over the last 52 weeks, shares have ranged between $9.50 and $21.99.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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