Interactive Investor

Motif Bio's multi-billion dollar best-seller?

18th June 2015 10:32

Lee Wild from interactive investor

Hospital can be a dangerous place. So-called "superbugs" - MRSA and Clostridium difficile in particular - are potentially fatal. About 300,000 people develop infections while being treated by the NHS every year. Nearly 50,000 die every year across Europe and the US because many antibiotics are now useless as bugs develop resistance. It's a problem which has reached crisis point.

Doctors need new antibiotics like never before. And one company, listed on AIM for just a couple of months, thinks it has the answer. Motif Bio has acquired a late-stage antibiotic called iclaprim, which targets skin and skin structure bacterial infections that are increasingly resistant to existing antibiotics.

It's been around for years, discovered by F. Hoffman-La Roche before being licensed and developed by Swiss biotech Arpida. Things didn't go well, though. Following an over-ambitious Phase III trial, iclaprim was rejected by the US Food & Drug Administration (FDA). But with over $300 million spent on it already, Motif reckons that with a few tweaks this potentially lucrative antibiotic can tackle the crisis head on.

In a recent meeting with Interactive Investor, chairman and biotech start-up expert Richard Morgan explained why his antibiotic was different to the others.

"It penetrates cells and interferes with DNA production," said Morgan, also chief executive at 50% shareholder Amphion Innovations. "Then it kills the bug. Rival antibiotics just slow the rate of reproduction. But this drug penetrates the bacteria's reproductive machinery."

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Iclaprim is one of four antibiotics on the way to market and was declared safe by the FDA, two weeks after Motif's IPO on 2 April.

"We think our drug will be on the market for 5-10 years before we see any resistance," Morgan told us. "For Paratek [$476 million Nasdaq-listed rival] it could be within one year."

"It has the potential to be a multi-billion dollar best-seller."

Motif wants to enter Phase III trials in the second half of 2015, so it's a little behind Paratek which could begin its own trials within weeks. Commercialisation could yet take three years from now, though. Skin trials - Arpida had already run them, but the FDA "has moved the goal posts" and is demanding new data - will take about 18 months, and data analysis will take time, too.

Morgan also wants to get trials for iclaprim in pneumonia underway before the skin trials end - "we'd like to start in the first or second quarter of 2016," he says. Pneumonia is the most common cause of death among hospital-acquired infections. Trials, however, will be tougher than usual as the subjects in clinical trials for pneumonia are invariably being treated for other serious illnesses.

A deal signed earlier this month with a leading clinical research organisation (CRO) should help. Motif is paying it $950,000 to do the prep work for two Phase III skin trials. Of course, the trials themselves are also expensive. It will cost $20 million for each of the them and a further $35 million for the pneumonia trial - $75 million in total. Morgan says Motif is already "reaching out" to funding sources such as company management, partners and capital markets.

Clearly, the potential here is significant. But what are Motif Bio shares worth? Well, the company raised £2.8 million at IPO at just 20p a share, but investors chased them up to almost 77p. They're currently 59p, but Vadim Alexandre at house broker Northland Capital thinks it will be more.

"[Iclaprim] is set to fill a major market void," he says. "Having already been tested on over a thousand patients, iclaprim's safety and efficacy is well supported. If approved, the drug could achieve over $1bn/year in sales. We initiate coverage with a 'buy' rating and 89p price target."

However, that's not all. "[there is] substantial scope for future upgrades, as the group hits short term milestones. Moreover, Motif's closest peer, Paratek, trades at a substantial premium to our target valuation."

Northland expects a maiden pre-tax profit in 2016 of $23.6 million on revenue of $25.8 million. Its discounted cash flow (DCF) analysis assumes iclaprim is launched in the US in 2018 and that the addressable market is two million patients annually in the first year of sales in the US, one million Europe and one million in the rest of the world. Market penetration is pencilled in at a highly conservative 0.3%, rising to 1.2% after five years of sales. A 10-day course is estimated to cost $3,650 in 2018 then growing at 3% a year.

"Our estimates indicate that iclaprim could achieve end market sales of over $1bn by 2025," says Alexandre.

Clearly, iclaprim has stacks of potential. In fact, it appears to have a better chance of success than many other development drugs out there. Morgan assures us there'll be regular updates, too, which is a comfort given that irregular newsflow is often the downfall of even the most promising biotech.

That said, getting a drug to market, even at this late stage, takes time. It'll be three years before the real money rolls in, assuming trials go well and that iclaprim gets approval. Funds will have to be raised, too, and partnering agreements struck. Despite all the usual risks, however, and with all the obligatory warnings for widows and orphans, Motif Bio looks like an exciting bet on a potential blockbuster antibiotic that could save thousands of lives every year. Put it on your watchlist.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.