GSK - Scynexis: From Fungal To Bungle The Brexafemme Recall And A Slippery Slope (Rating Downgrade)

2023-09-26 19:54:24 ET

Summary

• We downgrade Scynexis to a sell rating following the voluntary recall of antifungal pill, Brexafemme.
• Historical precedence suggests that manufacturing recalls can take months to resolve, and for a single-product biotech, we see further downside to the stock price.
• Concerns around the impact on clinical trials, partnership with GSK, and uncertainty surrounding hospital-based fungal infection trials remain a key focus/risk moving forward.

Thesis update: downgrading to a sell rating due to recent product recall

Unexpectedly, SCYNEXIS (SCYX) announced a voluntary recall of its antifungal pill, Brexafemme, which was licensed to GSK (GSK) yesterday. The company noted that the decision came after concerns about potential cross-contamination with an allergy-causing compound; the news caused the stock to drop 30% due to the high degree of uncertainty this news brings to the company's already troubled market launch. To give more context, the company discovered that substances with beta-lactam were made using the same equipment as Brexafemme, and since the FDA requires separate manufacturing for beta-lactam compounds due to potential allergic reactions, they may cause, the company seems to have decided to recall the product to prevent further safety issues voluntarily. The management noted that the recall was precautionary, with no reported adverse events. Now, the key question revolves around how this issue will be resolved; in our view, looking at historical analogs, this issue will take at least a few months to a year to resolve. Furthermore, this jeopardizes the partnership with GSK and may further lead to delays in its clinical trials moving forward and crushes the enthusiasm around the hospital-based fungal infection that has been driving a majority of its value due to better pricing power than the retail indication, such as VVC. For a more in-depth analysis of this topic, please refer to our previous article.

Historical precedence for similar manufacturing recalls

Cross-contamination or manufacturing-related recalls are not uncommon in the biotech and pharmaceutical sectors. These recalls are initiated to protect consumers from potential harm, even if the risk is theoretical. Here are a few examples:

1. Valsartan Recall (2018) :

   • Issue : Valsartan, a popular drug used to treat high blood pressure, was recalled due to contamination with N-Nitrosodimethylamine (NDMA), a potential carcinogen.
   • Duration : The recall started in mid-2018, and investigations, along with subsequent recalls of affected batches, continued well into 2019. The full impact on the supply chain and resolution extended over several months.

2. McNeil Consumer Healthcare Recall (2010) :

   • Issue : McNeil, a subsidiary of Johnson & Johnson, recalled over-the-counter drugs, including Tylenol, Motrin, and Benadryl, due to manufacturing deficiencies that could have affected the quality, purity, and potency of the products.
   • Duration : The recall began in 2010, and efforts to improve manufacturing standards continued for a couple of years, with some products taking years to return to the market.

3. Baxter International Heparin Recall (2008) :

   • Issue : Baxter recalled heparin, a blood thinner, due to contamination with oversulfated chondroitin sulfate, which was associated with severe allergic reactions and deaths.
   • Duration : The initial recall occurred in early 2008, with subsequent investigations and adjustments in the manufacturing process extending through the year.

4. Genzyme’s Allston Manufacturing Plant Incident (2009) :

   • Issue : Genzyme had to halt the production of Cerezyme and Fabrazyme, drugs for rare genetic disorders, due to viral contamination in its Allston, Massachusetts, plant.
   • Duration : The halt began in mid-2009, and while production restarted later the same year, the company faced supply constraints for an extended period due to the production interruption.

5. Excedrin Recall (2012) :

   • Issue : Novartis recalled its over-the-counter migraine medication, Excedrin, due to concerns about potential mix-ups of different products during manufacturing.
   • Duration : The recall was initiated in early 2012, and the product didn't return to most store shelves until 2013.

The duration for resolution in these cases can vary significantly based on the nature of the issue, the company's response, regulatory requirements, and the complexity of the manufacturing process. Some situations might be resolved in months, while others can extend for a couple of years, particularly when significant manufacturing overhauls are required. Considering that Scyx is a small biotech company with limited capacity, although it is partnered with GSK, we expect the recall to take at least several months to resolve.

2 years of cash runway looks pretty decent

On a positive note, the company holds ~$85m cash, which should offer around two years of cash runway (considering around ~$85m of annual cash burn that we have seen so far), which isn't too bad for a SMID cap biotech company and at this valuation, we do not expect further dilution through public raising.

Risks

1. Drug Development Risks : Biotech companies, including Scynexis, often have pipelines of drugs in various stages of development. There's always a risk that a drug might not progress to the next stage or receive FDA approval due to inefficacy, safety concerns, or other regulatory issues.

2. Regulatory Risks : Regulatory bodies like the FDA have stringent requirements. Any negative feedback, delays in approvals, or rejections can significantly impact a biotech company's valuation.

3. Manufacturing Risks : As highlighted by the recall of its antifungal pill, SCYX faces risks associated with manufacturing. Cross-contamination, quality control issues, or disruptions in the supply chain can affect product availability and the company's reputation.

4. Commercialization Risks : Even if a drug is approved, there's no guarantee it will achieve commercial success. It depends on factors like market demand, competition, pricing, and the company's ability to market the product effectively.

5. Financial Health : Like many biotech companies, SCYX may rely on rounds of financing to fund research and development. If the company isn't profitable or struggles to secure funding, it might face financial challenges.

Conclusion

We are downgrading Scynexis from a "hold" to a "sell" rating following its recent announcement of a voluntary recall of the antifungal pill, Brexafemme. This recall, rooted in concerns about potential cross-contamination with an allergy-triggering compound, led to a significant 30% drop in the company's stock, casting doubt on an already challenging market launch. Historical patterns suggest that such manufacturing recalls can take months to years to fully resolve. Notably, the intertwining of the production processes of Brexafemme with beta-lactam compounds, which require separate FDA-regulated manufacturing due to potential allergic reactions, adds layers of complication. Even though the recall is precautionary, the company's decision to halt ongoing clinical studies, coupled with the potential impact on its partnership with GSK, and the uncertainty regarding the hospital-based fungal infection trials, compounds our concerns. Based on these factors, alongside inherent risks in the biotech sector, such as regulatory challenges, competition, and financial health, we recommend a "sell" rating for SCYX. We remain on the sidelines until the company releases more clear guidance around the situation.

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