2023-04-21 16:46:43 ET
Summary
- The market is discounting the lucrative $600M partnership with GSK.
- Multiple pipeline catalysts will occur in 2023 with Phase 3 readout anticipated in early 2024.
- Market cap is only $90M and they have 109M in cash & cash equivalents.
- Share price is near an all-time low and we believe should appreciate throughout 2023 as it approaches the pivotal Phase 3 readout in 1H 2024.
Investment Thesis
Spero Therapeutics (SPRO) sits in the sweet spot of late stage biotechs when considering an investment. They have more cash than current market cap, lead drug about to enter a pivotal Phase 3 trial, target market with unmet medical need and lucrative partnership with big pharma. The share price is within 10% of their all-time low. Several catalysts throughout 2023 should cause the market to take notice.
Company Summary
Spero is a clinical stage biotech company whose primary asset, oral Tebipenem HBr (Tebipenem), will be starting pivotal Phase 3 testing later this year for complicated Urinary Tract Infections (cUTI), including pyelonephritis. The company received a CRL back in May of 2022 which caused a significant share price drop. But recent clarity from the FDA has enabled a path forward for Tebipenem. The company also garnered a lucrative partnership with GlaxoSmithKline (GSK).
The company is also developing SPR720 for non-tuberculous mycobacterial pulmonary disease (NTM-PD). It is a chronic infection with debilitating pulmonary symptoms. A Phase 2 study is ongoing.
The final drug in the pipeline is SPR206. It is an investigational next-generation polymyxin candidate being developed to treat multidrug-resistant gram-negative infections in the hospital setting. The company plans to submit an IND for a Phase 2 study in the 4th Q 2023.
Share Price History
The 5-year price chart shows a bumpy and then downright depressing ride for shareholders.
This is not uncommon for clinical biotechs.
5-year price chart (TradingView)
But to really grasp the investing opportunity of SPRO, we need to understand the recent history, specifically the last 18 months. Below is an 18-month chart.
18 month price chart (TradingView)
The downhill slide started in Oct 2021 with an Oppenheimer rating downgrade . There was a momentary uptick in Jan 2022 when the FDA granted priority review for Tebipenem. But the downhill slide continued as it did for almost all biotechs throughout 2022. In April 2022 the FDA relayed deficiencies with the marketing application for Tebipenem. Then in early May, the company said Tebipenem is not likely to be approved by the FDA. The stock lost 70% of its value that day. The stock continued its decline to less than $1 in Aug of last year.
But then in early September 2022 the FDA clarified a regulatory path for Tebipenem. Shortly after, the company received extremely positive news, that we feel the market still has not fully valued. In late Sept 2022, the company inked a deal with GSK to provide $600M that provides needed capital for operations and fully supports tebipenem clinical program through potential approval. Yet the company market cap, as of today is $90M.
Partnership Rights
The exclusive partnership gave SPRO a significant cash infusion in exchange for giving away worldwide marketing rights (except certain Asian countries) of Tebipenem for cUTI & pyelonephritis. The money will allow the company to advance all 3 drugs through the pipeline and should permit the company to achieve NDA approval for Tebipenem (assuming Phase 3 success). If you want to read a great take on the GSK deal, I recommend checking out Biotech Fan's Seeking Alpha article .
Here is the exclusive license agreement as reported via a PR from GSK :
The exclusive license allows GSK to commercialize tebipenem in all regions except for Japan and certain other Asian countries.
Spero Therapeutics receives $66 million upfront, with potential for future milestone payments and tiered royalties.
GSK will purchase $9 million in shares of Spero common stock.
Both of these transactional events have already occurred. But that is not all. There are future milestone payments and tiered royalties based on Phase 3 success and eventual sales. Here is the payout structure (also from GSK's PR ):
Event | Milestone payments (up to) |
Delivery of Phase 3 Program | $150M |
Total commercial milestone payments based on first sale (US/EU) | $150M |
Sales milestone events | |
Net sales greater than $200m | $25M |
Net sales greater than $300m | $25M |
Net sales greater than $400m | $25M |
Net sales greater than $500m | $50M |
Net sales greater than $750m | $50M |
Net sales greater than $1B | $50M |
Total sales milestone payments: | $225M |
Royalties | Low-single digit to low-double digit (if sales exceed $1B) tiered royalties on net product sales. |
Source: GSK Press Release
A comforting aspect of a significant partnership is that it provides an external validation of Tebipenem & Phase 3 approach of SPRO.
Pipeline
Here is a chart of the current drugs and clinical trial status, along with partnerships and funding sources.
SPRO Pipeline and Partnerships (Company Presentation)
Tebipenem
Tebipenem will start its final pivotal Phase 3 clinical trials later this year. Tebipenem is being tested to treat cUTI, including pyelonephritis. Pyelonephritis is a type of urinary tract infection where one or possibly both kidneys become infected.
Here is a graphic from the company presentation regarding its previous successful Phase 3 trial.
Tebipenem Phase 3 Results (Company Presentation)
The trial showed that an oral dose of Tebipenem was non-inferior (not worse) than an IV administered dose of Ertapenem. The trial met the primary endpoint as well as several secondary endpoints.
A feather-in-the-cap event was publication of their results in the prestigious New England Journal of Medicine ((NEJM)). Here is their summary:
Results from Spero's Phase 3 ADAPT-PO study, as published in the NEJM, demonstrated that oral tebipenem HBr was well-tolerated and non-inferior to IV ertapenem, based on its pre-specified trial protocol, in the treatment of 1,372 enrolled adult patients with cUTI, or acute pyelonephritis.
Another factor that bodes for positive NDA acceptance is that the company reports ( page 16 ) that Tebipenem is already approved in Japan (since 2009) for pediatric pneumonia, otitis media and sinusitis (over 4 million patients dosed to date). In addition they have conducted extensive post-marketing safety and efficacy surveillance completed, covering a whopping 3,331 patients. There have been no safety issues observed, and adequate efficacy was demonstrated.
Note that while there are available treatments for cUTI (i.e. IV Ertapenem), the oral version of Tebipenem qualifies as addressing an unmet medical need. This is b/c of differentiation b/w the 2 products. An oral version of a UTI treatment is much more convenient than a drug that must be administered via IV in a hospital setting. The drug also has patent protection until 2038.
SPR720
SPR720 is being developed for non-tuberculous mycobacterial disease pulmonary disease ((NTM-PD)). It is a chronic infection with debilitating pulmonary symptoms. Chief Medical Officer Kamal Hamed said this during the most recent earning call:
There are inherent challenges of treating patients with refractory disease; there remains no FDA-approved first-line therapy for NTM-PD. Instead, patients early in their disease journey are frequently treated with combinations of off-label therapies with limitations related to tolerability and effectiveness. In fact, published estimates indicate that 75% of patients with NTM-PD who receive standard-of-care treatment discontinue such treatment after about a year, mainly due to tolerability and effectiveness concerns.
Phase 1 showed promising results with the drug being tested as a monotherapy as well as being used with other drugs. There were no serious adverse events. See results below.
SPR720 Lung CFU Reductions vs. Control (Company Presentation)
At the end of the last year the company initiated its Phase 2a trial to show a signal of efficacy in patients, measuring both clinical and microbiological outcomes. They are currently enrolling patients with data expected in 1H 2024.
SPR206
The 3rd drug undergoing testing is SPR206, which just completed its Phase 1 trial. It is SPRO's investigational next-generation polymyxin candidate being developed to treat multidrug-resistant gram-negative infections in hospitals. Phase 1 results were good. The company is planning for Phase 2 trial initiation, after filing of IND, in Q4 2023. According to the company the drug program is supported by multiple organizations , including Pfizer , Everest Medicine, the National Institute of Allergy & Infectious Disease and the U.S. Department of Defense. Due to this drug being the furthest from potential commercialization, we will not cover it here. Anyone who wants to learn more about it can view the company presentation (Pages 19-23).
Tebipenem Final Phase 3 Trial
On Sept 6 of last year , Spero and the FDA also achieved alignment on key components of the proposed pivotal Phase 3 trial design, which may be the subject of a Special Protocol Assessment ((SPA)) request, to be confirmed once the clinical protocol is finalized.
CEO Ankit Mahadevia, M.D. stated:
We are pleased to have found common ground with the FDA on the regulatory path forward for tebipenem. With this clarity, we are better positioned to advance the program as we work to establish and nurture external partnerships for further development. The pivotal Phase 3 trial is supported by an extensive clinical and nonclinical data package demonstrating the potential of tebipenem HBr to provide cUTI patients with an oral alternative to intravenous therapy…
The company anticipates providing an update from the FDA in the first half of this year, which should include additional details of the clinical trial design. Once the company has a better understanding of the trial design, additional information should be forthcoming on the events that trigger milestone payments from the GSK partnership.
SPRO anticipates initiating the pivotal Phase 3 trial in the 2H 2023.
One final note: Phase 3 trials are notoriously expensive. But the company says the increased costs associated with the Phase 3 trial will be offset by achieving milestones resulting in payment from GSK. In the company's own words , they expect it to be "a wash".
Total Addressable Market
We will only cover the 2 drugs furthest along in their clinical trials: Tebipenem and SPR720.
Tebipenem
The corporate presentation states the total addressable market ((TAM)) is very large at 2.7M patients. It's important to remember that Tebipenem is being developed as a 2nd line treatment of cUTIs. Other antibiotics must be tried first, but if those fail, then Tebipenem can be prescribed.
TAM for cUTIs (Company Presentation)
The main value driver for Tebipenem is that it is an oral antibiotic. This means it can be taken at home vs. IV treatment requires an outpatient visit. This significantly reduces the burden on the health care facilities and improves overall economics for the health care system. There is clearly a need for an oral antibiotic to address cUTI infections.
SPR720
According to the company presentation there are approximately 95,000 patients in the US and a total of 245,000 in US, Europe and Japan. More than 75% of NTM patients are non-refractory and lack any approved options to treat the disease. SPR720 has orphan drug designation and, if approved, could be the only novel first-line oral treatment for NTM-PD. SPRO currently retains world-wide rights to the drug.
Cash
During the March 30, 2023 conference call , the company stated it had $109M in cash and cash equivalents as of Dec 31, 2022. Including the milestones payments for Phase 3 progress, the company figures it has operating funds beyond 2024. A micro-cap clinical biotech having the funds to start & complete a Phase 3 trial and put 2 additional drugs through Phase 2 clinical trials over the course of the next 2 years, is comforting. We do not expect any capital raises until 2025.
Upcoming Catalysts
Here are the catalysts expected throughout the rest of 2023. We expect each of these catalysts to generate a positive PR from the company.
Q2 - Additional feedback from FDA on Phase 3 clinical trial details
Q2 - Additional details on the specific regulatory and development activities over the coming months that will trigger milestone payments from the GSK partnership
H2 - Initiate pivotal Phase 3 trial for Tebipenem
Q4 - Initiate Phase 2 trial of SPR206
Here are the catalysts expected in 2024
H1 - Results from Phase 3 trial of Tebipenem
H1 - Data expected from Phase 2 trial of SPR720
H2 - File for NDA of Tebipenem
H2 - Announcement of Tebipenem submitted NDA
Risks
As with any biotech in a pivotal Phase 3 trial, there is a chance the trial will fail. We see this as remote since the Tebipenem showed both efficacy & safety during the previous Phase 3 trial.
The other risk is that the company doesn't show positive data in either one of its Phase 2 trials. A negative Phase 2 result (from either SPR720 or SPR206) will significantly impact the share price since it will knock out 50% of their remaining drugs in the pipeline.
While the company should have adequate cash for the next 2 years from its GSK partnership, these cash milestones are achievement based. If the company has difficulty enrolling patients in its Phase 3 trial, or encounters delays with filing or achieving NDA approval, the company might have to raise cash. We suspect that releasing final results of a Phase 3 trial will be one of the milestones to trigger a cash payout; however, that has not been disclosed at this time.
Conclusion
SPRO is close to starting its pivotal Phase 3 trial with results in 1H 2024. Its lucrative partnership with GSK ensures the company should have enough cash until 2025. The market cap is less than available cash, which can result in a floor, of sorts, on the share price. We expect the share price to slowly appreciate throughout 2023 as catalysts are announced.
For further details see:
Spero Therapeutics: Massive Partnership Deal Still Not Properly Valued By The Market