2023-07-05 15:06:02 ET
Summary
- Spero is eligible to receive up to $525 million in development and sales milestone payments as well as royalties on net product sales under the agreement with GSK.
- In addition, Spero has two other assets that will soon be evaluated in proof-of-concept studies, both of which address significant unmet medical needs and have high commercial potential.
- The lead compound, SPR720, could be approved under an accelerated approval pathway and offers potential blockbuster status with peak sales of up to $1 billion.
- Peer comparison shows Spero is undervalued based on SPR720 and has further potential.
In my first article on Spero Therapeutics ( SPRO ), I already highlighted the benefits of the GlaxoSmithKline ( GSK ) deal. Based on this deal, I believe that Spero is undervalued. In line with the deal, there are two chapters in Spero's near future: Chapter 1 covers the period leading up to top-line results and potential approval in 2026. In this chapter, Spero is eligible to receive guaranteed milestone payments covering the costs of the follow-up Phase 3 study with Tebipenem HBr. The second chapter describes the enormous potential of the deal, consisting of further potential milestone payments and tiered royalties on sales.
In this article, however, I will focus on the progress of the multi-program pipeline of differentiated medicines. In addition to Tebipenem HBr, Spero has two other unique assets that combine unmet needs with high commercial potential. Both assets also have the potential to independently justify Spero's current market cap, although they have yet to demonstrate proof of concept.
Business of Spero Therapeutics
Logo of Spero Therapeutics (Company Homepage)
It is our mission to bring hope to patients and families of loved ones suffering from serious infections. Source: Company Homepage
Spero Therapeutics is a multi-asset, clinical-stage biopharmaceutical company focused on treatments using a novel therapeutic approach to treat bacterial infections and rare diseases. Spero is targeting indications with both high unmet medical need and good commercialization opportunities. In addition to the lead compound SPR720, the pipeline includes two partnered programs, Tebipenem HBr and SPR206.
Spero's late-stage pipeline addresses significant unmet needs (Company Presentation)
Tebipenem HBr
Regarding Tebipenem HBr, the statements in my first article are still valid. A further update may follow once Spero releases more information on the final study design in the coming weeks. Spero aims to reach an agreement with the FDA on the study objective through a Special Protocol Assessment . This SPA could potentially guarantee approval if the study objectives are met. Given the rejection of the NDA despite the successful Phase 3 trial, this would provide certainty to shareholders.
Update on status of Special Protocol Assessment agreement for Tebipenem HBr program expected mid-year 2023; initiation of Phase 3 trial in complicated urinary tract infection (cUTI) expected in 2H 2023.
Source: Company Filing .
At the same time, Spero will announce the timing and amount of milestone payments from its partner GSK. An additional $150 million is guaranteed as part of the execution of the trial, and management has confirmed that these funds will fully fund the trial.
GlaxoSmithKline already announced in its last quarterly update that it aims to launch Tebipenem HBr by 2026. Final data from the study should therefore be published no later than 2025.
We'll continue to anticipate initiating the Phase III trial in the second half of 2023. And if all goes well with the program, we believe Tebipenem HBr could reach commercialization by 2026, as noted by GSK on their earnings call last month.
If Tebipenem HBr is approved, GSK would be able to cover the entire patient population for urinary tract infections. Following positive Phase 3 data, Gepotidacin is close to approval as the first new novel oral antibiotic for the treatment of uncomplicated urinary tract infections in over 20 years. Significant sales synergies can be leveraged and, if approved, the launch could be accelerated.
SPR720
Following the GSK partnership, Spero Therapeutics' focus quickly shifted to its unpartnered asset SPR720. SPR720 is in-licensed from Vertex ( VRTX ). It is an oral antibiotic for the treatment of nontuberculous mycobacteria (NTM). NTM is a group of bacteria that are commonly found in water or soil. While they are not harmful to most people, in rare cases they can cause severe and chronic lung infections with debilitating pulmonary symptoms. The current standard of care is a combination of drugs that must be taken for months to years, often much longer than recommended. At the same time, many patients do not respond at all to these drugs and suffer significant side effects, even if the disease is detected and treated early. In addition, many patients do not have long-term benefits from treatment because they relapse. For patients with refractory disease, there is one approved product with limited therapeutic benefit, ARIKAYCE from Insmed ( INSM ).
The new lead compound is currently in a Phase 2 study with results expected in the first half of 2024. The Phase 2 study is expected to enroll up to 35 subjects and is designed to provide rapid proof-of-concept. At the moment, the top-line results are still in the uncertain future. The market has not yet appreciated the potential and the value of the asset. However, once the trial is fully enrolled, the market will be able to anticipate the publication of the top-line results. I expect the topline data to be published approximately 3-4 months after full enrollment.
Overall, the need for new, well-tolerated therapies for NTM is enormous. For this reason, the path to approval is likely to be relatively quick and cost-effective. As in the case of Insmed's ARIKAYCE, an accelerated approval procedure with a confirmatory study under the "Limited Population Pathway for Antibacterial and Antifungal Drugs" ( LPAD pathway ) seems very likely. Therefore, it is worth taking a closer look at competitor Insmed on the one hand and deriving a potential for SPR720 based on the comparison on the other.
Assessment of the Market Potential
Given the clear and fast path to approval, once proof of concept has been established, I will evaluate the market potential of SPR720 in NTM. NTM is an orphan disease with no approved treatment options. The indication has high unmet medical need and represents a global health problem with increasing incidence. To assess the market potential, I will provide a comparison to Insmed's ARIKAYCE.
Overview of the NTM market and total addressable patient population. (Source: Author's Chart)
In total, NTM could affect up to 275,000 patients worldwide in key markets . ARIKAYCE received accelerated approval in the US in 2018 for the treatment of refractory Mycobacterium avium complex ((MAC)) lung disease, with study results for final approval expected in 2023 . Treatment-refractory MAC are patients who continue to test positive for the bacteria after more than 6 months of therapy. This patient population is estimated to represent approximately 15% of all NTM patients.
Successful sales launch of ARIKAYCE and continued strong growth rates (Insmed Company Presentation)
ARIKAYCE has been a growth driver for Insmed, despite a very limited patient population and very serious side effects ( black box warning ). Historically, ARIKAYCE was administered intravenously and was associated with severe toxicity to hearing, balance, and kidney function. The approval is based on the new method of delivery directly into the lungs using a special inhalation device. In the first quarter of 2023, the drug generated sales of $65.2 million, representing year-over-year growth of approximately 23%. On a full-year basis, growth is expected to continue. Sales are expected to reach up to $300 million for the full year 2023.
Another peer comparison is AN2 Therapeutics ( ANTX ). AN2 has a comparable asset that is in an advanced stage of development. Unlike Spero, which is primarily targeting first-line therapy in NTM patients, AN2 is evaluating the efficacy of its product candidate epetraborole in all NTM patients. AN2 expects to complete patient enrollment in mid-2023 and report top-line data 9 months thereafter. Despite the challenging financial situation and the need for capital following the top-line data, epetraborole is currently valued at approximately $90 million by the market.
In summary, SPR720 shows enormous potential. The market has a high unmet medical need for new, tolerable therapies. NTM is a chronic disease and therapy is long-term, typically 12-18 months or longer. Due to the lack of treatment options , only 50% of newly diagnosed patients start therapy, and more than 75% of those receiving medication discontinue it within the first year. However, in the cycle of infection, many patients experience severe chronic lung damage that is more difficult to treat. Currently, there is only one treatment option in the refractory setting, so the regulatory need is enormous and accelerated approval may be possible.
The profile of SPR720 meets the requirements of the market due to its oral administration and good tolerability. All blockbusters of the last 2 decades in this area meet the following 2 criteria: First, patients can be treated outside the hospital setting, and second, there is no generic competition.
The sales potential of SPR720, if approved, would be enormous and has already been verified by ARIKAYCE. ARIKAYCE addresses only about 15% of the patient population and will generate up to $300 million this year. SPR720 focuses on treatment-naive and treatment-inexperienced NTM patients, a patient population approximately 5 times larger. In a best case scenario, SPR720 could reach blockbuster status; the company itself currently expects peak sales up to $750 million per year . If approved, and taking into account the usual multiples in the rare disease space, the value of SPR720 could quickly reach several billions.
In addition, Spero is reporting strong interest in SPR720 from companies in Japan and is talking openly about a potential partnership. I think it is very likely that Spero will enter into additional partnerships similar to SPR206 in order to advance its commercialization. A partnership would further validate the potential of SPR720 and could unlock additional significant value.
SPR206
In addition to SPR720, Spero has another compelling asset in its pipeline that is currently overlooked by the market. SPR206 is a novel intravenous antibiotic being developed for the treatment of multidrug-resistant Gram-negative infections in the hospital setting. SPR206 has achieved positive results in a Phase 1 trial and the company plans to advance SPR206 into a Phase 2 trial in the fourth quarter of 2023 . While full, external, and non-dilutive funding of the trial is a great advantage, it slows down the development process to achieve proof of concept.
However, the partner in China is making progress. Everest Medicines plans to initiate a Phase 3 trial later this year . In 2021, Everest Medicines has committed to significantly increase funding for SPR206 . With the start of the trial, Spero could be eligible to receive a portion of the outstanding $38 million in milestone payments.
SPR206 is expected to enter a Phase 3 study later this year (Corporate Presentation Everest Medicines)
Spero retains rights to SPR206. In addition to the partner Everest Medicines in China, the rights outside the U.S. have been partnered with Pfizer ( PFE ) for approximately $40 million in 2021. Based on the external validation provided by the partnerships, the rights to SPR206 in the U.S. represent an additional value component.
Financials
Following the agreement with GSK to partner Tebipenem HBr, Spero is in an excellent position to advance its own pipeline and focus on its new lead compound SPR720. This is particularly true as the expected milestone payments from GSK will cover the costs of the follow-on Phase 3 trial for Tebipenem HBr. Spero currently has a market capitalization of $77 million. With just under $100 million in available cash and a net cash position of $87 million, Spero's pipeline has a negative value of $10 million. Based on its current operating plans, Spero believes that its cash and cash equivalents will be sufficient to conservatively fund its operating expenses and capital expenditures beyond 2024.
To assess the potential value of SPR720, a comparison to AN2 Therapeutics can be made. Looking at key metrics, it is obvious that Spero is undervalued based on SPR720 alone. At its peak, AN2 had a market cap of just under $400 million. Currently, epetraborole, AN2's product candidate for NTM, is still valued by the market at just under $90 million. The valuation is even more impressive when you consider that AN2 will need additional capital by 2024 at the latest. In general, however, it is worth considering that these companies are discounted due to potential emerging bacterial resistance.
Financial Overview and Peer Comparison (Author's Chart)
In addition to the pipeline, Spero is eligible for additional milestone payments related to its partnership with GSK. In my first article, I explained why the GSK deal alone could cover the current market capitalization. Spero will receive a guaranteed $150 million in connection with the delivery of the Phase 3 trial. The agreement also includes an additional $375 million in milestones and royalty payments provide further upside.
Summary
With SPR720 and SPR206, Spero has two assets with unique profiles that address high unmet medical needs and have strong commercial potential. For example, SPR720 not only addresses a disease with no currently approved therapies, but also allows physicians to treat patients where they want to treat patients (outside the hospital setting). SPR720 could provide a solution for patients early in their disease course, preventing more long-term and permanent damage to the lungs and improving patients' quality of life.
While the deal with GSK fundamentally underpins the story, SPR720 will bring new attention to the stock. The timing of the data release could be estimated with full patient recruitment at the latest and provide new momentum associated with a data run. With the start of the Phase 3 trial for SPR206, I also expect further milestone payments that have not yet been factored in.
As an added bonus, there is still a chance that GSK will buy out the entire company to avoid paying the milestones and royalties if Tebipenem HBr is approved. However, you should never base your investment thesis on a buyout.
For further details see:
Spero Therapeutics: The Multi-Asset Pipeline Could Outpace The Tebipenem HBr Deal With GSK