Anacor: Overvalued On Weak Drug Pipeline

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PALO ALTO, Calif. ( TheStreet) -- The announcement last January by Anacor Pharmaceuticals ( ANAC) of results from a phase III study of tavaborole for the treatment of toenail fungus (onychomycosis), sparked a month-long selloff of the stock from $5.17 to $3 per share. Since those lows, Anacor shares have now more than tripled, closing Monday at $10.24.

Just as January's selling was overdone, Anacor's summer rally has gone too far. While there are a number of irons in the Anacor fire, the stock will ultimately rise and fall on its two later-stage products -- tavaborole and AN2728 -- neither of which generates a compelling risk/reward at the company's current valuation.

Let's take a closer look at both drugs, starting with tavaborole.

Valeant Pharmaceuticals' ( VRX) late-stage toenail fungus drug efinaconazole achieved a complete cure rate of 14.5 percent (9.7 percent adjusted for placebo) in its own phase III study. By comparison, tavaborole's complete cure rate was 6 percent, or 7.6 percent when adjusted for placebo.

With all the caveats of comparing data across different trials in place, efinaconazole appears to be more efficacious than tavaborole.

The comparison of the two drugs does not look any better when examining the mycological cure rates (negative fungal culture at week 52), where tavaborole had placebo adjusted rates of 23.9 percent and 23.7 percent versus 36.5 percent and 38.4 percent for efinaconazole.

While the relative efficacy will not have an impact on tavaborole's chances for approval, it certainly can limit the drug's commercial opportunity.

The FDA rejected Valeant's efinaconazole due to unresolved manufacturing issues and there is an ongoing arbitration case in which Anacor is seeking over $200 million in damages. All that being said, odds are both drugs will make it to the market in 2014. Combining the efficacy edge efinaconazole and the commercial experience of Valeant, it is difficult to see how the commercial prospects of tavaborole can justify Anacor's recent price move.

Anacor's second pipeline product AN2728 is being developed for the treatment of atopic dermatitis. Early results appear good with the most recent study showing that up to 71 percent of the treated legions improved from baseline as measure by the atopic dermatitis severity index (ADSI.) But like with tavaborole, it's important to compare AN2728 to competing drugs, in this case, Valeant's Elidel, which was just recently approved.

There is absolutely no way to get an apples-to-apples comparison between AN2728 and Elidel because their respective studies used completely different efficacy endpoints. In fact, atopic dermatitis researchers actually acknowledge the lack of commonly used endpoints and are currently attempting to harmonize trial outcome measures. Anacor was justified in using ADSI as a measure of response in its AN2728 study but the scale lacks an assessment of surface area involvement which is critically important.

Perhaps a better comparison is an earlier AN2728 study that was placebo controlled. The percent of patients that achieved a total or partial clearance (defined as an ADSI score less than 2) was 52 percent, or 36 percent placebo adjusted.

On its FDA-approved label, Elidel's response was 67 percent, or 27 percent placebo adjusted, defined as patients achieving clear or mild disease.

The efficacy of AN2728 and Elidel appear similar but keep in mind the drugs were not assessed using identical endpoints. In addition, the Elidel trial enrolled patients with more severe disease, with the treatment being applied up to 96 percent of their body surface area whereas the Anacor study limited it to 35 percent of body surface area.

While I would prefer to have a more clear comparison of efficacy, it is simply not possible at this point. It seems like the best-case scenario for Anacor would

be for AN2728 to demonstrate efficacy similar to Elidel. Two warnings signals to keep in mind, however:

AN2728 was originally meant as a treatment for psoriasis and even had "positive" data from an earlier phase II trial. In fact, efficacy was quite weak. At the end of the treatment period only 17 percent of the subjects met PGA success compared to 14 percent in the control group, essentially no difference.

Compare this to Celgene's ( CELG) apremilast, an oral PDE4 inhibitor, that had a statistically significant benefit on both PASI and PGA at the end of treatment. Anacor pushed AN2728 into atopic dermatitis after the drug's failure in psoriasis, although the company painted this move as more related to the market opportunity in atopic dermatitis.

The second warning sign is the efficacy of current atopic dermatitis treatments, which are usually over the counter anti-itch creams. If the problem persists, there are a number of prescription treatments with the most common being corticosteroids. In fact, treatment with corticosteroids can lead to significant clearance in 80 percent of cases. Note how similar this 80 percent is compared to AN2728 data with the obvious caveat that comparing across trials in atopic dermatitis is fraught with difficulty.

While Anacor often notes the risk of permanent skin thinning with corticosteroid treatments, a review of atopic dermatitis in the New England Journal of Medicine noted that "although thinning is possible, the concern on the part of patients (and parents) is often well out of proportion to the true risk."

AN2728 likely has modest efficacy and is going after a market that already has effective, safe, and inexpensive treatments. It is certainly possible that a large placebo-controlled study could show enough efficacy to be a breakthrough therapy for atopic dermatitis but at Anacor's current valuation a lot of that is already priced into the stock, meaning there is more downside risk than upside opportunity.

In general, the response to the tavaborole data was overdone but the current run to all time highs in Anacor's stock price is also not justified. Tavaborole has modest efficacy, which will likely lead to modest sales. The data for AN2728 is early and not compelling but can become so if shown in a large double-blind, placebo control study. The near-term wildcard in all of this is the ongoing arbitration with Valeant, but regardless of how that case turns out it will have limited effects on the long term prospects of tavaborole and AN2728.

Sobek has no position in Anacor and is long Celgene.
David Sobek has been writing on biotech for a number of years through various outlets with a general focus on small cap oncology and antibiotics companies. He received his PhD in political science from Pennsylvnia State Univeristy in 2003 and a BA in international relations from The College of William and Mary in 1997.

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