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.

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