Description

Joining the chorus of smaller cap biotech ideas on VIC recently, we have Scynexis (“SCYX”). The company raised capital from a group of investors to complete phase II and phase III trials of an anti-fungal medication in March. In July it subsequently had good phase II data (rallied 25%)  – but after a sell off over the last few weeks is now back to trading near cash (Market cap = $68 MM, cash = $64 MM, debt = $15 MM)

Phase 2 data for the drug in acute vulvovaginal candidiasis (“VVC”) showed a superior cure rate of 70% vs. 50% at 24 days between the Scynexis compound, and the current standard treatment of fluconazole. Only 4% of patients in the Scynexis drug arm required rescue therapy, where as 29% of patients under fluconazole did. There were no serious safety issues and patients tolerated the therapy well; there were no dropouts. In Phase III, Scynexis will only have to show its superiority against placebo which likely leads to resolution of symptoms in less than 20% of patients. Given the phase II data we think it is likely to work – we figure 75% odds.  Management is experienced with infectious disease trials like this – the CEO was the former CMO of Forest Labs which was taken over by Allergan. The Company has sufficient cash today to get through Phase 3 which should be available late 2019/early 2020.

The company’s stock had been under pressure in late 2016 / early 2017 after an IV formulation of the drug for systemic fungal infections caused acute injection site reactions.  The IV formulation is being reformulated, however this has no bearing on the opportunity in VVC (which is taken by mouth). VVC alone is a $500 MM revenue opportunity if approved and requires only a 75 person salesforce to target gynecology specialists, a salesforce easily built by a small biotech company.

We think on positive Phase III data the company is worth $400mm ($8 per share) (4x sales multiple applied to peak sales of $500 MM, 7 years from now, discounted back by 15%).  (Note that if the drug is approved, the IP will last through 2035.) This places no value on the opportunity in systemic fungal infections if the company’s IV formulation is successfully developed.  That indication could add another $200-$300 MM in sales at least because this would represent the only drug with a broad spectrum of activity and favorable safety profile that can be delivered both by IV and oral formulations allowing patients to be sent home from the hospital to finish their course of therapy.

In a downside case, the company trades to cash at time of failure ($10-$15 MM) plus a modest value for systemic infections call it ($20-$30 MM), leading to a $0.70 share a price. With 75% odds of success in Phase 3, this suggest a risk adjusted target price of more than $6 per share or 4x today’s price of $1.50 per share.

Catalyst

Phase III data in late 2019.