We are initiating coverage of Tonix Pharmaceuticals (OTC Markets:TNXP) with a ‘Neutral’ rating. The company is developing a very low dose cyclobenzaprine product, TNX-102-SL, that offers improved pharmacokinetics and convenient sublingual dose formulation for the treatment of fibromyalgia (FM). FM is a complex medical disorder characterized by widespread musculoskeletal pain, fatigue, lack of sleep, and mood and memory issues. Besides the dull aching pain and fatigue, patients with FM often also experience mood and psychological disorders such as anxiety and depression. Additionally, The National Pain Foundation estimates that 90% of all FM patients have sleep problems.
TNX-102 is being designed specifically for bedtime dosing in order to help patients improve quality (restorative) sleep and reduce the next-day pain and “fibro-fog” that is persistent with FM. We believe this is a meaningful opportunity for Tonix, mainly because currently approved FM medications, such as Pfizer’s Lyrica (pregabalin) and Lilly’s Cymbalta (duloxetine), do little to improve sleep quality. Plus, cyclobenzaprine is a well-known and commonly used medication for FM. Market research conducted by Frost & Sullivan found that cyclobenzaprine was the third most commonly prescribed medication for FM behind Lyrica and Cymbalta in 2010. Decision Resources estimates that approximately 50 million cyclobenzaprine tablets were taken by FM patients, off-label, in 2011. TNX-102 is an improved – very low dose – formulation of cyclobenzaprine designed to have fewer next-day residual effects.
…A Nice Opportunity…
Phase 2 proof-of-concept work sponsored by Tonix Pharmaceuticals clearly demonstrates proof-of-concept in patients with FM on validated endpoints including pain, fatigue, tenderness, and depression. The data is also suggestive of improved restorative sleep – a potential major differentiation in the treatment of FM.
Tonix is currently wrapping up formulation work on a sublingual dose of the drug, now called TNX-102-SL, and then plans to enter its first pivotal registration trial during the first half of 2013. We see little drug development or safety concerns with TNX-102-SL. Cyclobenzaprine is a well-known and understood molecule, first approved in 1977 for the treatment of muscle spasms. Since that time, the FDA has approved new low dose formulations (1990s), high-dose extended-release formulations (2007), and even entertained the idea of moving cyclobenzaprine OTC at 5 mg (ultimately deciding that the label indication of treatment for muscle spasms should remain prescription-based).
Following completion of its first pivotal phase 3 trial (data expected in 2014), we expect that Tonix will seek to secure a development and commercialization partnerships for the second phase 3 trial that includes an upfront payment, development and regulatory milestones, sales-related milestones, and royalties on sales. We see TNX-102-SL as a potential $300 million opportunity, and believe that, if successful in its first phase 3 trial, Tonix should be able to secure a commercialization deal in 2014. With positive phase 3 data from a first registration trial, we believe Tonix should be able to secure over $25 million upfront for TNX-102-SL, with development, regulatory, and backend sales milestones north of $250 million.
…Neutral While We Wait For Financing…
Tonix exited the second quarter (ended June 30, 2012) with approximately $1.34 million in cash. We forecast that cash at the end of the third quarter (ended September 30, 2012) stood at around $0.2 million. We believe that management is planning to raise an estimated $8 to $10 million in cash sometime in the next few weeks. The cost of the entire phase 3 program is estimated at approximately $20 million. We believe that Tonix requires at least $4 million to fund the first pivotal program and another $4 million to fund operations and then negotiate with commercialization partners.
We believe management is already in talks with interested partners for large private placement. We would not be surprised to see insider participation in the financing. The current market capitalization based on the basic share count is $23 million ($30 million fully-diluted). We estimate that Tonix will need to issue 10 to 15 million shares at the current price, to complete the financing. This will be highly dilutive to existing stock holders. This is the biggest reason for our ‘Neutral’ rating. Following the completion of a major financing, we believe the risk / reward for new investors will improve dramatically.
We have conducted a discounted cash flow (DCF) analysis on Tonix Pharmaceuticals incorporating our assumptions for a partnership and peak sales with TNX-102-SL in FM and PTSD, and the upcoming financing. We see $1.50 per share as fair-value. We would be buyers following completion of the financing, as we believe once the cash is secured and the phase 3 trial begins, the story will be dramatically derisked and under-valued.
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