Modern medicine does not exist without antibiotics. Not only are they essential to tackling life-threatening infection, but in chemotherapy and HIV treatment, organ transplantation and most surgery. But their future is in peril. In recent years, governments, public health organisations and the medical community have watched with alarm as existing antibiotics have started to lose effectiveness. While resistance is an evolutionary inevitability, it is now moving at a faster pace than the rate of discovery of replacement antibiotics.
In 2014, the UK government and the Wellcome Trust asked former Goldman Sachs economist Jim O'Neill to explain the likely impact of the threat, and identify ways of bringing it under control. The first report from the Review on Antimicrobial Resistance (AMR) put the issue in stark terms: unless it is tackled, superbugs will kill 10m more people each year by 2050. If that weren't ghastly enough, the cumulative impact on the world's GDP is also likely to reach $100 trillion (£70 trillion) by the middle of the century, equivalent to the loss of an economy the size of the UK from global output every year.
The situation was recently summed up by AstraZeneca's chief strategy officer, Dr John Rex. "We need to start thinking about antibiotics like the fire department," he told the Financial Times in November 2015. "It's not something you can start building when the fire breaks out. You need to pay for it even when there are no fires."
Why has this dystopian vision found itself in a magazine about investment? The simple answer is that the pharmaceutical industry - from diagnostic firms to manufacturers and drug developers - has little choice but to work in concert with governments to tackle the problem, and find appropriate incentive structures. It is widely accepted that failure to do so could lead to reputational damage several orders of magnitude greater than the financial crisis's effect on banks. However, after years of inertia, there are signs that action is finally coming. At this year's World Economic Forum in Davos, 85 companies - including AstraZeneca (AZN), GlaxoSmithKline (GSK), Pfizer (US:PFE), Roche (Ch: ROG) and Novartis (Ch: NOVN) - signed a declaration committing to combating drug resistance, and calling on governments to incentivise the industry.
Several listed companies working in this field, particularly at the junior end of the market, stand to seriously benefit from this much-needed push.
Pipeline blockage
It's important to explain the recent collective failure to tackle antimicrobial resistance. First, there are the scientific hurdles. In the last two decades, billions of dollars have been spent trying to discover new anti-bacterials, but finding molecules that kill bacteria and remain safe for humans is extraordinarily difficult. Then there are development issues. Bringing a drug to market typically requires two large trials involving several thousand people, an exercise further complicated by resistance. As Dr Rex explained in 2013: "If you wait until you have several thousand people with drug-resistant infections, you're too late and the epidemic has already happened."
Even if drug candidates get through trials, the very nature of antibiotics represents a commercial barrier and explains why, since the 1970s - when the effects of antibiotic overuse were first acknowledged - development has slowed to a standstill. The reason is straightforward. The majority of drug development programmes fail, and so successful candidates need to be wildly profitable to hit an overall break-even level. Because antimicrobials lose effectiveness through resistance, big pharma has shied away from their development and focused on drugs that can be used regularly without losing effectiveness.
Furthermore, most antibiotics are cheap and generic, meaning that healthcare providers and patients expect future pricing in line with current affordability. Yet, as has been the case across the developing world, high-volume sales and slapdash prescription standards only lead to greater and more dangerous levels of antimicrobial resistance.
Because of the challenges of discovery and development, and the commercial abandonment by the pharmaceutical industry, no new classes of antibiotics have been approved since 1987. Emblematically, Pfizer - a long time champion of antibiotic development - closed its antibiotic research facility in Connecticut in 2011, citing financial reasons.
Candidates
Antibiotics are a peculiar species of drugs in that their success is predicated on carefully managing demand in an enormous marketplace. Wherever over-the-counter sales are incentivised, antibiotics' effectiveness is jeopardised. In its place, the Davos statement called for governments to introduce commercial models that "enhance conservation of new and existing antibiotics while improving financial and access-related predictability for both industry and health systems".
Inevitably, governments will have to find models that address this and respond to the AMR review findings. In the meantime, UK investors have several routes to invest in drugs that should fit into those models.
One such company is Aim-listed Motif Bio (MTFB), a clinical-stage drug developer specifically focused on novel antibiotics. Its leading candidate is iclaprim, first discovered by Roche and later abandoned after it failed to get regulatory approval in the US and Europe. After reviewing the pre-clinical and clinical data, Motif Bio decided it could gain approval by improving the development plan, and acquired the patent.
That plan is progressing well. Trials to date have shown effective action against hospital-acquired pneumonia and several strains of the staphylococci bacteria, including methicillin-resistant staphylococci, also known as the superbug MRSA. Motif plans to progress to human trials, which are unlikely to be completed until next year, but if they prove successful, iclaprim could be commercialised in 2018.
The best chance of this occurring would be through some sort of corporate transaction. Motif chief executive Graham Lumsden points to Merck's (US:MRK) 2014 purchase of Cubist, then the largest antibiotic manufacturer in the US, as a clear sign that there is appetite for antibiotics among pharma's bigger fish. One reason for that deal, which valued Cubist at $9.5bn, was recent legislation giving the US Food and Drug Administration (FDA) powers to award antibiotic developers longer exclusivity terms and speedier approval processes. Motif Bio has already achieved that status. Last July, the FDA made iclaprim a QIDP (qualified infectious diseases product), giving Motif 10 years of market exclusivity, priority review and fast-track designation.
A licensing deal or sale of the business - not to mention the company's valuation - could be further aided by a listing on Nasdaq. Last month, Motif appointed MTS Health Partners and PwC to advise on future financing options in the US.
Homegrown
Though listed in the UK, Motif's research team is based in the US. For a drug developer taking the fight to AMR a little closer to home, investors could consider IC tip RedxPharma (REDX), which also listed on Aim last year.
RedxPharma is a little further behind in the development of its key anti-infective, although the MRSA candidate it is developing with two NHS hospital trusts in Liverpool is now in formal pre-clinical development. Human trials for Gram-positive treatments for staphylococcus and streptococcus are fully funded and expected to commence in 2017, while in vivo proof of concept models for Gram-negative bacteria are expected later this year. The latter programme is of particular significance, as GlaxoSmithKline and Sanofi (Fr:SAN) have both already retained the rights to develop the assets with RedX. Because of this - along with the profile of the compounds being developed - broker Hardman & Co thinks the programme is the likelier short-term candidate for a licensing deal.
An important aspect of RedX is that the anti-infective division is hedged by a wide pipeline of other treatments in development, including immunology and oncology drugs. For example, its chemistry technology - which involves exploiting the gaps in big pharma patents - received the backing of AstraZeneca in 2014, when the pharmaceutical giant signed a two-year deal to develop an undisclosed cancer drug. That collaboration has the potential for significant licence fees, clinical and commercial milestone payments and royalties. And while the share price has suffered due to an absence of a commercial agreement so far, we believe a combination of heady early newsflow and low liquidity are more to blame.
Another potential play on the antibiotic theme is drug discovery group Summit Therapeutics (SUMM), which was last month granted a European patent for a novel antibiotic called ridinilazole, which the company believes could be used to treat infections caused by c.difficile. The patent, which is also effective in Japan and the US and gives Summit exclusivity until 2029, has so far shown strong Phase 2 clinical data and superior performance over vancomycin, currently the standard orally-administered antibiotic against c.difficile.
Larger players
At present, smaller drug developers such as RedX, Summit and Motif offer a more direct play on the need for antibiotics than big pharma companies. Some larger outfits do market antibiotics, although their sales represent slimmer contributions to the bottom line. For example, FTSE 250 constituent Clinigen (CLIN) owns the rights to Vibativ, an anti-bacterial used in the treatment of nosocomial pneumonia caused by MRSA. But it is just one of four drugs that make up Clinigen's speciality pharmaceuticals division, which in turn comprises around a third of the group's gross profits.
However, investors should expect increasing interest from the big players soon enough. In addition to its partnership with RedX, GSK recently contributed to a $30m funding round for US-based Spero Therapeutics' push to create a new therapeutic class of antibiotics. As the AMR review puts forward its recommendations in the summer and governments begin to develop incentives for antibiotic development, this kind of partnership is likely to proliferate.
Motif Bio chief Mr Lumsden agrees. "We're facing this crisis because big pharma hasn't been able to find the commercial incentives for years," he says. "But the model is changing. The larger companies now want to become the experts on commercialising products, and it's the development groups like us that will do the rest of the entrepreneurial work."
This is the third in the Finding the Cure series, and follows Harriet Russell’s pieces on the ways the industry is tackling cancer and Alzheimer’s.
