Monday, November 21, 2011

Coronado Biosciences (CNDO) And Its Hygiene Hypothesis

Coronado Biosciences (CNDO) is staking its value proposition on two potential drug treatments that apply the Hygiene Hypothesis.  This theory argues that the industrialized world's advances in personal and public hygiene have suppressed the natural development of bacteria (specifically intestinal helminths) whose presence would otherwise prevent excessive T-cell activation.  Coronado's CNDO-201 drug treatment is a biosimilar compound that replicates Trichuris suis ova (TSO).  Its other drug, CNDO-109, uses "natural killers" to attack cancer cells. 

The most compelling thing about this company at this time is the strength of its management team. The CEO, Dr. Bobby Sandage, was with Indevus Pharmaceuticals when Endo Pharmaceuticals acquired it for $370M.  Investors should know that the single best risk-mitigation technique for a startup company is the presence of serial entrepreneurs among its senior management.

Early-stage companies rely on the strength of their IP to attract early capital.  Biologic drug patents currently have a 12-year life but that is a contentious political issue. The Administration tried to shorten this patent length in its health care reform legislation. Any future reform efforts that weaken patents on biosimilar drugs will open the door to generic versions earlier. 

The company thinks its early data is encouraging, but the drugs need to complete FDA Phase II testing. The stock recently debuted at $10.00/share.  I personally believe that is quite high for a company that does not yet have an FDA-approved product and will probably not see revenue for several years.  The company's private equity investments were priced much lower.  It is difficult to say at this point what a realistic valuation would be without comparing Coronado's prospects to other drug makers that have been acquired prior to completing Phase III trials. 

There are mature companies that compare to Coronado's approach, but Coronado will have an uphill battle taking market share. Biopharma maker Onyx Pharmaceuticals (ONXX) has a market cap of $2.4B today. Coronado would have to compete head-to-head with Onyx with its cancer treatments, also delivered orally. Pharmasset (VRUS) is another oral drug maker worth over $10B right now. Onyx and Pharmasset have something very important in common: They've had negative net income for three years running. These drug companies achieve high valuations on the promise of Phase III completion and full adoption by the medical community. I personally prefer to put my money into companies with solid earnings histories.

Full disclosure:  No position in CNDO or other companies mentioned at this time.