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TSRX - Trius Remains Low-Risk and Attractively Valued

By Jason Napodano, CFA

First Quarter Financials

On May 13, 2012, Trius Therapeutics (TSRX) reported financial results for the first quarter 2012. Total revenues in the first quarter were $9.8 million, and consisted of $3.0 million in contract research from the company’s NIAID and DTRA grants and $6.8 million collaborative and licensing fees from Bayer Pharma AG, the company’s partner in Asia/Pacific market for tedizolid. We note that included in the $6.8 million figure was a $5.0 million milestone payment from Bayer AG for the successful completion of the TR701-112 phase 3 study with tedizolid. Revenues were slightly above our expectations.

In the coming quarters we are modeling a decrease in revenues relative to the first quarter 2012 on two circumstances. The first, we do not expect any additional milestone payments from Bayer AG in the remainder of 2012, and second, in May 2012, the Defense Threat Reduction Agency (DTRA) notified Trius that it had elected to not exercise its option to extend funding to the company’s marine natural products program. As a result, Trius has discontinued the program, as well as its worth with UC – San Diego in which Trius and UCSD were jointly researching antibacterial agents for combating gram-negative and gram-positive biodefense pathogens. This work was also being funded by the DTRA grant. DTRA contributed $1.1 million in revenues in the first quarter 2012. In total, Trius recognized $7.1 million in revenues of the $29.5 total grant from DTRA. While we are disappointed to see this preclinical program halted, it was not a significant driver of interest for shareholders.

Net loss in the first quarter was $7.6 million, or 22 cents per share. Research and Development expenses in the quarter totaled $16.8 million, significantly higher than our expectations and higher sequentially from the fourth quarter 2011. Management noted that R&D costs in the first quarter increased on initiation of the second phase 3 trial with tedizolid, TR701-113. We note enrollment in this program continues today, and data is expected in the first quarter 2013.

S&GA expense was in-line with our modeling. Results in the first quarter included a $2.4 million non-cash gain for revaluation of the common stock warrant liability. As Trius stock move down, the fair value warrant liability also declines, causing a balance sheet adjustment. The net result of all these adjustment was an overall net loss was right in-line with our expectations.

…Solid Cash Position…

Trius exited the first quarter 2012 with $96.5 million in cash and investments. The cash position was bolstered in January 2012 through an underwritten public offering of approximately 9.9 million shares of common stock at a price of $5.25 per share, for net proceeds after fees of $48.4 million. We find this to be sufficient to fund operations well into the future, including the ongoing second phase 3 trial (TR701-113) and a planned HAP/VAP (lung infection) phase 3 trial later this year. We remind investors that management is also planning a fourth phase 3 trial in bacteremia (systemic infections) in 2013.

…EU Partnership Remains Biggest Catalyst Near-term…

Trius is in talks with potential European partners on tedizolid. We suspect that Bayer Pharma AG is the likely eventual European partner for the company, but the solid cash position allows the company to continue to entertain offers from other companies.

Fundamentals Remain Strong

We believe fundamentals at Trius remain solid. We see the development of tedizolid, current in its second phase 3 trial, as low risk. Data from the first phase 3 trial met all primary and secondary endpoints. The company has secured a strong partner for the Asia/Pacific and emerging markets in Bayer Pharma AG. We believe Bayer is keen on licensing the European rights to tedizolid later this year. Finally, Trius is well funded, with $96.5 million in cash on hand at the end of the first quarter 2012. 

We see fair-value at $11 per share based on our 10-year DCF model (posted below). We believe Trius is an attractive take-over candidate for a specialty pharmaceutical company looking to enhance its late-stage anti-infectant pipeline. We would be aggressive buyers of the stock at this level.

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