Good news hit the wires this morning from Motif Bio(LSE: MTFB), a clinical-stage biopharmaceutical company aiming to develop novel antibiotics. The market likes it and the shares are around 36% higher as I write.
The excitement surrounds details of a positive topline result from a global Phase 3 clinical trial called REVIVE-2, which is focused on the firm's investigational drug candidate iclaprim for patients with Acute Bacterial Skin and Skin Structure Infections (ABSSSI).
A new drug is born
Chief executive Graham Lumsden tells us that today's positive results mean the company has completed the two required Phase 3 trials in ABSSSI necessary to submit a new drug application to the US Food and Drug Administration (FDA), which Motif Bio plans to do by the end of the first quarter of 2018.
According to medical experts, ABSSSI is a serious infection and every year around 3.6m people in the US are hospitalised with it for several days. The problem with existing treatments is that they tend to be toxic to the kidneys and that's bad because around 26% of those suffering with ABSSSI also have kidney disease. Happily, during the trial, kidney toxicity was not observed with iclaprim.
The hope now is that Iclaprim may prove to be "an important option for the growing population of patients with ABSSSI and kidney disease who need a safe and effective antibiotic targeting Gram-positive bacteria, including MRSA." Meanwhile, from an investing point of view, the outcome of the trial means that Iclaprim now has value, which Motif Bio may be able to commercialise down the road.
Will the cash roll in?
Perhaps Iclaprim will go on to become a blockbusting best-seller. If so, it could end up delivering much-needed incoming cash flow to the company's coffers. We saw with the recent interim results that Motif Bio has no income and spent more than $28m on operations during the first half of the year - early-stage drug development is an expensive activity. Investors are keeping the firm solvent, and a placing in June brought in just under $24m. But even then, the cash sitting on the balance sheet was only around $29m and the cash-burning agenda for operations marches on.
Of course, Motif Bio isn't the only drug-development company with precarious finances, and we investors have to make judgements in such cases that balance the financial risks of owning the shares against the upside potential in a firm's story. One consequence of this push-pull scenario in Motif Bio's case is that the share price seems to fly up and down on news announcements depending on their tone. So, although the long-term story is full of potential, maybe it's best to buy-in on down days rather than up days like today.
The news today takes it closer to earning income, but the firm's market capitalisation running close to £129m strikes me as hefty for a company with everything yet to prove. This stock could be a millionaire-maker or it could, yet, send you to the poorhouse, so I remain cautious.
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Kevin Godbold has no position in Motif Bio. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.