Last week, Anacor Pharmaceuticals (ANAC) shares jumped over 50% after the company released positive results from a Phase 2 clinical trial that found that the company’s investigational atopic dermatitis drug, AN2728, had blockbuster potential.

Anacor shareholders were gleaming after the company’s market cap increased from 136.59M on March 20, 2013 to 172.16M on March 21, 2013, to 216.27M on March 22.

Just weeks ago, Anacor’s stock hit a 52-week low of $3.00. The company’s market cap had plummeted to 112.05M after the results from its Phase 3 study of the company’s lead product, tavaborole, a onychomycosis (nail fungus) treatment, appeared to indicate that tavaborole did not appear to work nearly as well as Valeant Pharmaceuticals‘ (VRX) efinaconazole.

What is this Palo Alto, California biopharmaceutical company about?

Boron Chemistry Platform

Anacor is pioneering the research of boron containing small molecules that the company believes have the potential to treat a wide range of diseases.

All of Anacor’s current research and development programs have been internally discovered using Anacor’s boron chemistry platform.

Boron is a mineral that is found in food and the environment. People frequently ingest it by eating fruits and vegetables or drinking milk and coffee.

Researchers have found that boron-based compounds have a unique geometry that allows them to have two distinct shapes, giving boron-based drugs the ability to interact with biological targets in new ways, which may be effective when existing drugs are not.

Anacor scientists have developed methods for modulating boron’s reactivity to optimize reactions with the target and minimize unwanted chemical reactivity. These advances have enabled Anacor to optimize the disease-modifying properties for the company’s lead drug candidates that may be able to treat diseases that have not been effectively addressed by carbon based compounds.

Anacor’s compounds have exhibited strong preclinical activity in multiple disease areas, including fungal, inflammatory and bacterial diseases, as well as in parasitic, diabetes, cancer and ophthalmic indications and applications in animal health.

Anacor’s Pipeline

Anacor’s lead product candidates include:

• tavaborole, an antifungal product candidate in Phase 3 clinical development for the treatment of onychomycosis; and
• AN2728, an anti-inflammatory product candidate that completed Phase 2 clinical trials for the treatment of atopic dermatitis and psoriasis.

The company’s clinical pipeline also includes AN2718, a topical antifungal product candidate, which is in Phase 1 clinical trials for the treatment of onychomycosis and fungal infections of the skin, and AN2898, a topical anti-inflammatory product candidate in the Phase 2a clinical trials for the treatment of atopic dermatitis and psoriasis.

Tavaborole

Tavaborole, also known as AN-2690, is Anacor’s lead topical antifungal product candidate for the treatment of onychomycosis, a fungal infection of the nail and nail bed that affects approximately 35 million people in the United States. Estimates of the prevalence of onychomycosis fluctuate from 2% to 3% of the U.S. population to 13% of the male Finnish population.

The pharmaceutical industry research firm, GlobalData conducted an analysis of the global onychomycosis therapeutics market. The firm’s research found that the market was valued at $2.1 billion in 2010, and is forecast to grow at a Compound Annual Growth Rate (CAGR) of 7% over the next seven years, to reach $3.4 billion by 2017.

In the first quarter of 2013, Anacor announced the results from two Phase 3 clinical trials in which tavaborole achieved statistically significant results on all primary and secondary endpoints.

On January 28, 2013, the company announced positive preliminary results from the first of two Phase 3 trials of tavaborole. Researchers found that 6.5% of patients treated with tavaborole met the primary endpoint of “complete cure,” 26.1% of patients treated with tavaborole achieved a “completely clear” or “almost clear” nail. In addition to the primary and secondary endpoints noted above, 87.0% of patients treated with tavaborole had a negative fungal culture.

On February 28, 2013, Anacor Pharmaceuticals released positive preliminary results from the second of two Phase 3 trials of tavaborole. In this study, tavaborole achieved a complete cure rate of 9.1% in a patient population that Anacor believes represents the majority of onychomycosis patients. In both Phase 3 studies, the company allowed enrollment of adult patients of all ages who had up to 60% of their toenail affected by disease. In addition, 27.5% of patients in the study achieved a completely clear or almost clear nail. While older patients and those with more extensive disease may be more difficult to treat, Anacor believes they represent a significant portion of the patient population. Approximately 50% of people over the age of 70 have onychomycosis. These patients do not seek treatment until the infection has progressed and involves a significant portion of the nail.

In both Phase 3 trials, tavaborole demonstrated better efficacy than ciclopirox lacquer, the only approved topical treatment for onychomycosis. Importantly, ciclopirox lacquer requires concomitant nail debridement (removal).

Tavaborole may be more effective than ciclopirox lacquer, but many are skeptical if the compound is more effective than Valeant‘s efinaconazole. Once daily topical efinaconazole may be a reasonable alternative to treating onychomycosis, according to results of a recent study.

Researchers in the United States and Japan conducted two Phase 3 studies studying efinaconazole as an onychomycosis treatment concluded that 17.8% of patients treated once daily with efinaconazole reached a complete cure. In the second study, 15.2% percent of patients treated with efinaconazole reached a complete cure. Using the secondary endpoint of complete or almost complete cure , the success rates for efinaconazole increased to 26.4% and 23.4%, respectively. The adverse events that were reported were generally mild and transient and were similar between subjects treated with efinaconazole solution 10% and vehicle. The study was published in the November 2012 edition of the Journal of the American Academy of Dermatology.

On an investor call, Anacor said that patient population in its study may have been older and less healthy than those patients in Valeant’s efinaconazole trials.

Anacor has an ongoing arbitration claim against Valeant Pharma subsidiary Dow Pharmaceuticals seeking injunctive relief and damages of at least $215 million for breach of contract, breach of fiduciary duty, intentional interference with prospective business advantage and unfair competition “in connection with Anacor Pharma’s efforts to develop its topical antifungal product candidate for the treatment of onychomycosis,” which Abacor claims “may impact IDP-108 market launch if approved.” The company expects the resolution of the arbitration to occur in the second half of 2013.

After hearing the Phase 3 tavaborole trial results, Canaccord Genuity lowered its price target on Anacor from $9 to $5. The firm commented that “tavaborole’s potential in onychomycosis becomes uncertain” and although tavaborole may be approved by the FDA, efficacy rates lower than a competitor will likely limit market potential.” Canaccord also predicted that Anacor’s atopic dermatitis drug, AN2728, would have positive Ph2b data. Canaccord’s prediction was correct. The firm maintained its “Buy” rating for Anacor.

Anacor expects to file a new drug application (NDA) with the FDA for tavaborole in mid-2013.

AN2718

AN2718 is Anacor’s second topical antifungal in clinical development for skin and nail fungal infections. AN2718 utilizes the same mechanism as tavaborole, Anacor scientists believe that AN2718 appears to be well suited to target organisms that cause common skin and topical fungal infections, including Trichophyton and Candida fungi.

AN-2728

AN-2728 is the reason why many investors are excited about Anacor. On March 21. 2013, Anacor shares skyrocketed after the company announced positive results from a Phase 2 dose-ranging trial of its topical boron-based phosphodiesterase-4 ((PDE-4)( inhibitor, AN2728. The study included 86 adolescents, ages 12 to 17, with mild-to-moderate atopic dermatitis, a chronic disease characterized by inflammation and itching. About 40 million people are believed to have atopic dermatitis. The disease is believed to affect 20% of children and almost 3% of adults.

In the study, lesions treated with AN2728 ointment twice daily for 28 days achieved a 71% improvement from baseline in their Atopic Dermatitis Severity Index (ADSI) score, with 66% of lesions in this treatment group achieving total or partial clearance. AN2728 was found to be generally safe and well-tolerated. Most adverse events were mild and largely unrelated to study drug.

The research firm, companiesansmarkets.com estimates that the global atopic dermatitis therapeutics market was worth $666.4 million in 2010. The firm expects the market to grow to a value of $1,344.3 million by 2018, at a compound annual growth rate of 9.2%. The firm found that although several products are effective, the safety profile of these drugs is not always satisfactory, and as a result, the atopic dermatitis therapeutics market has significant unmet patient need. Companiesandmarkets.com estimates that the unmet need for atopic dermatitis therapeutics is approximately 35% of the total market.

Atopic dermatitis is currently treated with a number of drugs that have been found to have limited efficacy or are plagued with safety concerns. Topical corticosteroids, as well as combinations of antibiotics and antihistamines are the mainstay of treatment. The recent introduction of topical immunomodulators, such as Valeant‘s Elidel (pimecrolimus) and Astellas‘ (ALPMY) Protopic (tacrolimus), have proven to be effective treatments for many people with atopic dermatitis. However, there are safety concerns with these two drugs. In January 2006, the FDA approved “black box warnings” for Elidel and Protopic that there have been rare reports of cancer in patients taking the drugs, although the drugs have not been proven to cause cancer.

Impressed with the results from the Phase 2 AN2728 trial, Wedbush Securities reiterated its “Outperform” rating on March 22, 2013. The firm increased their price target for Anacor stock to $20 from $10. Wedbush estimates the treatment for atopic dermatitis could result in nearly $1 billion in annual worldwide sales by 2021.

Anacor is also developing AN-2728 as a treatment for psoriasis. Psoriasis is a chronic inflammatory skin disease characterized by thickened patches of inflamed, red skin covered with thick, silvery scales typically found at the elbows, knees, scalp and genital area.

According to the research and consulting firm GlobalData, there were approximately 36.5 million prevalent cases of psoriasis in the United States, France, Germany, Italy, Spain, UK, Japan, China, and India in 2012. By 2022, GlobalData epidemiologists forecast that this figure will reach approximately 40.93 million prevalent cases, following a 12.1% increase based on projected population growth. Prevalence proportions are expected to remain constant.

GBI Research predicts the psoriasis sector’s global revenue will maintain respectable growth over the next few years, climbing from a 2011 total of $4.6 billion to $6 billion in 2018, at a compound annual growth rate of 4%.

The introductions of new systemic biologic therapies for moderate to severe psoriasis has provided new treatment options for patients with moderate to severe disease and greatly expanded amounts spent on drugs to treat psoriasis. These drugs, known as tumor necrosis factor (TNF) inhibitors, are not only expensive but carry an FDA warning due to safety concerns. These drugs include Amgen‘s (AMGN) and Pfizer‘s (PFE) Enbrel (etanercept), Abbott Laboratories‘ (ABT) Humira (adalimumab), and Janssen‘s/Johnson & Johnson‘s (JNJ) Remicade (infliximab).

In June 2011, Anacor announced the results of the company’s second and final Phase 2b trial to evaluate the safety and efficacy of AN2728 in patients with mild-to-moderate psoriasis. Anacor claims that the company conducted this trial under anticipated Phase 3 conditions to estimate efficacy in a patient-to-patient trial design, treating all of the psoriasis on a subject’s body compared to its previous bilateral Phase 2 trials, in which one plaque on a patient’s body was treated with AN2728 the other plaque was treated with vehicle, serving as a control. Anacor successfully completed its End of Phase 2 discussions with the FDA and received clearance to proceed with Phase 3 trials.

AN2898

AN2898 is Anacor’s second anti-inflammatory product candidate for psoriasis and atopic dermatitis. Like AN2728, AN2898 is a novel boron containing small molecule that inhibits PDE4 and reduces the production of both TNF-alpha, a precursor of the inflammation associated with psoriasis and atopic dermatitis, and other cytokines, including IL-12 and IL-23.

AN2898 has a similar mechanism of action to that of AN2728 and appears to work in a larger set of animal models, which may predict greater clinical efficacy than AN2728 in atopic dermatitis.

In December 2011, Anacor announced the results of a Phase 2a trial AN2728 and AN2898 in mild-to-moderate atopic dermatitis. The primary endpoint for both compounds was successfully achieved and there were no severe adverse events reported that were considered related to either study drug.

Anacor is also evaluating AN2898 for the treatment of psoriasis. However, the company expects AN2728 to remain its lead product candidate in psoriasis since it has reached a more advanced stage of clinical development.

GSK’052

In 2012, GlaxoSmithKline (GSK) ended its development of GSK ‘052, Anacor’s lead investigational systemic antibiotic for the treatment of infections caused by Gram-negative bacteria, a broad class of bacteria that are most commonly acquired and treated in the hospital setting.

In February 2012, Glaxo halted the clinical trials of GSK ‘052 due to the identification of microbiological findings of resistance in a small number of patients in the Phase 2b trial of the antibiotic for treating complicated urinary tract infections, and decided to discontinue clinical trials following a preclinical investigation.

From February, through October 2012, GSK conducted additional pre- clinical research and, after assessing various options, elected to discontinue further development of GSK ‘052 and return all rights to GSK ‘052 to Anacor.

Anacor continues to work with Glaxo on a tuberculosis program, which was initiated in 2011.

Lilly Collaborations

On August 10, 2011, Anacor announced that it had achieved the first development candidate in its animal health collaboration with Eli Lilly and Company (LLY). Anacor’s research collaboration with Lilly explores the use of Anacor’s boron chemistry to discover products for a variety of animal health applications. Under the terms of the collaboration, Anacor will receive a $1 million payment for achieving this milestone.

Pursuant to the terms of the agreement, Lilly has funded the research that resulted in this compound and will be responsible for future development and commercialization. Anacor is eligible to receive additional development and regulatory milestones as well as tiered royalties from the high single digits to low double digits on future sales.

In December 2012, Lilly selected a second development candidate under its research and development agreement with Anacor to create and develop new therapeutics for animal health. Under the terms of the collaboration, Anacor received a $1 million payment for this achievement. Anacor is also eligible to receive additional development and regulatory milestones as well as tiered royalties from the high single digits to the low double digits on future sales. Lilly is responsible for all further development of both candidates selected and related commercialization expenses for either or both candidates, if approved.

Neglected Diseases

“Neglected” diseases constitute diseases that disproportionately affect the world’s poorest people, including tuberculosis, malaria, visceral leishmaniasis, Chagas’ disease, human African trypanosomiasis, (HAT or sleeping sickness) and filarial worms. Despite the fact that these diseases cause significant morbidity and mortality worldwide, there has been little investment in developing new therapies for these diseases due to the absence of a reasonable expectation of a financial return.

Anacor believe its boron chemistry platform appears to be particularly well suited for the treatment of neglected diseases, diseases that disproportionately affect the world’s poorest people.

In December 2007, Anacor established a partnership with the Drugs for Neglected Diseases initiative, or DNDi, to develop new therapeutics for sleeping sickness, visceral leishmaniasis and Chagas’ disease. In May 2009, the company established a collaboration with the Global Alliance for TB Drug Development. In April 2010, Anacor entered into a research collaboration with the Medicines for Malaria Venture to identify lead compounds for the treatment of prophylaxis of malaria.

Finances

Anacor’s revenue for the quarter ended December 31, 2012, was $3.3 million, compared with $2.6 million for the comparable period in 2011. The increase in revenues was primarily due to the $1.0 million development milestone earned in the fourth quarter of 2012 under the company’s collaboration with Lilly, partially offset by decreases in revenue from its neglected diseases programs.

Revenue for 2012 was $10.7 million compared with $20.3 million in 2011. Revenue from Glaxo was $10.8 million in 2011, which was largely associated with the September 2011 amendment to Anacor’s collaboration agreement, compared to revenue from Glaxo of $1.3 million in 2012, primarily for research funding. In addition, revenue from Anacor’s neglected diseases programs decreased in 2012 as compared to 2011.

Anacor had cash, cash equivalents and short-term investments totaling $45.5 million at December 31, 2012 compared to $50.7 million at December 31, 2011.

The company believes its cash, cash equivalents and short-term investments will be sufficient to meet the company’s anticipated operating requirements until the NDA for tavaborole is filed in mid-2013.

Conclusion: Buy

Although tavaborole has long touted as Anacor’s lead drug, I believe AN2728 shows the greatest promise and has the strongest potential to become a billion dollar drug for the company. Not only has AN2728 demonstrated promising results as a treatment for atopic dermatitis, but this investigational drug has shown positive results in clinical trials as a much needed, effective and safe treatment for psoriasis.

Anacor was founded in 2002 based on technology created by two preeminent scientists, Lucy Shapiro, PhD, at Stanford University and Stephen Benkovic, PhD, at Pennsylvania State University. Benkovic and, Shapiro are both recipients of the National Medal of Science, one of the highest honors bestowed by the United States government upon scientists, engineers and inventors.

Anacor is unique because the company is developing novel small molecule therapeutics derived from its unique boron chemistry platform. Although boron is an essential plant nutrient required for maintaining the integrity of cell walls, little research has been conducted on the potential role of this essential chemical element in medicine. Anacor discovered compounds have exhibited extensive preclinical and clinical activity in multiple disease areas. I see a great deal of potential promise ahead in Anacor’s future.