Scynexis ($SCYX): Laws, Incentives, Politics, and Superbugs

Scynexis Analysis

The “Ick” Investment Strategy

In 2010, Vanity Fair published an exposé on Burry. It highlights how he goes looking for “ick” investments. In Burry’s words, “ick” investing involves taking a special analytical interest in stocks that inspire a first reaction of “ick”. The “ick” investing toolbox includes “looking for court rulings, deal completions, and government regulatory changes—anything that might change the value of a company.”

The example he provides in the article is that of the Avanti Corporation.

A court had accepted a plea from a software company called the Avanti Corporation. Avanti had been accused of stealing from a competitor the software code that was the whole foundation of Avanti’s business. The company had $100 million in cash in the bank, was still generating $100 million a year in free cash flow—and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avanti would be worth a lot more than the market then assumed. To make money on Avanti’s stock, however, he’d probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

The Laws, Incentives, and Politics Tweet

Roughly eight months ago, Burry resurfaced this investment strategy, which I have recently started referring to as “LIP” investing (LIP = Laws, Incentives, and Politics).

The advice is straightforward. Look for the most extreme absurdities in society. Research the laws, incentives, and politics that—if changed—could resolve the absurdity. If resolution is among the set of probable outcomes, find the best investment that takes advantage of that potential change.

At the time of the tweet, he was referring to the laws, incentives, and politics that have kept companies in the Cannabis industry in a state of capital starvation. Recently, another Burry investment surfaced that also fits the criteria of the “LIP” investment strategy—Scynexis, Inc.

In the text below, I provide some background on Scynexis as a company. Afterwards, I detail the LIP component of this thesis and where Scynexis fits into the equation. To be clear, it is my view that the LIP component of this thesis is perhaps the most critical aspect, so if basic biotech information puts you to sleep, you may want to jump to the LIP section entitled Laws, Incentives, Politics, and Superbugs: The Elevator Story.

Scynexis: the One-Trick Pony

Scynexis is a one-trick pony. In the biotech space, a one-trick pony refers to any company that has one drug—and only one drug—in any stage of development. One-trick ponies tend to carry a lower valuation than ponies with two or more tricks. The reason for this is that one-trick ponies have no other drug to fall back on if their pony’s only trick doesn’t cut it. Pharmaceutical startups typically spend over 8 years bringing a drug through the various phases of drug development. They commonly spend well over $1 billion as they work towards clearing the hurdle of FDA approval and getting their drug into the marketplace. As the drug clears the various pre-approval milestones, the risk of failure decreases and thus the risk of losing your investment decreases. If it fails at any point, it is not uncommon to see your investment vanish entirely.

Even a drug company whose drug makes it through the FDA approval stage is still considered high risk. That’s because approval alone doesn’t necessarily imply strong sales in the post-commercialization phase. If you take a sampling of various one-trick ponies who had an FDA approved drug and who were nearing their commercialization date, you’ll find significant variance in how the market values each pony. At this point, the real question is—who will pay for this pony’s trick, how many will pay for this pony’s trick, and how certain are we that our predictions are right? From the valuation perspective, there’s another question to add to the mix: what type of trick is the pony offering and how many investors care about that type of trick?

Scynexis received FDA approval for its single medication on June 1st, 2021. The market valued it at its highest point ever on that date—$206M. They started selling their drug in August 2021. For some reason, the market wasn’t all that interested during this timeframe. The stock entered a four month downtrend from June 1st until October and then travelled sideways until the news that Burry bought the stock skyrocketed it back into the heavens.

Contrast this with Aerie Pharmaceuticals who was also a one-trick pony but in the glaucoma space. Pre-commercialization, their medication had similar revenue projections to those of Scynexis but the market valued them at $1.2B at the same point in their corporate lifecycle. From what I’ve researched thus far, pre-commercialization sales estimates are highly unreliable.

The One-Trick Pony’s One Trick: Ibrexafungerp

Scynexis’s only drug, ibrexafungerp, is currently sold under the brand name Brexafemme. It is approved for the treatment of recurrent Vulvovaginal Candidiasis (yeast infections) but offers a broad spectrum of activity. It is mentioned in the book Superbugs from 2018, which I think covers Scynexis and the LIP component of the thesis quite well.

One afternoon Tom identified a candidate: an antifungal drug so new that it hadn’t yet been given a name. The drug was discovered at Merck at the turn of the twenty-first century, but the company abandoned it in 2013 following a disappointing portfolio review (a detailed financial analysis of an investment), and licensed the compound to a New Jersey-based company called Scynexis. Early studies indicated that it was effective in a test tube—it kills just about every fungus in sight—but Merck wasn’t certain it would work as well in humans or that the market could sustain its hefty price tag. — Matt McCarthy, MD (author of Superbugs)

The antifungal drug space is a lot like the antibiotic space where basically all of the heavy-hitting drugs were developed between the 1950s and the 1990s. The 1950s were the golden age for Big Pharma—Pfizer’s sales force grew from 8 people in 1950 to 100 people in 1951. In 1955, the Journal of the American Medical Association had more pages of ads than Life magazine. It was an interesting time. But, outside of the size of Pfizer’s sales force and the Journal of the AMA’s ad count, not much has changed on the antifungal medication front. The way that Matt McCarthy described it back in 2018 is the reality we’re still living in today.

Tom and I had […] highlighted the need for better treatment options. There were just three major classes of antifungal drugs, we noted, and no new classes had been approved in years. There’s just not much interest in finding a cure for something so rare.

Triterpenoids: the New Kid on the Block

For many fungal infections, there are multiple therapeutic options available that offer a broad spectrum of activity and that are well-tolerated by the body. Ibrexafungerp is the first medication in the novel drug class known as Triterpenoids and the most recent therapeutic option to be added to the mix. The other three antifungal drug classes that Matt refers to in his book are polyenes, echinocandins, and azoles.

Polyenes such as Nystatin were discovered in 1950 and are still heavily prescribed today. Nystatin is most effective against infections caused by Candida species. It is too toxic for systemic use, is not absorbed by the gut, and is thus primarily used topically for Candida albicans infections (e.g., as creams for skin infections).

Echinocandins, discovered in the 1970s, have been described as the “penicillin of antifungals”. This class has emerged as the preferred choice in the therapy of invasive candidiasis and candidemia. Their potent fungicidal activity and minimal toxicity have made them first-line drugs for this indication. In certain clinical settings, they may be agents of first choice. As a drug class, they have two main issues. The first is that they can’t be administered orally. Their primary route of administration is via intravenous infusion. The second is that recent research has demonstrated that certain fungi such as Candida glabrata have been developing resistance to the echinocandin drug class.

Where Echinocandins fail in the oral realm, the azole drug class excels. Azoles hail from the 1970s and 1980s. Fluconazole has been the drug of choice for most clinical syndromes of candidiasis, including yeast infections, due to its tolerability, effectiveness, and ease of administration (orally). A few of the negatives of this class include its ability to interfere with other common medications (which can be a serious issue depending on your condition), the potential for liver failure (which happens rarely), and an increasing fungal resistance to azoles due to overprescribing.

Triterpenoids such as Ibrexafungerp (there’s only one Triterpenoid drug at this point) are a new drug class that borrows strengths from a couple of the other classes. For example, it shares the same mechanism of action as the echinocandins which allows it to achieve a similar degree of potent fungicidal activity and minimal toxicity. Unlike echinocandins, it can be administered orally, which makes it a strong competitor with the azole class of drugs. Unlike both echinocandins and azoles, Ibrexafungerp hasn’t yet been prescribed broadly which means fungal resistance to Triterpenoids, if it ever occurs, is likely decades away. This makes it the best option for the treatment of fungal infections that have developed resistance to azoles alone or to both azoles and echinocandins. This resistant type of fungal infection has been trending up over the past several years.

The New Kid Will Be Picked Last

It would be an understatement to say that echinocandins dominate their niche in the hospital setting while azoles dominate the world beyond the hospital walls. It has been this way for decades. In my opinion, it’s one of the main reasons that Wall Street and biotech retail investors haven’t paid much attention to Scynexis and this new drug class. Worse still, antifungals as a group of drugs are already starving for attention. Matt McCarthy describes this well—

Fungal work sometimes feels like an intellectual backwater. Bacteria get all of the attention, both from academics and from industry, and the world’s small cohort of fungal specialists, known as mycologists, shrinks a bit more every year. There’s nothing sexy about being an expert in yeast infections.

Yet, from the perspective of an investment thesis, this makes Ibrexafungerp an underdog, the ultimate contrarian in a world dominated by attention-grabbing bacteria and “sexy” drugs focused on curing even more attention-grabbing diseases like cancer and heart disease (or anything that CRISPR could potentially cure such as sickle cell). If you’re trying to understand who will buy Ibrexafungerp and how many will buy it, you’ll quickly find that it’s no easy task.

One would think that estimating the patient population for Vulvovaginal Candidiasis (yeast infections) would be a relatively straightforward thing to do, but one would be wrong. Even if you were able to estimate how many yeast infections were occurring on an annual basis, you’d need to figure out why someone would take Ibrexafungerp instead of Fluconazole. This is another sticking point for many potential investors.

The most important thing to note about Ibrexafungerp as a treatment for VVC is that it won’t be picked as the first treatment. It’s slightly more effective than Fluconazole from the clinical perspective but it’s also more than triple the price. Fluconazole is effective in over 95% of acute VVC cases. If that’s true, then how did Scynexis manage to do $1.3M in sales of Ibrexafungerp in their first commercial quarter?

The answer lies in the azole-resistant strains of Candida. Scynexis is targeting recurrent yeast infections rather than the much more common acute/one-off infections that Fluconazole already has cornered. There are many academic studies that provide data about recurrent VVC including its global and national prevalence. There are additional studies that focus on the prevalence of individual Candida species that cause recurrent VVC as well as the rate of Fluconazole resistance that each Candida strain carries. There’s additional data for Boric Acid response rates which is a common second attempt at treatment.

These are the groups that will are most likely to buy Ibrexafungerp. The math goes something like this:

If you exclude “normal” cases of VVC and focus exclusively on the cases of recurrent VVC that do not respond to Fluconazole treatment or Fluconazole plus Boric Acid treatment, you come out with a ballpark estimate of $520 million in peak annual sales.

This is actually smack dab in the middle of the range that Scynexis has touted in previous presentations where they’ve stated $400 - $600 million as their VVC annual sales estimate. They likely got to that number differently than I did and their estimate assumes that a small percentage of acute VVC cases will use Ibrexafungerp. My estimated penetration rate for that group is 0%.

Early on in my research on Scynexis, I thought that their valuation was low because this annual sales estimate is very difficult to come up with (it took me tens of hours of reading academic studies on yeast infections to come up with this model). But, the fact is, once you model a reasonable ramp rate for sales based on this estimate, it still hardly seems worth the investment. The company will probably get to profitability by 2024 or 2025 and will slowly but surely increase free cash flow into the 2030s. This is an investment I’d want to revisit closer to the first year of positive cash flow which would be a couple years from now. It’s not a company I’d want to invest in the 2021-2022 and have travelling sideways for the next couple of years.

It wasn’t until I read an interview with Scynexis CEO Marco Taglietti that I realized there had to be something else to this thesis that prompted Burry to buy. The interview excerpt below confirmed my suspicion that most people—even infectious disease specialists—don’t realize that there’s a significant unmet need in the yeast infection space.

AT: Do you have an example of how this strategy has worked for you?

MT: We have ibrexafungerp, an antifungal with great versatility. With my training in  infectious disease, I’m very excited to develop this product for the hospital setting. But at a certain point, my team came to me with the idea of developing a different indication.

Their new indication idea was vulvovaginal candidiasis, also called vaginal yeast. And, I’ll tell you, as an infectious disease specialist who has been treating difficult, life-threatening infections in very sick patients, my first reaction to vaginal yeast was to tell my team, “Nah, don’t waste your time.”

But I was able to bite my tongue and let my team brainstorm the idea. And you know what? Our first NDA will actually be for vaginal yeast!

Their idea addressed a significant unmet medical need that I was unaware of, so patients and doctors were excited about joining our clinical trial to treat vaginal yeast. We are very excited to launch the drug for the treatment of vulvovaginal candidiasis and at the same time continue to develop the hospital indication.

So, as a CEO, I try to let the wisdom of the team come out and not nip it too early.

The One-Trick Pony’s Hidden Trick: Candida auris

Candida auris is another species of fungus from the genus Candida. Unlike many Candida species, C. auris does not cause vaginal yeast infections. Instead, C. auris has gained widespread attention for causing outbreaks of invasive candidiasis—an infection of the bloodstream that is highly fatal for those that get it (30-60% death rate).

Invasive candidiasis is caused by other Candida species, too. But, C. auris is particularly bad because some of its strains resist the first-line and step-down therapies for fungal infections of the blood. These patients typically have no other treatment option. Resistance to one of the leading antifungals for Candida species (Fluconazole) is almost an innate trait of C. auris at 90% resistance (I've seen as high as 96% in some research papers; either way it is pretty incredible).

Luckily, echinocandins appear to be effective against most isolates of C. auris. While Echinocandins are injected intravenously in the hospital, they aren't available in oral form. This is why many invasive candidiasis cases have longer-than-average hospital stays (they need to stay in the hospital to receive the IV formulation even after the worst has passed). Future patients can count themselves lucky as the next medication to be approved on this front will likely be ibrexafungerp which Scynexis has in its pipeline for the invasive candidiasis indication (currently in phase 3).

Ibrexafungerp can be delivered both orally and intravenously and shares the same mechanism of action as the echinocandin drug class. This makes it a strong candidate for step-down therapy in azole-resistant invasive candidiasis cases whose first-line therapy is Echinocandins. It opens up the opportunity for patients to get discharged earlier because they can get similar clinical benefit from an oral ibrexafungerp prescription at discharge as they would from extended echinocandin treatment delivered intravenously in hospital.

While Candida auris is a compelling indication for ibrexafungerp, Scynexis estimates just ~$200 million in annual sales related to Candida auris treatment. This is highly problematic for a few reasons. The most important reason is that the company may not be able to stay afloat as it continues to burn cash for R&D and sales spending at a faster rate than Brexafemme sales is scaling. Even with an additional $200 million of sales several years from now, it may not be enough revenue to achieve meaningful profitability. This in turn means that Wall Street isn’t interested from the investment perspective and the company is less likely to get the capital they need to get their C. auris indication all the way to commercialization.

And with that, we’ve arrived at the LIP component.

Laws, Incentives, Politics, and Superbugs: The Elevator Story

There is an urgent need for novel antibiotic and antifungal drugs that can be used to treat infections caused by superbugs that have developed resistance to the current arsenal of antimicrobial drugs. Due to a lack of incentives and adequate returns on investment, Big Pharma has largely exited the antimicrobial market. Small biotech firms like Scynexis are now developing most new antibiotic and antifungal drugs (75% of projects). Due to the significant R&D costs required to bring a drug to market and the potential for low revenue post-commercialization, a promising—even effective—drug is not always enough to keep these biotech firms from declaring bankruptcy.

The net result is a pipeline of antimicrobial drugs that remains alarmingly small compared to the global scale of the threat of antimicrobial resistance (AMR). With global AMR deaths in excess of 1 million, more and more governments are paying attention to this broken market and are aware of the need for a new system of incentives, one that keeps these firms out of bankruptcy and gets their drugs onto hospital shelves worldwide.

A new bipartisan bill called the PASTEUR Act would stabilize the antimicrobial marketplace through a new subscription-based model. If a small company has a novel antimicrobial drug that meets the criteria set forth in the PASTEUR Act, they could apply for a subscription that would bolster their revenue during the development and early commercialization phases. These subscriptions would ensure that antimicrobial drugs with demonstrated promise make it to market by providing a buffer against bankruptcy.

What are superbugs?

“Superbug” is a colloquial term for an antimicrobial-resistant (AMR) microbe (i.e., antibiotic-resistant bacteria or antifungal-resistant fungus). Some professionals prefer to call them “difficult-to-treat infections”.

[Superbugs] had become a persistent problem for us; they didn’t really exist before the 1960s, and they were only sporadically seen in the world until the 1990s. But a combination of poor prescribing practices by doctors along with the indiscriminate use of antibiotics in commercial agriculture and farming exposed bacteria to our precious arsenal of effective drugs, and the microbes figured out ways to neutralize them. Superbugs were now everywhere and they had become a leading cause of deadly infections in humans. — Matt McCarthy, MD

It has now been three years since Superbugs was published; we are not much further along in terms of progress in this area. On January 20, 2022, the Institute for Health Metrics and Evaluation published a paper entitled “Global burden of bacterial antimicrobial resistance in 204 countries and territories in 2019”. In that paper, scientists from IHME estimate that over 1.2 million deaths globally were attributable to AMR microbes in 2019. By that estimate, superbugs are the 12th leading cause of death globally (ahead of malaria).

The WHO declared AMR as one of the top 10 global public threats facing humanity. And, as we all know, by the time the WHO “declares” something, it’s likely already too late. In 2017, the WHO published their priority pathogens list with the expressed intent to update it in 2022. Notably absent from the 2017 list is the entire kingdom Fungi. It remains to be seen whether the WHO’s next list will also be limited to bacteria.

The CDC published their own list of threats in a report from 2019 called Antibiotic Resistance Threats in the United States. This list spans bacteria and fungi and classifies them by severity/priority (i.e., buckets for Urgent, Serious, and Concerning threats as well as a “Watch List”).

The PASTEUR Act

The CDC’s list of threats is highly relevant to anyone studying the verbiage in the PASTEUR Act. Under this act, Scynexis could submit ibrexafungerp to be designated as a critical need antimicrobial. If designated as a critical need antimicrobial, Scynexis could then submit an application for a subscription contract. Assuming they meet the requirements in the Act, they could be approved for a subscription.

As summarized on this website, the PASTEUR Act would:

• Form a Committee on Critical Need Antimicrobials, consisting of representatives from relevant federal agencies, as well as doctors, patients, and outside experts, to develop and implement necessary guidance regarding infections of concern, and the favored characteristics of potential treatments.

• Establish a subscription model to encourage innovative antimicrobial drug development aimed at treating drug-resistant infections. This model will be delinked, meaning that participating developers would not receive income, as a part of their subscription payments, based on volume or quantity of sales. The model would offer antibiotic developers an upfront payment in exchange for access to their antibiotics, encouraging innovation and ensuring our health care system is prepared to treat resistant infections.

• Terms and conditions of the subscription contracts would include product availability to individuals on a government health insurance plan, supporting appropriate use, and completion of post market studies. These contracts could be valuated between $750 million and $3 billion.

• Build on existing frameworks to improve appropriate use through the CDC National Healthcare Safety Network and other programs to collect and report on antibiotic use and resistance data.

• Include transition measures such as smaller subscription contracts to support novel antimicrobial drug developers that need a financial lifeline, according to a brief released by the creators of the legislation.

What this means for Scynexis

After reading through the PASTEUR Act verbiage, I wanted to confirm that Scynexis could be one of the beneficiaries of this legislation in the event that it goes from being a bill to being a law. So, I reached out to their IR agency. Here’s the response I received:

I also wanted to establish how this would change things for the company from the investment perspective. The most important thing to keep in mind is that if Scynexis gets approved for the lowest subscription of $750 million over 10 years, the company could go from burning tens of millions in 2022 and 2023 to generating over $100 million in positive cash flow in 2025 and onwards. Ibrexafungerp sales will grow over the next three years and then suddenly an extra $75 million will be dumped on top of whatever that sales number is.

Their current burn rate for operating cash flow is $45 million. Even if operating expenses climb another $10-15M per year, you’re still looking at a company that is currently sitting on $130M in cash with the potential for $100M in cash flow about 3 years from now. And, the market currently values them at ~$110 million. If the PASTEUR Act gets approved, it is my view that this company will jump quickly in value as the market learns that this legislation and this company exist to begin with.

It is the LIP investment strategy to a tee. There is an extreme absurdity—companies working on important life-saving treatments for antimicrobial resistant infections who are going out of business because the infections are too rare to make them enough money and because investors are too afraid to invest in a class of companies that, on average, will likely need to close up shop. Then you have the laws, incentives, and politics piece brought to you by the PASTEUR Act which is a law that would flip the incentive structure for antimicrobial resistance companies on its head assuming that politicians vote in the right way later this year.

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That’s the end of the thesis. Please keep in mind that I’m not endorsing this company as an investment. I’m not an investment advisor nor is this financial advice—just the culmination of the research I’ve done on Scynexis. I own shares in the company but, to be clear, it’s a very high risk proposition (which you can see for yourself by the rate at which it tanked as the greater market fell).

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