Tonix Pharmaceuticals — Update 1 December 2016

Post-traumatic stress disorder is a large though somewhat underserved market. Anyone who has had a traumatic experience (eg child abuse, rape, seeing a loved one die) can exhibit symptoms of the disease. Lifetime prevalence for adults is 8%,1 which goes up to as high as 31% for veterans.2

According to the Diagnostic and Statistical Manual of Mental Disorders (DSM-5), to be diagnosed with PTSD sufferers have to exhibit symptoms across four categories: intrusions, avoidance, mood and cognition, and arousal (see Exhibit 1).

There are a number of shortcomings associated with available treatments for PTSD. There are currently only two products approved for the disorder, paroxetine and sertraline, both SSRIs with the associated side effects and only modest effect size. Based on the Cohen’s d statistic, where 0.2 is considered a small effect size, 0.5 is considered moderate and 0.8 is considered large,3 both approved therapies have only small to moderate impacts (see Exhibit 2).

There have been 11 published positive randomized control trials (RCTs) for SSRIs, mostly in predominantly female civilian populations. There were also six negative RCTs in PTSD, mainly in predominantly veteran, male populations.

Among other pharmacological therapies, some of which are used off label after SSRI failure, meaningful effect sizes were generally seen only in small trials (the effect size for topiramate is heavily skewed by a 67-patient trial in Iran where the drug was tested as adjunct therapy rather than monotherapy for PTSD).

What is most concerning is that there are 2.9m prescriptions per year for benzodiazepines in the civilian PTSD market alone, representing about 20% of all prescriptions for PTSD (see Exhibit 3) and indicating that 55% of patients receive a drug class that may actually worsen PTSD (note that a single patient may have multiple prescriptions from different classes).

The Department of Veteran’s Affairs/Department of Defense Clinical Practice Guidelines go so far as to strongly recommend against the use of benzodiazepines to treat PTSD due to negative cognitive effects and withdrawal symptoms, some of which mirror PTSD symptoms like nightmares and insomnia (and can start while the patient is still on-drug at a stable dose due to the building of tolerance). The guidelines state:

“Although benzodiazepines have been frequently used “as needed” and continuously for anxiety disorders, including to augment evidence-based treatment modalities in PTSD, there is theoretical, animal, and human evidence to suggest that benzodiazepines may actually interfere with the extinction of fear conditioning or potentiate the acquisition of fear responses and worsen recovery from trauma. Benzodiazepine should be used especially cautiously in combat veterans with PTSD because of the very high co- morbidity of combat-related PTSD with alcohol misuse and substance use disorders (upwards of 50 percent of co-morbidity) and potential problems with tolerance and dependence. Once initiated, benzodiazepines can be very difficult, if not impossible, to discontinue due to significant withdrawal symptoms compounded by the underlying PTSD symptoms.”

With proper education, it may be possible to convince physicians to switch out benzodiazepines with TNX-102 SL, which has a much more innocuous toxicity profile and does not have the tolerance/withdrawal issues. The toxicity profile is so innocuous that not a single patient withdrew due to an adverse event from the high-dose arm, while three withdrew for that reason from placebo (in total 16% withdrew from any reason from the 5.6mg arm, compared to 27% from placebo).

The company provided additional clarity on the design of its Phase III program. It will involve two large Phase III trials, the first being in military-related PTSD and the second in predominantly civilian PTSD (though with a military component). The first trial will be a randomized, double-blind, placebo-controlled trial with up to 550 patients who will receive either 5.6mg of TNX-102 SL or placebo. The entrance criteria will be stricter than in the AtEase trial, with a minimum CAPS-5 score of 33 required for entry, instead of 29. This will help ensure that the participants in the trial actually have PTSD. The endpoint will be mean change from baseline in total CAPS-5 score at week 12.

Tonix plans to conduct one to two unblinded interim analyses with the first occurring after approximately 180 patients are enrolled (~90 in each arm), after which the study can be stopped due to efficacy or the sample size can be adjusted. As the exact statistical plan has not yet been approved by the FDA, the p-value hurdle necessary for an efficacy stop is unknown, but it is likely to be high. This first Phase III trial is expected to begin in Q117 with an interim analysis in H217. We continue to expect the full data readout in 2018 and do not expect an early halt due to efficacy.

The second trial will have the same design as the first except that it will be a predominantly civilian sample. The company expects over half of the participants to be female, which leads to an expectation of around 25% of the trial participants suffering from military-related PTSD. Note that historically female PTSD patients have been more responsive to medical therapy. The target start date for this trial is yet to be determined but it will follow the military-related trial initiation.

It is possible that Tonix will be able to obtain breakthrough designation for its program as the therapy has data showing TNX-102 SL may successfully treat a serious condition. This could allow for FDA approval following one Phase III trial; however, we continue to model a requirement for two Phase III trials for approval.

We have reduced our valuation from $208m or $8.05 per basic share, to $207m or $5.27 per basic share, mainly due to the dilution from Tonix’s 9.5m share offering in October. We expect to update our valuation with the advancement of the PTSD program and/or regulatory actions such as breakthrough therapy designation.

Tonix reported a loss of $7.6m in Q316, down from $9.8m in Q216, mainly due to the reduction of R&D expenses from $7.5m to $5.5m, predominantly associated with clinical development expenses. The net loss for the quarter, excluding non-cash expenditures, was $6.8m, down from a net loss of $12.4m, excluding non-cash expenditures in Q315. We expect spending to decrease for the remainder of the year to reflect fewer R&D commitments following the suspension of fibromyalgia development. The company ended the quarter with $26.7m in cash and added an additional $4.6m in an equity offering in October. We currently forecast that the company will need an additional $80m before profitability in 2023, up slightly from $70m previously.