Tonix Pharmaceuticals — Update 23 November 2015

Fibromyalgia is a diffuse, chronic pain disorder where the areas of pain often fluctuate and there are a variety of comorbidities/symptoms, with sleep-related disorders (fatigue, stiffness, non-restorative sleep and difficulty falling asleep) being some of the most intense (see Exhibit 1). It is a relatively common problem from which approximately 2% of Americans suffer (3.4% of women and 0.5% of men)1 with prevalence highest amongst those between the ages of 55 and 64.

Tonix believes that Tonmya, a muscle relaxant that would be taken once daily at bedtime, can improve the sleep quality of patients and hence improve many of the core symptoms of fibromyalgia.

Data from the Phase IIb BESTFIT trial of Tonmya vs placebo in fibrymyalgia patients presented at the recent ACR conference reinforced the thesis that improvements in sleep score are correlated with improvement in pain scores. 41% of the patients on Tonmya were considered to be sleep responders (defined as those in the top tertile of sleep score improvement from baseline) compared to 21% of those in the placebo arm. This is important because those who achieved a top tertile improvement in sleep score had a 78% chance of being a pain responder (regardless of treatment arm), while response rates were in low single digits for those in the bottom tertile of sleep improvement (see Exhibit 2).

In fact, if you look at all of the sleep outcome-related secondary endpoints, they had a high correlation with fibromyalgia and pain outcomes, with most correlation coefficients between 0.5 and 0.7 (see Exhibit 3). This is important given that Tonmya was able to hit all sleep secondary endpoints with high statistical significance.

In May 2015, the company launched the 500-patient Phase III AFFIRM study of Tonmya in fibromyalgia. We remain confident in the outcome of this trial despite the fact that the 205-patient Phase IIb BESTFIT trial missed the primary endpoint of mean change from baseline in the daily diary pain score during week 12. This is due to the fact that it showed a statistically significant improvement in a number of secondary endpoints using both mean change and responder analyses (see Exhibit 4), including the endpoint that has been selected as the primary endpoint for the AFFIRM trial, 30% responder rate on daily diary pain score. We expect data from the AFFIRM trial to be released in Q316. Also, the company has said that it expects to start a second Phase III trial in fibromyalgia patients in Q216, although it may be able to receive approval with just one trial, depending on data.

2016 will be a make-or-break year for Tonix, as besides the AFFIRM data, we will see data from two additional trials. First will be data from a Phase II for TNX-201, the R-isomer of isometheptene (the racemic version had been on the market in various forms for decades as a headache treatment), in Q116 for ETTH, which may offer an effective and non-addictive option for ETTH sufferers. Next will be data from a Phase II for TNX-102 SL in Q216 for PTSD, where current medications have spotty efficacy, especially in military-related PTSD, a subpopulation on which Tonix’s Phase II focuses. Finally, the Phase III for Tonmya, which has a high chance of success based on both prior data and clinical trial design improvements, will read out in Q316.

As TNX-201 will be the first of the company’s clinical trials to provide data, we provide a review of the history, the clinical trial and the market opportunity. ETTH is a highly prevalent problem, with an estimated 38% of the US population suffering episodic tension-type headaches, with approximately 25% of those suffering frequent tension-type headaches,2 making it a potentially attractive market for large pharma. The only FDA-approved treatments include the barbiturate butalbital, with opioids and triptans used off-label, all of which can lead to addiction, tolerance and medication overuse headaches. Overall, an estimated 3.5m prescriptions are written annually for butalbital containing medications for ETTH and another 6.5m prescriptions for opioids and triptans.

TNX-201 is the R-isomer of isometheptene mucate, a headache medicine that had been on the market in various forms for decades, but without official FDA approval since 1962 due to its grandfathered drug status. The FDA began an initiative in 2006 to pull unapproved drugs off the market, and as of 2011 there are no products containing isometheptene mucate commercially available outside compounding pharmacies.

Tonix initiated a Phase II trial of 200 patients comparing 140mg of TNX-201 to placebo in June, with top-line results expected in Q116. Given the size of this indication and the expense of running a Phase III clinical trial program for ETTH, we expect the company will license this product once positive Phase II results are available, especially as large pharma should be interested in a medication that serves such a large market. Our model assumes that a collaboration will be signed in 2017 with $40m upfront (the average upfront received for headache products, according to BioCentury), another $140m in milestones and a 15% royalty rate. Sales peak at $1bn, representing 25% of the butalbital + opioid + triptan market in 2033 (c 3m prescriptions). Given its apparent safety and non-habit forming qualities, this estimate appears reasonable.

Note that we do not currently model any indications outside ETTH for TNX-201, but potential exists to use it in other pain-related indications. However, that would require a positive trial in ETTH and a large pharmaceutical partner to develop.

We have increased our valuation from $347m or $18.44 per basic share to $348m or $18.48 per basic share, mainly due to the slightly higher than expected cash balance at the end of Q315. As we view the ETTH and PTSD programs as high risk and assign 20% and 30% probabilities of success to them, respectively, positive trial results would lead us to increase the value of the company, possibly by a large percentage.

Tonix reported $55m in cash and cash equivalents at the end of Q315. The company spent $10.3m on R&D and $3.0m on SG&A in Q315. We project that R&D spending will accelerate for the rest of this year and into early next year as clinical trials progress. We have kept our estimates for future revenue and spending substantially the same. We expect the company will require another $80m until profitability in 2020 (we currently expect additional financing in 2016, 2017 and 2018, which we model as long-term debt), although any capital raise is unlikely to occur until after some, if not all, of the expected top-line data from the three ongoing trials are released, potentially minimizing dilution if the data are positive. For context, the company sold 2.67m shares of common stock at a price of $7.50 per share for gross proceeds of $20.1m in July. We have assumed that Tonix will partner fibromyalgia and PTSD after approval, to maximize the deal terms and ETTH after Phase II.