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PropThink: Several Ways To Play The Linzess (linaclotide) Approval; Buy IRWD, FRX, SCMP, and SGYP

August 31, 2012 -

Forest Laboratories (NYSE:FRX) and partner Ironwood Pharmaceuticals (NASDAQ:IRWD) announced FDA approval of Linzess (generically known as linaclotide) for the treatment of irritable bowel syndrome with constipation (IBS-C) and chronic idiopathic constipation (CIC). The approval came a week early, but was expected. Mixed reaction Thursday (FRX up ~1%, IRWD down ~2%) was due to the high expectations for approval and slight negative of a boxed warning in the label noting that the drug should not be used in children or adolescents <16 years of age. Ironwood notes that the drug was not studied in this population, and therefore as planned, will not be sold in this patient segment.  While a direct competitor to Sucampo's (NASDAQ:SCMP) Amitiza product (earlier coverage), Linzess should significantly expand the prescription market for IBS and CIC treatments, as most patients take over-the-counter medicines for the condition. IRWD and FRX stated on their investor conference call yesterday that there are over 40 million patients suffering from IBS and CIC, with 10 million currently seeing a doctor for treatment. According to IRWD and FRX, roughly 70% of those patients use an OTC medication and that will be a key target for Linzess as it aims to increase the number of patients getting a prescription. A significant marketing effort with direct-to-consumer advertising funded by both FRX and IRWD is expected to increase awareness of prescription options, increasing the overall market, and potentially benefitting SCMP's Amitiza.
According to both IRWD and FRX, Linzess is differentiated by once-daily dosing (Amitiza is taken twice daily) as well as specific information in the drug's label demonstrating pain relief. The once-daily option is a significant benefit, but it is likely that those already doing well on Amitiza will stay on the drug. While Wall Street analysts are very excited about the pain relief in the label (Linzess' key marketing message will be a ""feel better"" campaign), Amitiza's approval was based on efficacy endpoints that included symptomatic relief (bloating, abdominal discomfort) in addition to increasing the number of bowel movements per week. Overall, the higher noise level in the marketplace for new prescription treatments for IBS and CIC should help to expand sales of Amitiza, good news for SCMP. It is notable that Linzess' key side effect is severe diarrhea, and a key factor in prescribing either Amitiza or Linzess will likely be tolerance (Amitiza has shown severe nausea in some patients).
As for Synergy Pharmaceuticals (NASDAQ:SGYP), its lead product candidate, plecanatide, works similarly to Linzess, but appears to have a more favorable side effect profile (See PropThink's previous coverage). Certainly, approval of Linzess validates plecanatide's mechanism, and is a strong indication that this drug will make it to market. If so, and the tolerability profile holds up (less diarrhea vs. Linzess), SGYP could have the leading product in the segment. Clinical data intended to support a new drug application (NDA) for plecanatide is due out by year-end, and the potential for SGYP to get a major drug company partnership for plecanatide remains high (Note: An additional Phase III study will need to be run for plecanatide even if the current trial is positive). Investors can leverage the Linzess approval in several ways. In addition to benefitting as an IRWD or FRX shareholder (analysts are coming out today and beating the drum), one can own derivative plays in this underpenetrated and expanding treatment segment. Expect SCMP and SGYP to continue their climb in today's session. FRX and IRWD should also reflect the good news of the approval today.
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