Mike Havrilla on SNTA - Synta Pharmaceuticals Inc.

Synta Pharma (SNTA): Price: $1.97; Market Cap (MM): $66.8
Market Perform; Simos Simeonidis, Ph.D.
Senior Biotechnology Analyst

http://biomedreports.com/research.html

Synta cuts 42% of workforce; waiting for strategic alternatives guidance

The News: Synta announced today a 42% reduction in its workforce, laying off 90 employees, in an effort to preserve its cash balance, following the failure of the Phase III melanoma trial with Elescomol, the company’s only late stage program.

Our view: This was an anticipated and absolutely necessary first step, given that the company’s most valuable and tangible asset is their cash position, and it would make no sense to continue spending like a Phase III company with a big Pharma partner, given the Elescomol failure in melanoma and the uncertainty around the future of the GlaxoSmithKline partnership (GSK, Not Rated).

What’s next for Synta? 1) An analysis of the data on what may have caused the imbalance of deaths will occur in the upcoming weeks, 2) GSK’s decision on whether to give the compound back to Synta and end the partnership or continue its development and 3) the company’s guidance on what its plans are going forward in terms of strategic alternatives.

We would also expect management to act promptly to further preserve the current cash position, and in addition to today’s restructuring effort (that still leaves the company with a significant workforce for a company of its stage), to explore strategic alternatives that may eventually return some value to current SNTA holders, including A) bringing in a later stage asset through a potential merger (or reverse merger), and/or B) the sale of the company’s remaining assets, and the return of cash to existing shareholders. We believe that given the current market environment, it would be unwise for the company to continue spending in unproven and highly risky, early stage programs.

Our view on what’s coming up: It would be mere conjecture to attempt to speculate on what may have caused the excess deaths in the patients treated with Elescomol. We believe however that it is highly unlikely that we will see further development on Elescomol in melanoma, or in other solid tumors, given the excess deaths observed in the Phase III trial.

We do not believe that another pharma or biotech company will invest in this program any further, given 1) the major safety issues in the melanoma trial, 2) the fact that we are dealing with a new and unproven mechanism of action, 3) the fact that Elesclomol has also failed in lung cancer and sarcoma trials back in 2005 and 4) given the amount of time another Phase III trial in solid tumors would take, the fact that time on the Elescomol patent clock continues to run out.

Assuming Elescomol is finished, what does Synta look like now? Given that the analysis of the data from the trial has not yet been completed, we believe there is always a small theoretical chance (we would estimate it at no more than 5%), that following the analysis of the full dataset from the trial, an explanation could arise that could exonerate Elescomol for its role in the excess deaths in the trial and that could thus justify further development of the compound. However, we believe that this possibility is miniscule and believe that Elesclomol’s development is over. Assuming this is the case, we are taking a look at Synta’s remaining assets:

1. Cash: Between $75M or ~$2/share as of today ($65-$70M at YE08, plus $16M from Roche, $10M from GlaxoSmithKline, minus ~$15-$20 we assume has already been spent in ’09), but with significant burn in order to further develop any other of their compounds.

2. The Roche (RHHBY, Not Rated) partnership (CRACM inhibitors): This program is certainly interesting having received some validation through the Roche partnership and could potentially be significant in a few years, but it is still a high-risk discovery effort, and thus too early to assign any significant value to in terms of share price. This is especially true in the current market environment, when investors assign little value to even late stage programs.

3. Apilimod: enrolling a Phase IIa for Rheumatoid Arthritis.

4. Hsp90 inhibitor (STA-9090): currently enrolling two Phase I trials in solid tumors, but facing a potentially crowded development space with other more advanced Hsp90 inhibitors, including Infinity’s IPI-504 (INFI, Market Outperform) and BMS' Tanespimycin (BMY, Not Rated).

Maintaining our Market Perform Rating: Based on the recent developments, i.e. the end (for all practical purposes) of the company’s only advanced program, and since the only value near-term we see in the shares is in the company’s cash position, which we estimate at about $2/share, we view SNTA shares as fairly valued and maintaining our Market Perform rating.

We expect shares to trade below cash for the foreseeable future and we do not see a reason to own SNTA shares at this point, given that Synta in its current structure is-at best-an early Phase II company with still significant burn and 130 employees.