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Cempra Inc (NASDAQ:CEMP) Drops on Manufacturing Issues

Date Published: 2016-10-28

Author: Ophir Gottlieb

Written by Ophir Gottlieb

PREFACE: Cempra Inc. (NASDAQ:CEMP)
Cempra Inc (NASDAQ:CEMP) is easily our riskiest Top Pick -- a development stage biotech with no product approved yet. The company initially announced earnings yesterday in a press release and it was much a do about nothing. This company is focused on November 4th -- its official advisory committee meeting with the FDA and then December 27th and 28th -- the PDUFA dates (approve / reject dates).

The company also has a huge amount of data coming out for its other treatments, all of which are progressing well. In particular we are focusing on gonorrhea, which is a multi billion dollar opportunity, on top of the multi billion opportunity with CABP, which has already completed its Phase III trials and has the Nov 4 and Dec dates set.

The company seemed ready for its AdCom and PDUFA dates and quite ready to start selling its likely approved CABP drug in January of next year. Everything seemed good, and then... this happened.

Bad News
The conference call all of a sudden let out information that was unforeseen, and is bad news. Here it is, straight from the CEO:

Based on an in person meeting held with the FDA in late October, we currently believe the FDA may not allow us to use API produced by Wockhardt for approval and commercial supply of solithromycin, and we are preparing to provide the FDA with data from API that we are manufacturing with another API supplier.

We believe that the FDA's concerns with Wockhardt's operations and facilities are related to the GMP quality systems at Wockhardt, and not specifically focused on Cempra's product or processes.

English
The FDA is about to block manufacturing of the drug at its location in India. That's a really big deal. Before we get into what it means, let's just finish off the comments from the CEO:

First an attempt at defense:

Solithromycin API manufacturing at Wockhardt was closely supervised by our personnel and we continue to have confidence in the solithromycin manufacturing process and the quality of our drug product.

After a defense, then an attempt at ameliorating the likely outcome:

As disclosed previously, as part of our commercialization plans for the anticipated demand for solithromycin for the treatment of CABP we have been developing various additional supply sources for the API of solithromycin.

This includes manufacturing activities at Uquifa in Cuernavaca, Mexico, which we began in the second quarter of 2014. Based on our recent discussions with the FDA, we have accelerated our API manufacturing activities with Uquifa.

We'll stop here for English again:

* The CEO tried a hail marry to say that perhaps the FDA would be OK with the plant in India. Opinion: Not gonna happen.
* Then the CEO rightly noted that the company did have a backup plan, which is a plant in Mexico. Opinion: Very good, but not enough to prevent a big shock.
After that the CEO submitted that this was in fact a big deal and she said this:

We expect to provide data from Uquifa to the FDA over the next several months, which, if acceptable to the FDA, would allow us to launch solithromycin for the 2017-2018 influenza/pneumonia season.

Yep, that's a year delay, at least, for the drug that was supposed to be approved (or at least judged) on December 27th and 28th (oral and IV).

What This Means
While it's true that the manufacturing delay is more about the plant in India than anything to do specifically with Cempra's drug, it's a huge blow. The company will likely need to raise more cash, and the PDUFA dates scheduled for December 27th and December 28th will likely be moved back.

"The FDA could withhold or defer potential approval until they are satisfied that commercial supplies of solithromycin meet their CMC requirements."

In the biotech world, this is really bad news. Cempra has already hired a sales force:

"In the third quarter of 2016, we completed hiring our core sales leadership team, consisting of three area sales directors and more than 20 regional sales managers. We have also hired 12 medical science liaisons who are responsible for communicating medical information to physicians and two national account directors who are responsible for establishing and maintaining our relationships with payors."

That means costs will balloon again, but there is no selling to be done in the near-term. While it seems easy enough to fix this problem, and patience is always key, it actually doesn't work out that easily sometimes. Some biotechs have gone done this road and spiraled into a pretty dark place. Some have faced the fire, and come out stronger, better and big winners. But, whatever the outcome, there is now yet more risk on an already risky asset -- Cempra Inc (NASDAQ:CEMP) stock.

So, Now What?
We maintain Cempra as a Top Pick, although we are thoroughly disappointed in the firm's failure to deliver execution at the most basic level. The bullish thesis for Cempra Inc goes well beyond this first treatment in CABP, and all of that data is still coming out on time.

We also believe that the CABP treatment will eventually be approved -- the data is very strong, and we direct you back to the Top Pick dossier to read the enormous opportunity this company has.

But... It is quite likely that the December PDUFA dates will be delayed, and if they are not (which would be weird), it's also possible that the firm gets a "complete response letter" (CRL), which is an unnecessarily complicated way of saying a "rejection." The company would then show evidence of proper manufacturing in its plant in Mexico, and try again.

Silver Lining
There is no silver lining in the news, but there is an entire gold mine in the company. We highly recommend reading the full CML Pro dossier which walks down some of the most compelling medical data and market data we have seen in a very long time for a single development stage biotech. Here is a link to the dossier, it's rather staggering:

CEMP: Small Cap Biotech: The Biotech Leading the Charge in Infectious Diseases.

CONCLUSION
Cempra Inc (NASDAQ:CEMP) is a huge disappointment and very frustrating. The stock is down 20% today. There will likely be news of a delayed PDUFA and that could act as a negative catalyst. On the other side, it does appear that the Advisory Committee (AdCom) will meet on November 4th, and if that goes well, the stock could find some serious legs to the upside. In all, the risk has just increased substantially as has the likelihood of more stock sales to fund operations.

The author is long shares of Cempra Inc (NASDAQ:CEMP).

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