Transition Therapeutics Inc.

TTH : TSX : C$8.56
Target: C$13.25

Transition Therapeutics is a clinical-stage biotechnology
company developing novel therapeutics for the treatment
of central nervous system diseases and diabetes. The
company’s lead drug, ELND-005, is in Phase II clinical
testing as a potential therapy in both bipolar disorder and
neuropsychiatric symptoms associated with Alzheimer’s
disease. Transition has partnered the development of
diabetes drug TT-401 with Eli Lilly.
All amounts in C$ unless otherwise noted

Life Sciences — Biotechnology
Investment recommendation
Transition has provided an update on its clinical programs, announcing
the discontinuation of the Phase II study of D-5 in bipolar disorder. We
view this as a positive move, focusing the company’s resources (cash
and otherwise) on clinical trials with the highest probability of success.
An analysis of previous D-5 studies suggested a durable response on
relevant NPS endpoints, highlighting the rationale to continue the Phase
II in agitation and aggression in Alzheimer’s disease.
Investment highlights
 A disciplined approach. We believe that the discontinuation of both
the bipolar trial and TT-601 demonstrates a disciplined approach to
drug development, as well as a prudent use of resources.
 Cash balance just sufficient to fund D-5 to Phase II data. We
estimate that Transition has pro forma cash of ~$51 million, which
is sufficient to participate in TT-401 development with partner Lilly
and fund D-5 development for at least the next 12 months.
 D-5 has huge potential. D-5 has received Fast Track designation
from the FDA, and we believe could receive Priority Review if
clinical trials are successful. Although clinical data is now not
expected until the middle of 2015, we believe that this is an
appropriate time to position ahead of this catalyst.
We value TTH using an explicit NPV model for D-5 in AD NPS, and a
pNPV for TT-401 in diabetes. Following this update, we have removed
bipolar from our model, revised our assumptions for improved
economics in AD NPS, and adjusted our TT-401 model to reflect Phase II
development. Based on these changes, we are raising our target to
C$13.25 (from C$9.80), which supports our SPECULATIVE BUY ratin


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