For the purpose of our model, we assume Tonix (and its partner) can capture 5% share – that’s one out of every twenty patients currently on generic oral cyclobenzaprine for FM switching to TNX-102 SL. At a cost of $10 per pill, with decent tier-2 and tier-3 coverage, we see TNX-102 SL as a $650 million peak drug. We expect that by 2017, both Lyrica and Cymbalta will be generic, and that Tonix commercial partner will have one of the only (if not the only) branded prescription medications for fibromyalgia available.

We note our forecast above is for sales in FM only. In the third quarter 2014, Tonix plans to initiate a Phase 2 study with TNX-102 SL for the treatment of post-traumatic stress disorder. This is the same formulation of sublingual low-dose cyclobenzaprine being used in the company’s Phase 2b/3 BESTFIT study. In June 2014, the company received IND clearance to begin this study. The Phase 2 study will be a randomized, double-blind, placebo-controlled clinical trial investigating the safety and efficacy of two doses of TNX-102 SL and placebo administered once daily at bedtime. This 12-week study is expected to enroll approximately 220 patients with military-related PTSD at about 30 sites in the U.S. The primary efficacy analysis will compare differences in mean scores on the Clinician-Administered PTSD Scale (CAPS).

As for PTSD, there is enormous overlap between fibromyalgia and PTSD. According to Tonix, 50% of the FM or PTSD patient population meets the criteria for the other disorder. Plus, the manifestations and treatment paradigms are similar, and include disturbed sleep and painkiller abuse and addition. Roughly 3.5% of the U.S. adult population suffers from PTSD. The numbers are shockingly high for U.S. military service personnel, a population with high incidence of suicide and opioid addiction. It’s a sad and growing problem, and there have been no new approved medications for PTSD in over a decade. Tonix’ Phase 2 program will focus specifically on PTSD associated with military / combat service. Although management has narrowed the PTSD population, eliminating things like car accidents and sexual assault, the homogenous population should lead to improved data collection. Plus, the growing attention of the U.S. government in this area should eventually lead to grants or additional funding in the future. It’s an astute development plan in our view.

The U.S. PTSD population is estimated at a similar 8 million in size. We believe approximately 25% of these cases are associated with military service, about half of which seek medical treatment for the disease. This puts the U.S. military-associated PTSD population at around 1 million. Assuming similar pricing and market penetration as noted above for fibromyalgia, we believe TNX-102 SL peak sales in PTSD are around $300 million.

TNX-201 Ready for Clinical Development

On March 3, 2014 Tonix announced that they had recently held a pre-Investigational New Drug (pre-IND) meeting with the U.S. FDA to discuss the development of TNX-201, a single isomer isometheptene (IMH) for the relief of episodic tension-type headache (ETTH). Tension type headaches (TTH) are the most common type of headaches among adults and are also known as “stress headaches”. These headaches were previously known by a number of terms, however the term “tension-type headache” was chosen by the International Classification Headache Diagnosis I (ICHD) in 1988 and later retained by ICHD II in 2004. The terms “tension” and “type” refer to the unknown nature of the underlying etiology, however a number of clinical studies have been performed that underscore their neurobiological basis.

ICHD II classified tension type headaches as either episodic (ETTH) or chronic (CTTH). ETTH are further subdivided into infrequent (occurring less than 12 days per year) or frequent (more than 12 days per year but less than 180 days per year). CTTH are characterized by an occurrence of more than 180 days per year. The clinical symptoms for the three types of headache are all similar and are only differentiated based on their frequency. We note that these types of headaches are different from migraines and cluster headaches.

Approximately 20% of the world’s population suffers from tension type headaches. Women are slightly more affected than men and the peak incidence occurs between the ages of 30-39 and decreases with increasing age. A 1997 study showed that lost workdays from TTH are as much as three times greater than from migraine headaches. Despite numerous clinical studies, the exact cause of TTH remains elusive; however, there are certain things that seem to trigger them including: stress and anxiety, squinting, poor posture, dehydration, noise, bright sunlight, tiredness and certain smells.

Current treatment options for ETTH include over-the-counter analgesics such as ibuprofen, naproxen, acetaminophen, and aspirin, all of which have been shown to be more effective than placebo in controlled trials. Studies have shown that non-steroidal anti-inflammatory drugs (NSAIDs) such as ibuprofen and naproxen are most likely more effective than aspirin or acetaminophen, but these results are not unequivocal. Caffeine, codeine, sedatives, or tranquilizers are often combined with NSAIDs to increase their efficacy; however, this can lead to the risk for dependency, abuse, and chronification of the headache.

The only currently FDA approved medications for the treatment of ETTH are fioricet and fiorinal, both of which contain butalbital, a barbiturate that can lead to dependency. These compounds have also been linked to Medication Overuse Headaches (MOH), also known as rebound headaches. These headaches occur through the overuse of pain medications to relieve primary headaches. They can occur frequently, can be very painful and are the third most common cause of headache. Regular use of over-the-counter medications such as ibuprofen and acetaminophen have also been linked to MOH, thus doctors typically advise limiting their use to not more than two days weekly. In addition to MOH, the overuse of acetaminophen has been linked to liver damage while the overuse of NSAID can cause gastrointestinal bleeding.

…A New Treatment Option…

Isometheptene, 6-methylamino-2-methylheptene, is a compound that has been utilized to treat headaches for greater than 50 years. It is composed of two isomers, one believed to provide efficacy while the other only contributes to side-effects. It was first introduced into the clinic for the treatment of spasdic conditions of the biliary and urinary tracts but quickly became utilized in the treatment of migraine headaches. It is an indirect-acting agent and is thought to elicit an anti-headache action through a sympathomimetic effect leading to constriction of blood vessels in the head. It targets both the Alpha-1A adrenergic receptor and the synaptic vesicular amine transporter. Interaction with these cell surface targets elicits smooth muscle activation leading to vasoconstriction.

Tonix has developed a method for purifying a single isomer of isometheptene that the company believes can potentially reduce the toxicity associated with the racemic mixture (a mixture of the two isomeric forms). Isometheptene falls under the category of drugs where one isomer is believed to confer the anti-headache effect while the other isomer is responsible for the unwanted side effects. Tonix will need to prove this is clinical trials. However, assuming that the clinical trials go according to plan, we foresee TNX-201 clinical trials finishing in 2017 with an NDA filing in 2018 and approval in 2019.

Tonix has an extensive patent portfolio for TNX-201. The intellectual property relates to isometheptene isomers and includes patent applications directed to a purified isomer of isometheptene, pharmaceutical compositions containing isometheptene, isometheptene formulations, methods for modulating headache and other CNS conditions and treating CNS conditions utilizing isometheptene isomers, and methods of manufacturing isometheptene isomers. The Isometheptene Technology patent portfolio includes U.S. patent applications such as U.S. Provisional Patent Application Nos. 61/754,281, 61/793,456, and 61/814,664. If U.S. and non-U.S. patents claiming priority from those applications issue, those patents would expire in 2034, excluding any patent term adjustments or extensions.

TNX-201 clearly targets a large market. Various sources range the number of Americans suffering from TTH between 35 and 45 million. Approximately 80% of these are episodic in nature, with roughly 10% not adequately controlled by OTC NSAIDs or aspirin. Of these approximate 3.2 million individuals, we suspect that 50% will seek medical Rx to treat their TTH. The average sufferer has about one episode per week. Assuming Tonix prices TNX-201 comparable to migraine drugs Cambia® ($33 per pill) and Treximet® ($28 per pill), with 10% market share of the active medical Rx seekers, TNX-201 looks to be around a $300 million drug.

Recommendation & Valuation

We have conducted a sum-of-parts valuation for Tonix Pharmaceuticals that incorporates our three forecasts for sales of TNX-120 SL in fibromyalgia, in PTSD, and for TNX-201 in episodic tension-type headache noted in our report. We believe investors are dramatically under-estimating the market size and potential adoption of TNX-102 SL in fibromyalgia. Through our research we found that this is a market meaningfully under-served by existing medications and there is a significant willingness for patients, physicians, and payers to try new medications. As a result, many fibromyalgia patients bounce around between existing approved and off-label therapies, one of which is cyclobenzaprine.

The economic / societal burden of fibromyalgia is significant, with a high number of patients on either disability or unemployment. Prescription drugs costs average over $10,000 per year, and the average out-of-pocket expense can range between $1,500 and $3,000 per year. We believe a low-dose, sublingual formulation of cyclobenzaprine specifically optimized for long-term, chronic bedtime use by the fibromyalgia patient can capture 5% market share of the existing generic cyclobenzaprine market.

Although generic competition is a concern, we believe Tonix and its commercial partner will employ aggressive pricing measures to reduce the average out-of-pocket expense for TNX-102 SL, thus leveling the playing field in the eyes of the patient and physician. Additional upside to the Tonix story comes from the development of TNX-102 SL in PTSD and TNX-201 in ETTH.

At the current market value of roughly $100 million, Tonix valuation is supported by $45+ million in cash on the books, a fully-enrolled Phase 2b program with data roughly two months away, and two new programs to start in the next several months. We believe the shares are fairly valued at $16.