Synthetic Biologics Target Price Change : Biotechnology Agenda · Keith A. Markey, Ph.D., M.B.A....

Keith A. Markey, Ph.D., [email protected]

212-514-7914

Stock Symbol NYSE:MKT: SYN

Current Price $1.36

12 mos. Target Price $7.50

Market Cap $79.6 mln

Shares O/S 58.5 mln

Avg Daily Vol. (3 mos.) 1,112,247 shs.

52-Week Price Low/High $0.95 - $3.64

Fiscal Year End Dec

Dividend / Yield $0.00 / 0.0%

EPS

FY 13A FY 14E FY 15E

Q1 (Mar) $(0.05)A $(0.07)A $(0.05)EQ2 (Jun) (0.06)A (0.06)E (0.06)EQ3 (Sep) (0.08)A (0.06)E (0.06)EQ4 (Dec) (0.09)A (0.05)E (0.07)E

$(0.27)A $(0.24)E $(0.24)E

P/E NMF NMF NMF

Jul-14May-14Mar-14Jan-14Nov-13Sep-13

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Synthetic Biologics Inc.

17 State Street, 3rd Floor, New York, NY 10004 • 212.509.9500 • www.griffinsecurities.com

July 17, 2014

Synthetic Biologics BUYTarget Price Change : Biotechnology

Management Sets an Impressive R&DAgenda

Synthetic Biologics recently laid out the development pathsof the most advanced products in its R&D pipeline.

■ A pertussis therapy may be the first to reach the market.The Company plans to file an IND and seek Orphan Drug statusin late 2014, while the dual antibodies that comprise the drugare manufactured. Results from an early clinical trial shouldlead to a Phase 2 trial that is tentatively scheduled for thesecond half of 2015. Data from that study may satisfy the FDA’s“compassionate use” hurdle, allowing the drug to be sold, whileit is in a pivotal trial.

■ A treatment for constipation-predominant IBS willprobably be the second drug commercialized. SyntheticBiologics has created a new formulation of an existing medicineso that it acts locally in the gut to alter the metabolism ofmethanogens, a microbe in the kingdom archaea. The result isa reduction in the production of methane, a gas that slows gutmotility. The Company will initiate a clinical trial in the secondhalf of 2014 that should end in mid-2015.

■ A C. difficile prophylactic agent will enter Phase 1 clinicaltrials later this year. The treatment consists of an enzymethat degrades a family of intravenous (IV) antibiotics commonlyused. By acting locally, Synthetic’s therapy should protectthe gut microbiome from the IV antibiotics, and in so doing,prevent opportunistic infections by C. difficile. That bacteriumhas been recognized by the CDC as the source of most hospitalacquired infections in the United States. The Phase 1 resultsare expected to lead to a Phase 2 trial in 2015.

■ A Trimesta™ licensing agreement may provide non-dilutive financing. Synthetic is engaged in negotiations, whichwill likely lead to an agreement later this year. We believe thedeal will provide an upfront payment of $10 million that will helpto support the 2015 infectious disease clinical trials.

We like the Company’s drug development strategy. The C.difficile and C-IBS medicines are low-risk programs that havethe potential to address sizable patient populations. The drug tocombat pertussis comes with higher risk, but has the potentialto save the lives of thousands of infants each year. We aremaintaining our BUY recommendation and are raising our pricetarget to $7.50.

Please Review Disclosures on Page 22 of This Report

DA

Restricted

Table of Contents Product Development Path Defined .............................................................................................................................. 3

Defeating Life-Threatening Pertussis ........................................................................................................................ 3

Relieving Constipation-predominant Irritable Bowel Syndrome .............................................................................. 5

Irritable bowel syndrome ....................................................................................................................................... 5

The Impact of C-IBS on the Quality of Life .......................................................................................................... 6

A New Therapeutic Approach to C-IBS ................................................................................................................ 7

The C-IBS Market ................................................................................................................................................. 8

Another Potential Indication for the Methane-Reducing Drug .............................................................................. 9

Drugs for Healthcare Facility-Associated Infections ............................................................................................... 11

Trimesta – A Potential Source of Non-dilutive Financing .......................................................................................... 14

Financial Projections & Valuation Analysis ................................................................................................................ 15

Quarterly Income Statements .................................................................................................................................. 15

Revenue Sources ...................................................................................................................................................... 15

Bordetella pertussis .............................................................................................................................................. 15

C-IBS ................................................................................................................................................................... 16

Clostridium difficile ............................................................................................................................................ 16

Trimesta ............................................................................................................................................................... 17

Annual Income Statements ...................................................................................................................................... 17

Balance Sheet .......................................................................................................................................................... 18

Valuation Analysis .................................................................................................................................................. 18

Discounted Cash Flow Analysis .......................................................................................................................... 19

Product Net Present Value Analysis .................................................................................................................... 20

Discounted Future Value Analysis ...................................................................................................................... 20

Investment Considerations........................................................................................................................................... 20

Future Milestones to Commercialization ................................................................................................................. 20

Pertussis: SYN-005 .............................................................................................................................................. 20

C-IBS: SYN-010.................................................................................................................................................. 21

C. difficile: SYN-004 .......................................................................................................................................... 21

Trimesta ............................................................................................................................................................... 21

In Sync with Global Healthcare Needs .................................................................................................................... 21

SYNOPSIS

Synthetic Biologics is a clinical-stage company with four innovative products to prevent or treat microbial-based

diseases worldwide. The investment community has failed to recognize the profit potential of the drug portfolio,

based on the results of our discounted cash flow model. But important milestones are rapidly approaching that

should validate these medicines and drive the SYN share price to our new price target of $7.50 a share. Accordingly,

we believe the time is ripe to BUY Synthetic Biologics stock.

Synthetic Biologics Inc. July 17, 2014

Griffin Securities Equity Research 2

PRODUCT DEVELOPMENT PATH DEFINED

Synthetic Biologics mapped out its plans for the development of its three lead medicines recently and discussed the

attractiveness of its multiple sclerosis (MS) drug Trimesta to potential partners. We are impressed with the corporate

focus on moving these products through clinical development expeditiously.

DEFEATING LIFE-THREATENING PERTUSSIS

Synthetic Biologics, its commercial collaborator, Intrexon Corporation, and its academic collaborator, the University

of Texas at Austin, have selected two antibodies that will constitute a therapy for Bordetella pertussis infections. We

believe the medicine, designated as SYN-005, will be the first to address both the underlying causative agent and the

toxin emitted by the bacterium. As such, it has the potential to rapidly rescue the two most susceptible groups of

patients, infants and the elderly, from the infectious agent’s lethal effects. At this juncture, antibiotics are the

standard of care, as they are effective against the bacterium, but they do not eliminate the toxin from the victim’s

blood. Data from a non-human primate study established that the Company’s antibodies have a rapid effect,

measured in lower white blood cell counts within two days of administration and a return to normal levels within

seven days. The results are shown in Figure 1.

The need for a pertussis therapy has been increasing as the microbe has undergone adaptions in the era of vaccines.

Several different mutations have been identified, including one in the promoter region of the pertussis toxin gene

that increases the level of the pertussis toxin. Mutations involving two other proteins that have been used as antigens

in pertussis vaccines have reduced the protection afforded by immunization. Indeed, one mutation, designated as

fim3B, was responsible for an upturn in pertussis cases in the United States from 2006 – 2009.1 (See Figure 2.)

Figure 2. Pertussis Cases Reported to the U.S. Centers for Disease Control & Prevention, 1990 - 2013

Another type of mutation created a pertactin-deficient strain that rapidly spread through countries and across

continents to account for 32% of the pertussis isolates in Japan (2009), 13% in France (2011), 30% in Australia

1 CDC – Pertussis – Surveillance & Reporting. (2013 data are provisional.)

Figure 1. SYN-005 acts rapidly against the

pertussis infection and toxin levels, resulting

lower white blood cell (WBC) counts. Three non-human primates were infected with

Bordetella pertussis on day 1 and two

received the therapy on day 3. Two days later, WBC counts of the treated animals

were in decline, while the untreated animal’s

count was elevated. By day 10, the treated animals’ WBC counts were normal.

Source: Synthetic Biologics



(2012), and >50% in the United States (2012).2,3,4,5

The mutations that led to the pertactin-deficient strains have not

resulted in a reduction in virulence, even though pertactin is an outer membrane protein that facilitates binding of the

bacterium to human tissue. Its elimination, however, renders Bordetella pertussis less susceptible to immune attack

by vaccinated individuals.6 The multiple changes that this microbe has undergone over the past 100 years are

illustrated in Figure 3.7 A mathematical model of the infection has indicated that besides reducing the protective

capacity of today’s vaccines, the mutations have altered the bacteria’s transmission rates over time, thereby

contributing to localized outbreaks.8

Synthetic Biologics will request Orphan Drug status by the end of this year and submit an IND on its monoclonal

antibody therapy by early 2015. A Phase 1 trial should commence in the first half of next year. We believe the study,

involving 10 – 15 healthy volunteers to establish the drug’s safety, will take little time to complete. Accordingly, a

Phase 2 study will probably be conducted in the second half of the year. See Table 1 for the development timeline.

Table 1. Timeline for the Development of SYN-005 for Pertussis

Time Activity

Q3/Q4, 2014 Submit request for Orphan Drug designation to the FDA

Q1, 2015 File IND to initiate clinical development

H1, 2015 Conduct Phase 1 trial

H2, 2015 Conduct Phase 2 study

H2, 2015 Topline results expected from Phase 2 trial

2 Otsuka, N, et al. Prevalence and genetic characterization of pertactin-deficient Bordetella pertussis in Japan. PLoS ONE (2012); 7(2): e31985. 3 Hegerle, N, et al. Evolution of French Bordetella pertussis and Bordetella parapertussis isolates: increase of bordetellae not expressing

pertactin. Clin Microbiol Infect (2012); 18(9): E340. 4 Lam, C, et al. Rapid increase in pertactin-deficient Bordetella pertussis isolates, Australia. Emerg Infect Dis (2014); 20(4): 626. 5 Pawloski, LC, et al. Prevalence and molecular characterization of pertactin-deficient Bordetella pertussis in the U.S. Clin Vaccine Immunol (2014); 21(2): 119. 6 Mattoo, S and Cherry, JD. Molecular pathogenesis, epidemiology, and clinical manifestations of respiratory infections due to Bordetella pertussis and other Bordetella subspecies. Clin Microbiol Rev (2005); 18(2): 326. 7 Schmidtke, AJ, et al. Population diversity among Bordetella pertussis isolates, United States, 1935-2009. Emerg Infect Dis (2012); 18(8): 1248. 8 Pesco, P, et al. Modelling the effect of changes in vaccine effectiveness and transmission contact rates on pertussis epidemiology. Epidemics

(2014); 7: 13.

Figure 3. Minimum spanning trees depict changes within the Bordetella pertussis population of the United States,

1935–1996. Multilocus variable number tandem repeat analysis (MLVA) types are represented by circles and are scaled in each panel to reflect the member count; multilocus sequence types are represented by shading. (A) Periods

1 and 2, 1935–1945 and 1946–1969, respectively. These two periods were combined for the generation of the tree.

Period 1 (prevaccine era) strains are shown on the left, distantly related to Period 2 strains from the early whole-cell pertussis vaccine era (on the right). (B) Period 3, 1970–1990. During this period, when the whole-cell vaccine was in

use, a high degree of diversity was identified, with two predominant multilocus sequence types. (C) Period 4, 1991–

1996. During the transition from whole-cell to acellular pertussis vaccine for the 4th and 5th dose of the childhood series, MLVA 27, alleles ptxP3 (pertussis toxin), and prn2 (protactin) were dominant, and the fim3B allele emerged.

Source: Schmidtke, AJ et al.7



The results of the Phase 2 trial may convince the FDA to grant access to the drug on a “compassionate use” basis,

since there is no existing medicine that reduces the deadly toxin levels. B. pertussis infections kill about 300,000

individuals (largely infants) out of an estimated 50 million who are infected worldwide each year. Under the

compassionate use policy, the Company will be able to charge patients for the medicine, though it will not be

allowed to promote it and insurers may elect not to provide reimbursement. In addition, a pivotal trial will be

necessary to gain final approval.

RELIEVING CONSTIPATION-PREDOMINANT IRRITABLE BOWEL SYNDROME

Synthetic Biologics licensed patents pertaining to a new approach to treating constipation-predominant irritable

bowel syndrome, or C-IBS, from Cedars-Sinai Medical Center. This condition accounts for about one-third of all

IBS cases.9 The Company’s drug, designated as SYN-010, is a new formulation of an agent identified by Dr. Mark

Pimentel who now serves as Chairman of Synthetic’s IBS Clinical Advisory Board.

Irritable bowel syndrome

IBS is the most common gastrointestinal disorder, affecting an estimated 11% of adults worldwide (range: 1% -

45%, depending on diagnostic criteria and geographic location).10,11

Women are more likely than men to be affected,

and people younger than 50 years of age are more likely to be affected than those over 50. Risk factors include

certain foods, gastrointestinal ailments, smoking, and a familial history of IBS.

The disease is diagnosed based on such symptoms as recurrent abdominal pain and bloating, abnormal bowel

function (i.e., diarrhea, constipation, or mixed disease), and flatulence, but work is ongoing to identify more

definitive diagnostic criteria, including biomarkers. Some progress in that regard has associated diarrhea-

predominant IBS with excessive production of hydrogen by bacteria in the gut, while C-IBS is associated with

excessive production of methane. Formation of the gas has been traced to methanogens, which are microbes in the

archaea kingdom (predominantly Methanobrevibacter smithii and to a lesser extent M. stadtmanae). 12,13

These

microbes have a long evolutionary history distinct from today’s bacteria. The involvement of archaea and methane

in C-IBS is noteworthy since the gas slows intestinal transit by as much as 70%, leading to constipation and

contributing to weight gain.14,15,16,17

Since up to 50% of the gas produced in the gut is excreted in expired air,

measurements of methane in an individual’s breath may be used as a diagnostic index of C-IBS severity.18,19

Yet,

methane alone is not an appropriate diagnostic test for IBS, because patients with mixed IBS flatulate between

constipation and diarrhea and because methane levels are also associated with chronic constipation. Predisposing

factors for positive results from a methane breath test are shown in Table 2 for healthy individuals worldwide.20

9 Hungin, AP, et al. Irritable bowel syndrome in the United States: prevalence, symptom patterns and impact. Aliment Pharmacol Ther (2005); 21(11): 1365. 10 Lovell, RM and Ford, AC. Global prevalence of and risk factors for irritable bowel syndrome: a meta-analysis. Clin Gastroenterol Hepatol (2012); 10(7): 712. 11 Canavan, C, et al. The epidemiology of irritable bowel syndrome. Clin Epidemiol (2014); 6: 71. 12 Weaver, GA, et al. Incidence of methanogenic bacteria in a sigmoidoscopy population: an association of methanogenic bacteria and

diverticulosis. Gut (1986); 27(6): 698. 13 Kim, G, et al. Methanobrevibacter smithii is the predominant methanogen in patients with constipation predominant IBS and methane on

breath. Dig Dis Sci (2012); 57(): 3213. 14 Pimentel, M, et al. Methane, a gas produced by enteric bacteria, slows intestinal transit and augments small intestinal contractile activity. Am J

Physiol Gastrointest Liver Physiol (2006); 290(6): G1089. 15 Jahng, J, et al. The effects of methane and hydrogen gases produced by enteric bacteria on ileal motility and colonic transit time.

Neurogastroenterol Motil (2012); 24(2): 185. 16 Mathur, R, et al. Methane and hydrogen positivity on breath test is associated with greater body mass index and body fat. J Clin Endocrinol

Metab (2013); 98(4): E698. 17 Basseri, RJ, et al. Intestinal methane production in obese individuals is associated with a higher body mass index. Gastroenterol Hepatol

(2012); 8(1): 22. 18 Pimentel, M, et al. Methane production during lactulose breath test is associated with gastrointestinal disease presentation. Dig Dis Sci (2003);

48(1): 86. 19 Hwang, L, et al. Evaluating breath methane as a diagnostic test for constipation-predominant IBS. Dig Dis Sci (2010); 55(2): 398. 20 Triantafyllou, K, et al. Methanogens, methane and gastrointestinal motility. J Neurogastroenterol Motil (2014); 20(1): 31.



Table 2. Predisposing Factors for Positive Methane Breath Tests20

The Impact of C-IBS on the Quality of Life

An international survey of 1,966 patients (78% in North America) diagnosed with IBS revealed how the disease

affected their lives.21

The responses, which are shown in Table 3, include four items (shaded area) cited most often

from an average of 7 given. (Fewer than 3% endorsed one item.)

Table 3. Factors that Contribute to IBS Severity21

When asked which single item was the most troubling, patients answered bowel difficulties and pain 29% - 30% of

the time, while bloating and incontinence came in a close third and fourth at 10%-11%. Of the individuals who

identified pain as a factor contributing to their disease severity, 25.9% were in constant pain while 74.1% had

frequently recurring pain. Hence, it is not surprising that 83% of the surveyed IBS patients had taken non-narcotic

analgesics and 76% had taken narcotic pain medications. But what is somewhat surprising is the frequency at which

pain impinges on their daily activities (see Figure 4), with 39% responding that it always or often does so.

21 Drossman, DA, et al. International survey of patients with IBS: symptom features and their severity, health status, treatments, and risk taking to

achieve clinical benefit. J Clin Gastroenterol (2009); 43(6): 541.



Figure 4. Interference with Daily Activities due to Abdominal Pain21

The impact of IBS also showed up in a quality of life assessment that found emotional distress as a significant

factor, which resulted in the use of anti-depressant medications (30.8% of survey respondents) and visits to a

psychiatrist in the past 12 months (18.8%).22

It has been suggested that mental status is an important consideration,

since IBS patients often report somatic and mental symptoms of fibromyalgia, chronic fatigue, and/or migraine.

A New Therapeutic Approach to C-IBS

Investigations have been conducted to assess the sensitivity of archaea to antimicrobial compounds and found that

both strains found in the human gastrointestinal tract are resistant to amphotericin B, ampicillin, streptomycin,

gentamicin, rifampicin, ofloxacin, and tetracycline.23

They are also highly resistant to vancomycin. The microbes are

susceptible to bacitracin, metronidazole, ornidazole, and squalamine. But these medications have not been used to

treat C-IBS. The front-line therapy for pain associated with the disease is peppermint oil, while laxatives have been

the primary therapy for constipation. Two newer drugs are the chloride channel-activator lubiprostone and

linaclotide, which stimulates chloride secretion via a guanylate cyclase pathway. Both result in increased fluid

secretion into the gastrointestinal tract to reduce constipation. However, an analysis of the functional net value of the

two drugs considered lubiprostone as the better compound, since it causes diarrhea less often than linaclotide.24

(Diarrhea is considered a side effect of a constipation therapy.) Synergy Pharmaceuticals is developing a gut

hormone that approaches constipation by promoting motility via a guanylate cyclase pathway. Results indicate that

it causes diarrhea somewhat more frequently than lubiprostone, and like the two commercial drugs, it does not

address the underlying cause of C-IBS.25

Synthetic is taking a different approach with a non-antibiotic therapy that was discovered by Dr. Mark Pimentel. The

active ingredient that is being developed has not been identified, pending the filing of a patent(s). We do know that

the compound has been on the market for decades and that it alters the metabolism of methanogens to reduce the

production of methane without eradicating the microbes. This is important because gut archaea serve a purpose –

they convert hydrogen gas produced during carbohydrate metabolism into methane. Without a proper balance,

hydrogen production can become excessive leading to pneumatosis cystoides intestinalis, or gas cysts in the bowel

wall that are often associated with bowel necrosis.26

Current work is establishing the minimum effective dose of the compound. The objective is to have a local effect

and not a systemic one, while bringing the rate of methane production into the normal range. Once that research is

completed, the Company will finalize a slow-release formulation that will ensure the active ingredient is released

throughout the gastrointestinal tract and then a sufficient quantity of drug will be manufactured for a Phase 2 trial

scheduled to commence in late December. The results from that study are expected to be available in mid-2015. Key

events in the development of SYN-010 are shown in Table 4.

22 Drossman, D, et al. Characterization of health related quality of life (HRQOL) for patients with functional bowel disorder (FBD) and its

response to treatment. Am J Gastroenterol (2007); 102(7): 1442. 23 Dridi, B, et al. The antimicrobial resistance pattern of cultured human methanogens reflects the unique phylogenetic position of archaea. J

Antimicrob Chemo (2011); 66: 2038. 24 Shah, E and Pimentel, M. Evaluating the functional net value of pharmacologic agents in treating irritable bowel syndrome. Aliment Pharmacol

Ther (2014); 39(9): 973. 25 Synergy Pharmaceuticals press release dated April 30, 2014. 26 Christl, SU, et al. Impaired hydrogen metabolism in pneumatosis cystoides intestinales. Gastroenterology (1993); 104(2): 392.



Table 4. Timeline for the Development of SYN-010 for C-IBS

Time Activity

Q3/Q4, 2014 Submit IND for clinical development

Q4, 2014 Initiate Phase 2 trial

Q2/Q3, 2015 Topline data from Phase 2 study

H2, 2015 Initiate Phase 3 trial

H2, 2016 Phase 3 data

The design of the initial clinical trial has not been completed yet, but a number of meaningful endpoints may be

monitored, including the number/frequency of bowel movements during the treatment period, change in stool

consistency, and changes in straining, abdominal bloating, and abdominal pain, as well as assessments of the

person’s quality of life. (Note that several assessment methods have been validated for IBS including the Functional

Bowel Disorders Severity Index that considers bowel symptoms, general health status, quality of life, and

psychological distress; the Irritable Bowel Syndrome Quality of Life Instrument that provides a psychometric

measure of the impact of the disease and treatment effects; and the Bristol Stool Form Scale that provides a simple,

7-point system for the patient to monitor stool consistency.27,28,29

) Use of such well-established measures will be

important, given the symptom variability and potential for a large placebo effect (e.g., psychological effect of simply

seeing a care provider frequently during a trial).

The C-IBS Market

The market for Synthetic’s C-IBS drug consists of about 11 million individuals in the United States and 260 million

worldwide. The condition results in significantly greater utilization of healthcare resources than healthy individuals

require. In the United States, the incremental healthcare costs are $3,856 per managed care patient per year, with

78% of the incremental expenditures related to increased use of medical services (largely physician office visits) and

22%, to prescription medications.30

The breakdown of costs, presented in Figure 5, reflects the broad range of

symptoms that the typical C-IBS patient exhibits and the types of care sought.

Figure 5. Mean Annual Medical & Prescription Costs of C-IBS Patients30

27 Drossman, D, et al. Functional bowel disorders. A multicenter comparison of health status and development of illness severity index. Dig Dis Sci (1995); 40(5): 986. 28 Patrick, DL, et al. Quality of life in persons with irritable bowel syndrome: development and validation of a new measure. Dig Dis Sci (1998); 43(2): 400. 29 The Bristol Stool Form Scale may be found at http://www.bowelcontrol.nih.gov/bristol.aspx. 30 Doshi, JA, et al. Economic burden of irritable bowel syndrome with constipation: A retrospective analysis of health care costs in a

commercially insured population. J Manag Care Pharm (2014); 20(4): 382.

Note: Other outpatient services included diagnostic tests, outpatient procedures, lab tests, radiology services, and non-pharmacological therapies.



http://www.bowelcontrol.nih.gov/bristol.aspx

An analysis of Medicaid patients who failed to respond to an initial treatment had 12.9% higher healthcare expenses,

amounting $4,353, than managed care C-IBS patients, though the breakdown of costs between medical services and

medicines was similar in the two studies.31

The limited efficacy seen with drugs used to treat IBS has probably contributed to the incremental healthcare

resource utilization. That may well change as more effective therapies reach the market. Indeed, it seems possible

that early intervention with SYN-010 that addresses the underlying cause of a patient’s disease will short-circuit the

transition from acute to chronic pain and, perhaps, the IBS-related somatic and mental symptoms. Moreover, we

believe the excess expenses incurred will provide Synthetic Biologics with considerable pricing flexibility for its

drug.

Another Potential Indication for the Methane-Reducing Drug

As discussed already, methane production that gives rise to C-IBS does so by slowing transit within the intestines.

That, in turn, provides extra time for absorption of nutrients, contributing to the excess weight observed in methane-

breathing obese individuals.15,16

This observation led scientists at Cedars-Sinai Medical Center to assess the effect of

antibiotics that reduce methane in the breath to undetectable levels on human metabolism. The results, which were

recently presented at the American Diabetes Association meeting held on June 13 – 17, reveal an exciting, new

potential use of Synthetic Biologics’ drug for C-IBS.32

Eleven pre-diabetic, obese individuals who had elevated methane levels in their breath were treated with a

combination of rifaxamin (550 mg, three times/day) and Neomycin (500 mg, twice daily) for ten days. (Note that

this is not the drug therapy under development by Synthetic Biologics.) Eight of the patients responded to the

treatment, as evidenced by an eradication of methane in their breath. The results, shown in Figure 6, suggest that

restoration of normal intestinal transit has a favorable effect on two important markers of general health, total

cholesterol and low-density lipoprotein (LDL) levels in the blood.

Figure 6. Eradication of Breath Methane on Total Cholesterol and LDL Levels32

The elimination of methane in the breath of these individuals was also associated with increased sensitivity to

insulin, by as much as 50% (see Figure 7). This is noteworthy because the patients who participated in the study

were pre-diabetic, meaning that they were showing signs of developing diabetes, and one of those is insulin

resistance. (Insulin resistance is characterized by production of insulin, but reduced sensitivity to it by such

important glucose-utilizing tissues as the muscles.)

31 Guerin, A, et al. The economic burden of treatment failure amongst patients with irritable bowel syndrome with constipation or chronic

constipation: a retrospective analysis of a Medicaid population. J Med Econ, epub (May 28, 2014). 32 Mathur, R, et al. Eradication of methane on breath testing and reduction in intestinal M. smithii levels result in improved insulin sensitivity and

lipid profiles in pre-diabetic, obese subjects. Presented at the American Diabetes Association meeting on June 15, 2014.



Figure 7. Insulin Sensitivity (SI) Improves with Reduced Methane Production32

The results of this study point to a potentially important use of Synthetic’s drug for C-IBS. For individuals with

elevated breath methane levels, the medicine may prove effective as a weight-loss treatment, particularly for

individuals at risk of developing cardiovascular disease and/or type 2 diabetes. We believe weight-loss is an

attractive indication for commercial development, given the incremental health resources utilized and costs incurred

to treat obesity-related diseases. Note, however, that we will not include this potential indication in our financial

model unless the Company decides to make the investment.



DRUGS FOR HEALTHCARE FACILITY-ASSOCIATED INFECTIONS

The Company’s R&D pipeline includes two medicines for infections that are frequently associated with stays in

healthcare facilities (i.e., hospitals and long-term care facilities), largely because they are caused by opportunistic

microbes that flourish by taking advantage of changes in the microbiome of our gut and/or severely weakened

general health. The drugs employ new, non-antibiotic approaches to thwart Clostridium difficile and Acinetobacter

baumanii, which constitute significant threats to health in the United States (see highlighted rows in Table 5). 33

Table 5. Prevalence of Infectious Pathogens33

As shown in the Table, C. difficile accounts for 70.9% of gastrointestinal infections, which numbered an estimated

123,000 in 2011 nationwide. In contrast, A. baumanii is responsible for 3.6% and 1.8% of pneumonia (157,500

infections) and surgical site infections (157,500 infections). Though the latter bacterium may seem less significant, it

is a pathogen that is often deadly, in part because of its resistance to the most common and potent antibiotics

available. C. difficile, alone, poses less of a threat to life, but it does increase the morbidity and mortality, as well as

the cost of medical care, estimated at $8.2 billion annually in the United States alone.34

Targeting Acinetobacter baumanii Infections

This is one of two pathogens for which Company is collaborating with Intrexon Corporation to develop therapeutic

antibodies. The near-term goal is to optimize the selection of antibodies for further preclinical research.

33 Magill, SS, et al. Multistate point-prevalence survey of health care-associated infections. N Engl J Med (2014); 370(13): 1198. 34 Agency for Healthcare Research and Quality. Healthcare and Cost Utilization Project. Statistical Brief #124, published January 2012.



Preventing Clostridium difficile infections

Synthetic Biologics is developing a treatment to prevent this bacterium from causing gastrointestinal infections that

typically occur when a patient receives an intravenous (IV) antibiotic. As such, it would complement other

approaches being employed to reduce the number of healthcare facility-related bouts of diarrhea. Some progress has

been made in that regard, as evidenced by a modest decline in incidence recently, but a 30% further drop in

antibiotic use is expected to generate only a 26% improvement in C. difficile infections. (See Figure 8.) That falls

short of the 30% reduction-target set by the U.S. Department of Health & Human Services in 2008.35,36,37

Figure 8. Trends in Hospital C. difficile Infections 36

Prevention is considered the optimal approach to thwarting C. difficile, given the related morbidity and mortality, as

well as the increased use of healthcare resources required to treat infected patients. (One study of 5.5 million patient

records determined that this bacterium increased the average patient’s length of stay by 4.88 days, second only to the

increase of 6.39 days seen with vascular catheter-associated infections.38

) Several preventive strategies have been

advocated. One is improved hygiene, since spores of the bacterium, which can persist in the hospital environment

for prolonged periods, are responsible for disease transmission between individuals.39

Another is more prudent use

of antibiotics since the latest increase in C. difficile infections was caused by the emergence of a fluorquinolone-

resistant strain.40,41

(Inappropriate use of antibiotics increases the probability of the emergence of resistant bacteria.)

Synthetic Biologics is developing a companion product that is designed to protect the gut microbiome from IV

antibiotics, thus preserving the natural flora and thereby preventing C. difficile infections.

The Company’s product is an enzyme, β-lactamase that degrades IV antibiotics when they enter the intestines or

colon. While the enzyme, designated as SYN-004, does not protect against all antibiotics, it is effective against

penicillins and cephalosporins. In addition, it is worth noting that C. difficile is not the only microbe associated with

gastrointestinal infections, as shown in Table 5. Indeed, we believe Synthetic’s product will help the natural flora of

the gastrointestinal tract defend against these infectious agents as well. Meanwhile, research is under way to expand

the protective effects of SYN-004 and/or develop other enzymes to protect against a broader range of antibiotics.

This should reduce hospital-acquired infections further, even as new antibiotics are introduced.

35 Centers for Disease Control and Prevention. 2012 National State Healthcare-Associated Infections Progress Report (March 26, 2014). 36 Assoc for Professionals in Infect Control & Epidemiol. APIC implementation guideline: Guide to preventing Clostridium difficile infections.

(February, 2013). 37 U.S. Dept of Health & Human Services. National action plant to prevent health care-associated infections: Road map to elimination (April

2013). 38 Bankowitz, RA, et al. Identifying hospital-wide harm: A set of ICD-9-CM-coded conditions associated with increased cost, length of stay, and

risk of mortality. Am J Med Qual, epub September 30, 2013. 39 Paredes-Sabja, D, et al. Clostricium difficile spore biology sporulation, germination, and spore structural proteins. Trends Microbiol (2014);

22(7): 406. 40 Muto, CA, et al. A large outbreak of Clostridium difficile-associated disease with an unexpected proportion of deaths and colectomies at a

teaching hospital following increased fluoroquinolone use. Infect Control Hosp Epidemiol (2005); 26(3): 273. 41 Pepin, J, et al. Emergence of fluoroquinolones as the predominant risk factor for Clostridium difficile-associated diarrhea: A cohort study

during an epidemic in Quebec. Clin Infect Dis (2005); 41(9): 1254.



Synthetic Biologics recently entered into a collaboration with Enterome Bioscience to define the effect of IV β-

lactam antibiotics on the gut microbiome. The 100-patient study, which should begin in July, will utilize Enterome’s

state-of-the-art metagenomic sequencing technology to profile the human gut microbiome and the effects of IV β-

lactam antibiotics on it. We believe this information will play a role in the drug’s regulatory review and

subsequently in its adoption by healthcare providers.

The timeline for development of the β-lactamase treatment is summarized in Table 6. The Company should have a

sufficient supply of SYN-004 available for Phase 1 and 2 studies, since a portion of the March quarter’s R&D

expense was for manufacturing this drug. A 28-day bridging study between two versions of the enzyme commenced

in June, and two Phase 1 trials will be initiated in the fourth quarter. The Phase 1a study will enroll healthy

volunteers and the Phase 1b will treat patients. The results should set the stage for a more advanced trial that will

start in the first half of 2015.

Table 6. Timeline of C. difficile Drug Development

Time Activity

Q2, 2014 Initiate 28-day bridging toxicology study

H2, 2014 File IND to initiate Phase 1a and 1b studies

Q4, 2014 Topline data from Phase 1a and 1b trials

H1, 2015 Initiate Phase 2 efficacy study

2016 Topline data from Phase 2 trial

We note that convincing clinical data may render SYN-004 eligible for Medicare reimbursement under revised rules

for new technology add-on payments that were adopted in the government’s fiscal 2013.42

This would mean that

hospitals would not bear the cost of the product and it would gain more rapid acceptance than otherwise possible.

On the other hand, U.S. hospitals that fail to reduce the incidence of acquired infections, based on data collected

between July 1, 2012 and June 30, 2014, are facing the threat of lower Medicare reimbursements as of October 1,

2015.43

42 See FY 2013 IPPS Final Rule Home Page at www.cms.gov 43 U.S. Dept Health & Human Services. Proposed Rules for Centers for Medicare and Medicaid Services. Federal Register, 79(94), 27978 (May

15, 2014).



http://www.cms.gov/

TRIMESTA – A POTENTIAL SOURCE OF NON-DILUTIVE FINANCING

Synthetic Biologics has entered into discussions with a number of pharmaceutical companies interested in multiple

sclerosis to partner its drug Trimesta™ based on the Phase 2 trial that was completed earlier this year. We believe

there are three reasons the patented drug will attract considerable attention:

Reduction in MS exacerbations. The study showed that in the first 12 months of therapy, patients taking

Trimesta and Teva’s Copaxone suffered significantly fewer relapses than those taking only Copaxone. At

24 months, the combination therapy still held a 32% advantage over Copaxone alone, but because of the

small number of patients involved, that difference did not meet the requirements for statistical significance.

Improved cognitive function. The cognitive function of the two groups of patients was assessed with

Paced Auditory Serial Addition Tests (PASAT). The results showed that the Trimesta-Copaxone patients

had a 14% improvement after six months of therapy, versus continued cognitive deterioration in the

Copaxone-only group. The cognitive function data were accompanied by a statistically significant

improvement in a broader measure of neurological function over the 24-month trial.

Excellent safety profile. Trimesta is the hormone estriol, a pregnancy-associated hormone that is orally

active and has few side effects. No other MS therapy has a toxicity profile as benign as Trimesta’s.

We believe these characteristics of Trimesta will lead to a licensing agreement once the final data from the Phase 2

trial is released, probably in the September/October timeframe. As shown in Figure 9, the MS market is dominated

by five multinational corporations. Competition will increase as generic versions of Copaxone are launched. One

company, Synthon, has submitted its version of the drug to regulatory agencies and it conducted a 796-patient trial

to demonstrate equivalency. Two teams, consisting of Momenta Pharmaceuticals and Novartis’s Sandoz subsidiary,

and Mylan Laboratories and Natco Pharma, are also prepared to launch versions of the biological agent. But Teva

has taken a dispute over its Copaxone patent to the U.S. Supreme Court and it recently introduced a new version of

the drug, reducing the number of injections from once per day to three times per week.

Figure 9. Players in the MS Pharmaceutical Market

We believe any of the major players in the MS market or those with generic versions of Copaxone could bid for the

rights to Trimesta, based on the safety, efficacy, and patent protection of the combination therapy.



FINANCIAL PROJECTIONS & VALUATION ANALYSIS

We are updating our financial presentation for information on the C-IBS program, status of other products in the

R&D pipeline, and the latest quarterly report.

QUARTERLY INCOME STATEMENTS҂ (Fiscal years end December 31st.)

҂ Data are in thousands, except for per-share figures. Estimates are in italics.

The small modifications to our quarterly model reflect expenditures booked in the first quarter for production of

SYN-004 (C. difficile) and take into account the Company’s budget for this year. We have included an upfront

payment for a Trimesta outlicensing agreement in the fourth quarter on an assumption that the total amount,

estimated at $10 million, is recognized over five years.

REVENUE SOURCES

The following summarize our assumptions regarding the development of each program in the R&D pipeline except

the Acinetobacter therapy since it is in the discovery stage.

Bordetella pertussis

Our estimates for the pertussis drug are based on child mortality reported for the year 2008 in the Americas, Eastern

Mediterranean, and Southeast Asia, since the disease is found predominantly in lesser developed countries.44

No

attempt has been made to make adjustments for population growth, since outbreaks are sporadic as illustrated in

Figure 2 and the number of cases varies greatly based on the genetic make-up of the infectious agent. We have

assumed that Synthetic sells the drug to distributors for sale abroad and receives the equivalent of a 15% royalty,

since it will rely on a contract manufacturer to supply the drug. The estimated price largely reflects pricing in less

developed countries with international non-profit sources (e.g., Bill & Melinda Gates Foundation) financing the

care. The probability of commercialization is based on the activity seen in the recent primate disease model that

provided evidence of both safety and efficacy. Commercial launch is projected for 2017, based on an assumption

that the drug is approved for compassionate use on Phase 2 clinical data.

44 Black, RE, et al. Global, regional, and national causes of child mortality in 2008: a systemic analysis. Lancet (2010); 375(9730): 1969.

Year penetration starts 2017 Incidence 123,200

Starting penetration rate 5% Percent addressable 125%

Years between penetration start and peak 5 Market growth rate 1%

Peak penetration 24% Price per patient $8,000

Duration of peak penetration in years 6 Treatment price growth 3%

Retention rate in decline years 90% Royalty rate 15%

Stage of development Phase 1 Probability of commercialization 25%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Total Revenues -$ -$ -$ -$ -$ -$ -$ 500$ 500$ 500$ 500$ 500$

Operating expenses

G&A expense 1,122$ 1,258$ 1,890$ 1,320$ 1,122$ 1,178$ 1,200$ 1,200$ 1,200$ 1,200$ 1,300$ 1,300$

R&D expense 1,118 1,203 1,475 1,479 2,717 2,325 2,400 2,583 2,700 3,100 3,500 3,700

Operating profit/(loss) (2,240)$ (2,461)$ (3,365)$ (2,799)$ (3,839)$ (3,503)$ (3,600)$ (3,283)$ (3,400)$ (3,800)$ (4,300)$ (4,500)$

Warrant-related (inc)/(exp) - - - - - - - - - - - -

Other Income/expense (net) 12 (36) (3) 10 1 1 1 2 2 2 1 1

Pretax profit/(loss) (2,228)$ (2,497)$ (3,368)$ (2,789)$ (3,838)$ (3,502)$ (3,599)$ (3,281)$ (3,398)$ (3,798)$ (4,299)$ (4,499)$

Income taxes - - - - - - - - - - - -

Net profit/(loss) - contin ops (2,228)$ (2,497)$ (3,368)$ (2,789)$ (3,838)$ (3,502)$ (3,599)$ (3,281)$ (3,398)$ (3,798)$ (4,299)$ (4,499)$

Discontinued/nonrecurring -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Net profit/(loss) (2,228)$ (2,497)$ (3,368)$ (2,789)$ (3,838)$ (3,502)$ (3,599)$ (3,281)$ (3,398)$ (3,798)$ (4,299)$ (4,499)$

Earnings/(loss) per share (0.05)$ (0.06)$ (0.08)$ (0.06)$ (0.07)$ (0.06)$ (0.06)$ (0.05)$ (0.05)$ (0.06)$ (0.06)$ (0.07)$

Discontin'd/nonrecur per sh -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Shares outstanding 44,601 44,654 44,654 48,759 58,324 58,500 61,000 64,000 64,250 64,500 68,000 69,000

2013 2014 2015



C-IBS

We have calculated a prevalence of about 22 million individuals with C-IBS in the United States and Europe based

on U.S. data. About 11% of the population suffers from IBS domestically, of whom about a third have the

constipation-predominant disease. The proportion considered addressable is set at 22%, since that is roughly the

proportion of family physicians in various countries that know and utilize the diagnostic criteria for the disease.45

(This figure may well increase with the availability of a truly effective therapy.) The launch date reflects the

initiation of a Phase 2 trial in the second half of this year and an assumption that a Phase 3 study commences about a

year later. The probability of commercialization is set at 25%, in line with a therapy that has completed a Phase 1

study. That seems reasonable, given Synthetic’s product is based on an existing active pharmaceutical ingredient.

We have assumed that the Company enters into a co-marketing agreement in 2016 in exchange for a $10 million

upfront and a 15% royalty rate. As a result, Synthetic books 50% of sales and royalties on its partner’s 50%.

Clostridium difficile

Our estimates pertaining to the C. difficile product are based on IV β-lactam antibiotics administered in U.S.

hospitals in 2012.46

We have assumed the drug is launched in late 2018, as two small Phase 1 trials should lead to a

Phase 2 study in 2015. The estimated price reflects the Company’s plan to set a low price to facilitate wide

acceptance of the drug. We figure it will be used largely to protect the elderly population, since those patients, who

account for 38% of the IV β-lactam antibiotics administered, are most susceptible to C. difficile infections. The

probability of commercialization is 40%, based on studies of an earlier version of the enzyme in the product that

showed good safety and signs of efficacy. We assume next year’s Phase 2 study lays the foundation for a licensing

agreement for foreign markets in 2016 that comes with a $15 million upfront payment and royalties of 10%. Our

revenue projections reflect an assumption that the domestic market generates 50% of worldwide sales and that

Synthetic Biologics receives royalties on the 50% generated in Europe.

45 Gikas, A and Triantafillidis, JK. The role of primary care physicians in early diagnosis and treatment of chronic gastrointestinal diseases. Int J Gen Med (2014); 7: 159. 46 IMS analysis, provided by Synthetic Biologics.

Year penetration starts 2017 Prevalence 22,000,000






Stage of development Phase 1-2 Probability of commercialization 25%

Year penetration starts 2018 Incidence 26,500,000



Peak penetration 20% Price per patient $500






Trimesta

Trimesta is a legacy product that offers the Company an opportunity to garner non-dilutive financing for its

antimicrobial drug portfolio. Discussions with potential licensees have already begun and once more detailed

information from the Phase 2 study that was completed recently is available, we believe negotiations will accelerate.

Our financial model includes a $10 million upfront payment this year that, like other upfront fees, will be recognized

evenly over five years. In addition, we figure Synthetic will receive royalties at a 10% rate. Moreover,

commercialization is estimated to occur in 2018, since Phase 3 multiple sclerosis trials will likely take significant

time to conduct. Prevalence and the addressable market estimates are based on worldwide data and the proportion of

patients with relapsing/remitting disease. Probability of commercialization is 40%, which is consistent with drugs

that have completed Phase 2 studies.

ANNUAL INCOME STATEMENTS҂ (Fiscal years end December 31st.)

҂ Data are in thousands, except for per-share figures. Estimates are in italics.

Assumptions:

Licensing agreements should begin to serve as a source of cash and revenues, starting later this year. We’ve

assumed that all upfront payments are spread evenly over five years. By 2017, commercial sales of the pertussis

and C-IBS therapies will likely begin, followed a year later by revenues from the C. difficile product and

Trimesta.

Cost of products sold reflects only sales booked by Synthetic, as we do not expect the Company to serve as a

manufacturer of its products to marketing partners.

We assume R&D expenditures will rise significantly this year and through 2016 before easing somewhat in

2017 with fewer trials being conducted. By 2018, we figure the Company will devote 22% of its revenues to

new product development.

SG&A should change little in the next year or two before increasing as the Company prepares to launch its first

products.

Year penetration starts 2018 Prevalence 320,000







Synthetic Biologics

2012 2013 2014 2015 2016 2017 2018 2019

Total Revenues -$ -$ 500$ 2,000$ 5,000$ 56,814$ 263,635$ 471,282$

Cost of products sold 3,474$ 51,824$ 97,689$

Gross Profit -$ -$ 500$ 2,000$ 5,000$ 53,341$ 211,812$ 373,594$

Operating expenses

SG&A expense 5,012 5,590 4,700 5,000 5,500 21,135 97,545 174,374

R&D expense 3,287 5,275 10,025 13,000 18,000 15,000 58,000 103,682

Total operating costs 8,299 10,865 14,725 18,000 23,500 36,135 155,545 278,057

Operating profit/(loss) (8,299)$ (10,865)$ (14,225)$ (16,000)$ (18,500)$ 17,205$ 56,267$ 95,537$

Warrant-related (inc)/(exp) - - - - - - - -

Other Income/expense (net) 15 (17) 5 6 4 4 8 10

Pretax profit/(loss) (8,284)$ (10,882)$ (14,220)$ (15,994)$ (18,496)$ 17,209$ 56,275$ 95,547$

Income taxes - - - - - 1,721 21,385 36,308

Net profit/(loss) - contin ops (8,284)$ (10,882)$ (14,220)$ (15,994)$ (18,496)$ 15,488$ 34,891$ 59,239$

Disc'd/nonrecur (8,784)$ -$ -$ -$ -$ -$ -$ -$

Net profit/(loss) (17,068)$ (10,882)$ (14,220)$ (15,994)$ (18,496)$ 15,488$ 34,891$ 59,239$

Earnings/(loss) per share (0.24)$ (0.24)$ (0.24)$ (0.24)$ (0.26)$ 0.22$ 0.45$ 0.76$

Shares outstanding 34,897 45,667 60,456 66,438 71,000 71,500 77,500 78,000



Income tax liabilities are calculated at a 38% effective rate in 2018 and 2019, when operations are expected to

be profitable for the full year. In 2017, we’ve made a provision at a 10% rate. Note, however, that Synthetic

closed 2013 with $42.8 million of net operating loss carryforwards that should mitigate its cash liabilities in its

first few years of profitability.

Shares outstanding reflect current stock issued, capital raises, stock-based compensation awards, and existing

warrants and options presently outstanding (equivalent to 5.4 million shares as of March 31st).

BALANCE SHEET҂ (Fiscal years end December 31st.)

҂ Data are in thousands.

VALUATION ANALYSIS

As presented on the next two pages, we performed three valuation analyses: A discounted cash flow assessment was

used to assess the Company’s market capitalization, a net present value analysis was conducted to identify the

relative contributions of each program, and a discounted future value was used to set our 12-month price target.

ASSETS 3/31/2014 12/31/2013

Current Assets

Cash & equivalents 11,155$ 14,625$

Prepaid expenses & other 1,332 1,591

Total Current Assets 12,487$ 16,216$

Long-Term Assets

Property & equipment 38 37

Other 6 4

Total Assets 12,531$ 16,257$

LIABILITIES

Current Liabilities

Accounts payable 773$ 142$

Debt due - -

Accrued expenses - 885

Total Current Liabilities 773$ 1,027$

Long-term obligations - -

Shareholders Equity

Common Stock, par value 58$ 58$

Additional Paid-In Capital 96,796 96,430

Accumulated Deficit (85,096) (81,258)

Total Shareholders Equity 11,758$ 15,230$

Total liabilities & equity 12,531$ 16,257$



Discounted Cash Flow Analysis

The DCF model projects cash flow through 2029, discounted back at multiple annual rates (7.5%, 10.0%, 12.5%,

15.0%, and 17.5%) to demonstrate the potential variability related to this assumption. It also includes three perpetual

growth rates (2%, 3%, and 4%) to show the impact on the present value of the company’s terminal value. The rates

used in calculating the per-share value for Synthetic Biologics are a 12.5% annual discount rate and a perpetual

growth rate of 3%. The number of fully-diluted shares estimated to be outstanding in 2018 is used in the per-share

calculation. The cash flows are risk adjusted, based on the proportional gross profit contribution by the Company’s

four lead products on an annual basis, adjusted for the probability of each being commercialized as discussed.

The discounted cash flow analysis yielded a valuation of approximately $3.50 per SYN share, or more than twice

the stock’s recent price. Hence, we believe the investment community fails to recognize the value of Synthetic

Biologics’ product portfolio at this time.

Discount Rate (2014-2029) 2.0% 3.0% 4.0% 2.0% 3.0% 4.0%

7.5% $225,074 $449,695 $555,015 $720,519 $674,769 $780,090 $945,593

10.0% $169,153 $218,992 $252,730 $297,714 $388,145 $421,883 $466,867

12.5% $127,546 $119,105 $132,933 $150,015 $246,651 $260,479 $277,561

15.0% $96,280 $69,183 $75,683 $83,364 $165,463 $171,963 $179,645

17.5% $72,567 $42,025 $45,364 $49,197 $114,592 $117,931 $121,764

Discount Rate Net Debt 2.0% 3.0% 4.0% 2.0% 3.0% 4.0%

7.5% -$11,155 $685,924 $791,245 $956,748 66.6% 71.1% 76.2%

10.0% -$11,155 $399,300 $433,038 $478,022 56.4% 59.9% 63.8%

12.5% -$11,155 $257,806 $271,634 $288,716 48.3% 51.0% 54.0%

15.0% -$11,155 $176,618 $183,118 $190,800 41.8% 44.0% 46.4%

17.5% -$11,155 $125,747 $129,086 $132,919 36.7% 38.5% 40.4%

Discount Rate 2.0% 3.0% 4.0% 2.0% 3.0% 4.0%

7.5% $8.85 $10.21 $12.35 3.33 4.11 5.34

10.0% $5.15 $5.59 $6.17 2.29 2.65 3.12

12.5% $3.33 $3.50 $3.73 1.75 1.95 2.20

15.0% $2.28 $2.36 $2.46 1.41 1.54 1.70

17.5% $1.62 $1.67 $1.72 1.18 1.28 1.38

Discounted

Cash Flows

Value per Diluted Share Implied EBITDA Multiple

PV of Terminal Value at a

Perpetual growth rate of rFCF Enterprise Value

Total Equity Value Terminal Value as % Enterprise Value

2014 2015 2016 2017 2018 2019

Revenue 500$ 2,000$ 5,000$ 56,814$ 263,635$ 471,282$

Operating income (14,225) (16,000) (18,500) 17,205 56,267 95,537

Net income (14,220) (15,994) (18,496) 15,488 34,891 59,239

Depreciation/amortization 15 20 25 25 30 100

Stock-based compensation 1450 1450 1500 1500 1500 1750

Tax loss carryforwards - - - 1948 21385 12455

Capital expenditures 15 20 25 30 200 100

Asset purchases

Other

Total cash flow adjustments 1,480 1,490 1,550 3,503 23,115 14,405

Free cash flow (12,740)$ (14,504)$ (16,946)$ 18,991$ 58,005$ 73,644$

Gross profit weighted probability 100.0% 100.0% 100.0% 26.4% 31.4% 32.1%

Risk-adjusted free cash flow (12,740)$ (14,504)$ (16,946)$ 5,015$ 18,224$ 23,652$



Product Net Present Value Analysis

We assessed the contribution of each product to Synthetic Biologics’ overall valuation on a probability-adjusted

basis. Revenues by product and year were based on the assumptions described previously, while operating costs

were allocated as shown in the table below. Allocation of expenditures was made based on trial sizes and duration,

as well as the involvement of partners in the clinical development of specific products. Accordingly, Trimesta

development costs are nominal since the Company intends to outlicense the drug for the Phase 3 trial(s), while the

C-IBS and C. difficile products have been allocated most of the R&D expenses since the largest numbers of patients

will be required for their clinical programs. Similarly, G&A and selling expenses have been allocated based on

Synthetic’s direct involvement in marketing these products. For instance, we have assumed that the Company sells

the pertussis therapy for overseas markets to distributors, thus incurring no overseas marketing expenses, and uses a

hospital-oriented salesforce to promote it along with the C-IBS and C. difficile products in the United States.

Product R&D G&A Selling Value

Contribution

Pertussis 15% 12% 10% 10%

C-IBS 40% 40% 45% 30%

C. difficile 40% 35% 45% 29%

Trimesta 5% 18% 0% 31%

The value contribution from each drug, shown in the right-hand column of the table, indicate that the C-IBS, C.

difficile and Trimesta products offer similar value contributions after adjusting for the current probabilities of

commercialization (see summary boxes in the Revenue section). Note that the C. difficile product does not reflect

ongoing research to expand its usefulness to additional IV antibiotics.

Discounted Future Value Analysis

Our 12-month price target was calculated based on the projected share earnings, $0.45, in 2018 multiplied by a P/E

ratio of 32, which resulted in a future value of $14.40. That figure was discounted back three years at a discount rate

of 24%, which we consider reasonable based on the relatively low risks associated with the development of

antimicrobials generally and on the information already known about the products in the R&D pipeline. The result

of that calculation was a $7.55 valuation. Accordingly, we have raised our 12-month price target to $7.50 per share.

INVESTMENT CONSIDERATIONS

Synthetic Biologics shares are significantly undervalued based on our discounted cash flow analysis. The investment

community’s view should change in 2015, after a licensing agreement for Trimesta is completed and data from the

pertussis and C-IBS therapies’ clinical trials are announced. Key valuation-driving development milestones are

listed below.

FUTURE MILESTONES TO COMMERCIALIZATION

Pertussis: SYN-005 Q3/Q4,’14 Seek Orphan Drug status

Q1,’15 File IND

H1,’15 Conduct Phase 1 trial

H2,’15 Conduct Phase 2 trial

H2,’15 Top-line data from Phase 2 trial

2016 File for compassionate use of SYN-005

2017 Launch SYN-005 under compassionate use



C-IBS: SYN-010 Q3/Q4,’14 Submit IND for clinical development

Q4,’14 Initiate Phase 2 trial

Q2/Q3,’15 Top-line data from Phase 2 trial

H2,’15 Initiate Phase 3 trial

H2,’16 Phase 3 data

H2,’16 Submit NDA to FDA

2017 Launch SYN-010 in United States

C. difficile: SYN-004 Q3,’14 Conduct 28-day bridging toxicology study

Q3,’14 Submit IND for SYN-004

Q3/Q4,’14 Initiate Phase 1a and 1b trials

Q4,’14 Top-line data from Phase 1a and 1b studies

H1,’15 Initiate Phase 2 trial

2016 Topline data from Phase 2 trial

2016 Initiate Phase 3 trial

2017 Topline data from Phase 3 study

2017 Submit NDA to FDA

2018 Launch SYN-004 in the United States

Trimesta We are not providing a detailed timeline for the development of Trimesta, since that will be determined by the

licensee and the indication that is selected (e.g., relapsing/remitting MS and/or cognitive impairment). However, the

one valuation-driving event that we are estimating is a licensing agreement in late 2014.

IN SYNC WITH GLOBAL HEALTHCARE NEEDS

We believe Synthetic Biologics is implementing a strategically sound approach through its investments in new

product development. Pertussis is a growing threat to world health, due to the emergence of strains that are less

susceptible to even the most advanced vaccines. The Company’s answer is an antibody-based therapy that not only

aids antibiotics in eliminating the bacterium, but also neutralizes the bacterial toxin that causes the infection-related

deaths. C-IBS is a debilitating condition treated with less-than-ideal palliative therapies today. Synthetic Biologics is

developing the first drug to target the underlying cause, excessive methane production by a commensal microbe. Its

C. difficile prophylactic will offer a novel approach to disease prevention for patients who require antibiotics. This

product should gain wide acceptance, because U.S. hospitals will soon face financial penalties from Medicare and

Medicaid for hospital-acquired infections and aging populations will create a greater burden on national budgets

worldwide. Then, too, SYN-004 may qualify for Medicare reimbursement. Finally, the results of a Phase 2 study of

Trimesta underscore its potential as an innovative treatment for multiple sclerosis and related cognitive impairment.

Such qualities should distinguish the Company’s drugs from the competition at the patient level. But they also align

the medicines with insurers’ interests by improving care cost-effectively, as total U.S. healthcare spending is

projected to rise by 5.8% annually and drug costs, by 6.5% in the ten years ending in 2022.47

We believe achievement of the near-term milestones will attest to the value of Synthetic’s R&D pipeline and, in so

doing, stimulate interest in SYN shares. That anticipated success underpins a decision to raise our 12-month price

target from $4.00 to $7.50 per share. Synthetic Biologics stock merits our BUY recommendation.

47 Cuckler, GA, et al. National health expenditure projections, 2012-2022: Slow growth until coverage expands and economy improves. Health

Aff (2013); 32(10): 1820.



Disclosures

ANALYST(s) CERTIFICATION: The analyst responsible for covering the securities in this report certify that the viewsexpressed in this research report accurately reflect their personal views about the subject Companies mentioned and itssecurities. The analyst responsible for covering the securities in this report certify that no part of their compensation was,is, or will be directly or indirectly related to the specific recommendation or view contained in this research report.

MEANINGS OF RATINGS: Our rating system is based upon 12 to 36 month price targets. BUY describes stocks thatwe expect to appreciate by more than 20%. HOLD/NEUTRAL describes stocks that we expect to change plus or minus20%. SELL describes stocks that we expect to decline by more than 20%. SC describes stocks that Griffin Securitieshas Suspended Coverage of this Company and price target, if any, for this stock, because it does not currently have asufficient basis for determining a rating or target and/or Griffin Securities is redirecting its research resources. The previousinvestment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NR describesstocks that are Not Rated, indicating that Griffin Securities does not cover or rate this Company.

DISTRIBUTION OF RATINGS/IB SERVICES:

IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [BUY] 34 80.95 4 11.76

HOLD [HOLD] 8 19.05 0 0

SELL [SELL] 0 0.00 0 0

COMPANIES MENTIONED:

Ticker Company Name Rating

SYN Synthetic Biologics Inc. Buy

MARKET MAKING: Griffin Securities does not maintain a market in the shares of these Companies or any other companymentioned in the report.

COMPENSATION OR SECURITIES OWNERSHIP:

The analyst Keith A. Markey who is responsible for covering the securities in this report receives compensation basedupon, among other factors, the overall profitability of Griffin Securities, including profits derived from investment bankingrevenue. Keith A. Markey who prepared the research report, did not receive any compensation from the Companies or anyother companies mentioned in this report in connection with the preparation of this report.

The analyst Keith A. Markey who is responsible for covering the securities in this report currently does not own commonstock in the Companies or any other companies mentioned in this report, but in the future may from time to time engagein transactions with respect to the Companies or other companies mentioned in the report.

Synthetic Biologics Inc. is currently a client of Griffin Securities.

Griffin Securities' services for Synthetic Biologics Inc. consist of non-investment banking securities-related services andnon-securities services.



Griffin Securities has received compensation from Synthetic Biologics Inc. in the past 12 months for non-investmentbanking services.

Griffin Securities from time to time in the future may request expenses to be paid for copying, printing, mailing anddistribution of the report by the Companies and other companies mentioned in this report. Griffin Securities expects toreceive, or intends to seek, compensation for investment banking services from the Companies in the next three months.

FORWARD-LOOKING STATEMENTS: This Report contains forward-looking statements, which involve risks anduncertainties. Actual results may differ significantly from such forward-looking statements. Factors that might cause sucha difference include, but are not limited to, those discussed in the “Risk Factors” section in the SEC filings available inelectronic format through SEC Edgar filings at www.SEC.gov on the Internet.

GENERAL: Griffin Securities, Inc. (“Griffin Securities”) a FINRA member firm with its principal office in New York, NewYork, USA is an investment banking firm providing corporate finance, merger and acquisitions, brokerage, and investmentopportunities for institutional, corporate, and private clients. The analyst(s) are employed by Griffin Securities. Ourresearch professionals provide important input into our investment banking and other business selection processes. Oursalespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to ourclients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investingbusinesses may make investment decisions that are inconsistent with the recommendations expressed herein.

Griffin Securities may from time to time perform corporate finance or other services for some companies described hereinand may occasionally possess material, nonpublic information regarding such companies. This information is not used inpreparation of the opinions and estimates herein. While the information contained in this report and the opinions containedherein are based on sources believed to be reliable, Griffin Securities has not independently verified the facts, assumptionsand estimates contained in this report. Accordingly, no representation or warranty, express or implied, is made as to, andno reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinionscontained in this report.

The information contained herein is not a complete analysis of every material fact in respect to any company, industry orsecurity. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in anyjurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It isfor the general information of clients of Griffin Securities. It does not take into account the particular investment objectives,financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients



should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. Certaintransactions - including those involving futures, options, and other derivatives as well as non-investment-grade securities- give rise to substantial risk and are not suitable for all investors. The material is based on information that we considerreliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The informationcontained in this report is subject to change without notice and Griffin Securities assumes no responsibility to update thereport. In addition, regulatory, compliance, or other reasons may prevent us from providing updates.

DISCLOSURES FOR OTHER COMPANIES MENTIONED IN THIS REPORT: To obtain applicable current disclosures inelectronic format for the subject companies in this report, please refer to SEC Edgar filings at www.SEC.gov. In particular,for a description of risks and uncertainties related to subject companies’ businesses in this report, see the “Risk Factors”section in the SEC filings.



Synthetic Biologics Target Price Change : Biotechnology Agenda · Keith A. Markey, Ph.D., M.B.A....

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