How you could profit in the hunt for new antibiotics

Medicine is facing a global crisis.

Thanks to the overuse of antibiotics, the number of drug resistant bacteria is quickly rising.

This means that conditions which are now easily treated could once again become mass killers, as they were at the start of last century.

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Things have got so bad that the prime minister has recently said that he's setting up a commission to look at the matter.

The good news is that several biotech firms and drug companies are already on the case. They're close to developing new antibiotics that could buy us precious time before we come up with a longer-term solution.

How antibiotics work

By the Second World War, scientists had managed to mass-produce penicillin-based drugs. The army then used them to treat diseases such as TB and syphilis, and to stop wounds becoming infected. After the war, antibiotics became widely available, helping eradicate a wide range of diseases that were previously untreatable.

However, if antibiotics aren't used properly they can end up making things worse. For instance, if you don't take enough, or stop taking them before the course is finished, they can leave some bacteria behind. Even worse, some of the remaining bacteria are likely to be resistant to the drug. These resistant strains can end up being spread from person to person.

As a result, doctors are increasingly forced to try multiple drugs in an attempt to find one that the strain is not resistant to. The downside is that these drugs might be less effective, or have worse side effects. Even worse, the strains can end up becoming resistant to these second-line drugs.

Eventually, you end up with superbugs' that are immune to all but a few of the most toxic drugs. In some extreme cases, the conditions are totally resistant.

Re-emergence of TB

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However, it was effectively eliminated from developed countries by a combination of vaccination (which confers immunity for about ten years) and antibiotics developed in the 1950s, 60 and 70s.

However, in the early 1980s antibiotic-resistant strains began to emerge. Despite a big increase in the resources invested in treating the disease, the number of globally reported cases has risen from 2.5 million in 1980 to 5.5 million in 2010.

A world without antibiotics

Already, infections from superbugs are estimated to kill 5,000 patients a year in the UK alone. The US Centers for Disease Control and Prevention (CDC) thinks that there at least 20,000 deaths in the US.

One solution is to cut down the use of antibiotics. The CDC estimates that antibiotics are incorrectly prescribed in as many of half of cases. There are also concerns that their use in farming may be contributing to the problem.

Health authorities are trying to raise awareness of this issue through public information campaigns that discourage patients from demanding antibiotics. The US Food and Drug Administration (FDA) has started to clamp down on agricultural use. However, changing these practices will take time and may only slow the process of growing resistance, not stop it.

It therefore looks like the only solution is to come up with new antibiotics. Sadly, over the past years many of the biggest companies have dropped out, on the assumption that antibiotics aren't lucrative enough.

One smaller company to watch

One company that looks interesting is Cubist Pharmaceuticals (Nasdaq: CBST). It recently had an antibiotic (Sivextro) approved by the FDA for the treatment of skin diseases related to MRSA.

Trials suggest that it is more effective than the current main treatment, with a shorter course of action required. There are also hopes that it could be used to treat hospital-acquired pneumonia.

Last year it bought two other drug companies, Trius and Optimer, which were also developing antibiotics. This should ensure that it has a strong drug pipeline, and make itself an attractive takeover candidate for a larger company.

Cubist currently trades at 26 times expected earnings for 2015. However, this multiple is expected to fall to 11.5 within three years.

A riskier bet is Cempra (Nasdaq: CEMP). This company is currently developing two antibiotics, one of which, known as CEM-101, could be very useful in treating antibiotic-resistant infections. While Cempra isn't currently making any money, it has partnerships with Cubist and Toyama Chemical Company which should tide it over until it hopefully gets approval for CEM-101 next year.

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