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One of the few biotech catalysts left in 2012 is on December 21st, which is the PDUFA-designated date for the FDA's final decision on Alexza Pharmaceuticals' (NASDAQ: ALXA) NDA resubmission for ADASUVE. While 2013 starts off with a bang as far as biotech catalysts go, anyone who is looking to make a short-term play before the end of a year should at least take a look at ALXA - there's no doubt that there will be a reaction to the decision given all the pent-up speculation between ALXA traders.

Their flagship drug ADASUVE (staccato loxapine) is an alternative delivery system for the generic antipsychotic compound loxapine, designed to specifically address the problem of agitation in schizophrenia patients. The company makes the argument that the rapidness of their staccato delivery system makes ADASUVE vastly superior to traditional methods of delivery (like oral tablets). Injection, which is an instantaneous method of drug delivery, comes with the problem of invasiveness. This leaves inhalation, which has problems that have been addressed with the introduction of staccato.

Alexza's staccato has the ability to penetrate the deep areas of the lungs, which drastically improves the speed and quality of drug absorption through the respiratory system. Traditional powders and aerosol sprays have only been able to effectively target local areas of the lung's respiratory system, drastically slowing down delivery to the rest of the body.

Alexza's case for ADASUVE specifically lies in the notion that rapid delivery of loxapine to the brain is crucial for the treatment of agitation symptoms in schizophrenia. This eliminates oral tablets due to their slow absorption through the gastrointestinal tract and traditional inhalation delivery systems due to their inability to effectively use the full absorptive potential of the respiratory system. The last option, injection, is challenged due to the invasiveness of injections and the difficulty of administering a smooth injection in an agitated schizophrenia patient. This leaves staccato loxapine, which is a very easy-to-use and practical alternative for loxapine administration.

The initial NDA submission was met with a complete response letter (rejection) in May of this year, despite the fact that the FDA's Psychopharmacologic Drugs Advisory Committee voted in favor of the drug's approval with REMS (this was an 9 to 8 vote, and one abstain). It's hard to say whether the market still thinks the drug's approval chance is about 50/50 given the additional components to Alexza's NDA resubmission since ALXA has traded neutrally (and range-bound) for most of the second half of 2012.

The problem with the resubmission that builds the bearish case against Alexza is the lack of a true safety profile for ADASUVE (or staccato, in general). While it has shown clear ability to speed up the absorption of the drug compounds it is paired with, the fact that the advisory committee required REMS on a hypothetical ADASUVE approved showed that they were not very confident in the potentially detrimental long-term effects of staccato on patients' health.

The FDA does approve certain drugs without strong safety profiles, but these are often drugs that have very significant unmet need. ADASUVE does have its use in the psychiatric setting, but does not really offer all that much improvement in efficacy. As mentioned, loxapine is a commonly used, generic antipsychotic compound that has already been well-established. It seems unlikely that the FDA will risk potential danger introduced by staccato for a marginal upgrade in speed of loxapine delivery and ease-of-use.

Generally speaking, ALXA has shown great hesitancy in breaking $6/share, but has remained supported above $4/share. I suspect that the market has dropped ALXA into their lower trading range due to higher expectations of FDA rejection of the NDA resubmission and lower expectations of an approval. This increases the explosiveness of the upside potential if ADASUVE gets approved on December 21st, also due to the fact that short interest has been building very heavily since the rejection back in May.

Note that there are now over 2.4 million shares short, representing about 16.5% of the float. This is huge. I think Investors who are willing to go against the lopsided bet that the FDA will reject ADASUVE again could easily see 80% gains or more in a short timeframe, but the bearish case against ALXA remains quite strong.

Source: Winding Down 2012 With Last-Minute Bets On Alexza