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This past week was not pleasant for anyone on the long side of Zogenix Inc. (NASDAQ:ZGNX).

After years of waiting for an NDA submission for the company's nearly finished drug program for Zohydro ER, we saw a submission earlier in the year and an official reply from the FDA on July 16, 2012. This set a PDUFA target action date of March 1, 2013, for Zohydro.

Unfortunately, we saw a lot of the building speculation about the FDA decision on Zohydro in March 2013 ruined on Friday, Dec. 7, when we got the results of an Analgesic Drug Products Advisory Committee (AADPAC) meeting. The FDA's advisory committee voted 2-11 (with one abstain) against approval of Zohydro, citing that there is significant abuse potential for this painkiller. What is noted specifically in the commentary is the fact that the Zohydro pill itself is not crush-resistant.

Dr. Stephen Farr, CEO of Zogenix, defended the drug with statements suggesting that there is still significant unmet patient demand for extended-release hydrocodone that doesn't contain acetaminophen. He also gave a nod towards the efforts that Zogenix has undergone to prove the drug's safe use (especially relative to standard hydrocodone), and seems confident that the company can work with the FDA towards some sort of solution that would make a Zogenix approval possible.

Although it seems almost certain right now that the 11-2 vote against Zogenix will dictate an FDA rejection of Zogenix on March 1st 2013, there is a very small chance that the FDA will go against the panel's vote and approve Zohydro ER. There are a few reasons that Zogenix still has a case for the introduction of their drug.

First is the Schedule II classification given to Zogenix by the Drug Enforcement Agency (DEA), which puts Zohydro in line with other hydrocodone products. This means that Zohydro ER will not only be more safe and addition-resistant relative to standard hydrocodone, but it will be available on the same DEA scheduling. What this means is that Zohydro is just as hard to get, but offers improvements that could potentially lower opioid addiction rates for patients that take it.

The second major reason is that Zohydro ER, post-approval, would be put on risk evaluation and mitigation strategy (REMS), which would allow the FDA to gather additional data to build the overall profile of Zohydro while allowing the company to actually earn some revenues with their drug on the market. According to company statements, the REMS for Zohydro will be consistent with recently introduced FDA-approved REMS for extended release and long-acting opioids.

Clearly the bet on the FDA decision is now in favor of the bears who held a negative view on Zohydro's chances at approval from the start, although this has now been reflected quite well. By yesterday's closing bell, the price of ZGNX got cut in half. The market capitalization of Zogenix went from $238 million to $117 million, showing that the market attributed the bulk of the company's valuation to the prospects of Zohydro.

Zogenix does have another drug in its developmental pipeline called Relday, which uses Zogenix's DosePro needle-free delivery system to administer a once-monthly dose of risperidone -- a generic antipsychotic compound used to manage schizophrenia symptoms. Relday does show promise due to the sheer size of the antipsychotic market (about $2 billion in 2011), although the IND for this specific drug and delivery system was only submitted on May 30, 2012. It will be years before we see the drug progress into late-stage clinical trials, and even longer before we see a potential FDA approval for this product. Zogenix investors are, for the most part, stuck with Zohydro and Zogenix's sales of their needle-free delivery system of the generic CNS-affecting compound sumatriptan (which is sold under the name SUMAVEL).

The shorts have taken most of the "meat" off of the ZGNX "bone" already, and are sitting at hefty profits. Although I expect the shorts to take profits, it's unlikely that this will cause a recovery rally that is worth chasing. The obvious thing that could really turn Zogenix around is a surprise FDA approval, although we stated earlier it is very unlikely -- even with the drug's Class II scheduling by the DEA on top of its REMS. The market seems to think so too, but if it's proven wrong those who were brave enough to take the opposite side of the ZGNX bet are looking at well over 100% gains at this point.

Source: FDA Advisory Meeting Leaves Zogenix Stock In Tatters