Is Zogenix A Buy After FDA Panel Says 'No' To Zohydro?

| About: Zogenix, Inc. (ZGNX)

Zogenix Inc., (ZGNX) is the first pharmaceutical company to face a U.S. Food and Drug Administration (FDA) panel seeking approval for pure hydrocodone, a painkilling drug that can be 10 times stronger than Vicodin.

Hydrocodone was first synthesized in Germany in 1920 and approved by the FDA in 1943. Hydrocodone is a semi-synthetic opioid derived from either codeine or thebaine. Hydrocodone compounded with acetaminophen produced the popular drug, Vicodin. Due to concerns about liver damage from prolonged use of acetaminophen at high doses, four pharmaceutical companies are developing extended-release versions of pure hydrocodone.

On December 10, 2012, shares of Zogenix sank to an all-time low after the FDA's Anesthetic and Analgesic Drug Products Advisory Committee ((AADPAC)) voted 2 to 11 (with one abstention) against the approval of Zohydro, the company's hydrocodone-based chronic pain reliever.

Zohydro ER

Zohydro ER (hydrocodone bitartrate extended-release capsules) is an extended-release formulation of hydrocodone without acetaminophen, formulated for the management of moderate-to-severe chronic pain when a continuous opioid analgesic is needed for an extended period of time. If approved by the FDA, Zohydro would be the first extended-release (ER) novel formulation hydrocodone therapy without acetaminophen for the management of chronic pain.

Zogenix claims a chief advantage of Zohydro is that the drug avoids the potential for liver injury associated with the use of acetaminophen. Acetaminophen can cause liver damage when taken in high doses or over long periods of time.

An estimated 100 million people in the United States suffer from chronic pain. Chronic pain can be managed with both immediate-release and extended-release opioids. Currently marketed hydrocodone products are limited to immediate-release compounds that contain an analgesic combination ingredient, which is usually acetaminophen.

Acetaminophen, also known as paracetamol, may cause liver injury when used in high dosages, over long periods of time or in accidental overdoses due to multiple acetaminophen products being taken at once.

Zohydro uses Alkermes's (ALKS) Spheroidal Oral Drug Absorption System (SODAS) drug delivery technology "to enhance the release profile of hydrocodone to provide extended-release pain relief relative to existing immediate-release combination products." Alkermes earned a $1 million milestone payment from Zogenix when the company filed Zohydro's new drug application (NDA) in May 2012.

Liver Toxicity

Acetaminophen is the most widely used medication in the United States. Acetaminophen overdose is the most common drug overdose reported to poison control centers. Acetaminophen toxicity is the most common cause of liver toxicity in the United States, replacing viral hepatitis as the most common cause of acute hepatic failure.

Acetaminophen is the active ingredient in Johnson & Johnson's (JNJ) Tylenol, and is a component of many over-the-counter cold and analgesic medications and prescription combinations, including codeine-acetaminophen (Tylenol #3), oxycodone-acetaminophen (Percocet) and or Vicodin (acetaminophen and hydrocodone).

In 2005, University of Washington researchers found that 63% of all accidental acetaminophen overdoses used narcotic-containing compounds. Over 80% of patients in the study reported taking an acetaminophen or other analgesics for acute or chronic pain syndromes. Of the 178 acetaminophen overdose patients surveyed, 65% survived, 27% died without transplantation, and 8% underwent liver transplantation.

In 2011, the FDA acted by "asking" drug manufacturers to limit the strength of acetaminophen in prescription drug products to 325 mg per unit. In addition, all prescription drug products that contain acetaminophen must include a "Boxed Warning" highlighting the potential for severe liver injury and a warning emphasizing the potential for allergic reactions.

Over-the-counter products containing acetaminophen were already required to contain a label warning consumers about these drugs' potential for liver damage.

Although Zohydro would provide patients with an effective dose of hydrocodone without acetaminophen toxicity potential, the drug could also increase illicit opioid use which some authorities believe is a "public health crisis."

Abuse Concerns

Some experts believe that the nation's sharp increase in painkiller addiction stems from a loophole in the 1970 Controlled Substances Act that classified pure hydrocodone as a strictly controlled Schedule II drug. However, hydrocodone combination products, such as vicodin, which contains hydrocodone and acetaminophen, into the less strict Schedule III classification. As a Schedule III drug, combination drugs such as vicodin can be refilled as many as five times, while Schedule II drugs can be filled only once.

Since it is relatively easy to obtain, vicodin use and abuse has significantly increased. Some authorities estimate that nearly two million people in the United States are addicted to vicodin. Despite increasing attention on Vicodin's potential for abuse and addiction, physicians prescribed hydocodone combination drugs approximately 136 million times in 2008.

Drug abuse experts fear that the approval of Zohydro and other pure hydrocodone drugs in development could bring on a new "epidemic" similar to the widespread oxycontin abuse seen during the 1990s.

According to the U.S. Drug and Enforcement Agency (NYSE:DEA), hydrocodone is the most prescribed opioid in the United States and is responsible for more drug abuse and diversion than any other licit or illicit opioid.

The U.S. Centers for Disease Control and Prevention (CDC) believes overdoses involving prescription painkillers, a class of drugs that includes hydrocodone are a "public health epidemic."

A 2008 study conducted by the International Narcotics Control Board found the United States consumes 99% of the hydrocodone and 83% of the oxycodone use in the world.

The FDA's Office of Surveillance and Epidemiology estimated that for hydrocodone combination products, the abuse ratio was 14 emergency department visits per one million tablets dispensed. For oxycodone combination products, the ratio was 24 emergency department visits per one million tablets dispensed, but for pure oxycodone extended-release products, the ratio increased to 85 emergency department visits per one million tablets dispensed. FDA staff concluded that it is likely that similar patterns will be observed between combination hydrocodone products and the extended-release, single-ingredient hydrocodone product, Zohydro.

FDA staff advised that Zohydro may have a higher risk of abuse than other painkillers. Zohydro contains up to 50 mg of pure hydrocodone. Vicodin has only 5 mg and is combined with acetaminophen. Zohydro is a twice-daily pain reliever while combination products are used every four to six hours.

Opioid drug abusers prefer extended-release (ER) drugs over immediate-release (NYSE:IR) formulations because ER versions have higher drug concentrations that can be manipulated for illicit drug use. Zogenix is an extended release product.

During the hearing, AADPAC members were noticeably moved by the testimony from parents whose children died from prescription pain reliever abuse and overdose. They pleaded with the committee to vote against recommending FDA approval for Zohydro.

AADPAC members said they could not recommend FDA approval for Zohydro for a number of reasons. Members were concerned that the drug could be abused because there were insufficient plans to limit the number of potential Zohyro customers. They also questioned why Zohydro was not formulated as a tamper resistant drug. There were also questions about the potential effectiveness of Zohydro's Risk Evaluation and Mitigation Strategy (REMS).

Tamper Resistance Issues

Committee members were concerned that Zohydro was not tamper resistant and that illicit drug users could crush the pills in order to snort or inject them for a greater high.

Zogenix President and Chief Operating Officer Stephen Farr told the committee that the company was in the early stages of studying a tamper-resistant pill. Farr claimed Zogenix did not develop a tamper-resistant version of the drug because there were choking and reduced effectiveness issues.

Several other pharmaceutical companies are believed to be in the final stages of developing a tamper resistant version of hydrocodone.

Purdue Pharma, a private company that introduced OxyContin in 1995, received a patent applying extended-release technology to hydrocodone in May 2011 for a once-daily tamper resistant hydrocodone tablet.

Teva Pharmaceuticals (NYSE:TEVA) is also anxious to get a tamper deterrent hydrocodone drug on the market. In May 2011, Teva purchased the biopharmaceutical company, Cephalon, for $6.8 billion. One of Cephalon's key assets was their late stage investigational "tamper deterrent" (NYSE:TD) hydrocodone pill called "TD Hydrocodone." Teva believes sales from the drug could be worth as much as $500 million annually. Teva executives have stated the drug could be on the market in the "relatively near future," hoping that revenue from TD Hydrocodone can replace the sales lost when the company's patent on Copaxone, Teva's mega-selling multiple sclerosis drug, expires in 2014. TD Hydrocodone is in the "final stage of testing."

The Danish pharmaceutical firm, Egalet Ltd., is also developing a tamper resistant instant release hydrocodone product, EGP-121, and an extended release hydrocodone pill EGP-113. Egalet also has tamper resistant morphine, oxycodone, and hydromorphone pills in its late stage clinical pipeline. The company could have their pure hydrocone drug on the market as soon as 2015.

Acura Pharmaceuticals(ACUR) has patented Aversion Technology in an attempt to decrease the abuse of common oral opioid analgesics. Remoxy (oxycodone) is being developed in a strateguc alliance between Pfizer (PFE) and Pain Therapeutics (NASDAQ:PTIE). Nektar Therapeutics (NASDAQ:NKTR) also has tamper resistant opioids in development.


On July 9, 2012, the FDA approved a standard Risk Evaluation and Mitigation Strategy (REMS) for extended-release (ER) and long-acting (LA) opioids, The FDA's REMS is part of a federal initiative to address the prescription drug abuse, misuse, and overdose epidemic. The FDA's REMS introduces new safety measures designed to reduce risks and improve the safe use of ER/LA opioids, while ensuring access to needed medications for patients in pain.

The new ER/LA opioid REMS will affect more than 20 companies that manufacture opioid analgesics. Under the new REMS, companies will be required to make education programs available to prescribers based on an FDA Blueprint.

Key components of the ER/LA opioid analgesics REMS include:

  • Training for prescribers, based on an FDA Blueprint, will include information on weighing the risks and benefits of opioid therapy, choosing patients appropriately, managing and monitoring patients, and counseling patients on the safe use of these drugs. These educational programs will also include information on how to recognize opioid misuse, abuse, and addiction, as well as general and specific drug information for ER/LA opioid analgesics.
  • Updated Medication Guide and patient counseling documents must contain consumer-friendly information on the safe use, storage and disposal of ER/ LA opioid analgesics.
  • Assessment/auditing. Companies will be expected to achieve certain FDA-established goals for the percentage of prescribers of ER/ LA opioids who complete the training, as well as assess prescribers' understanding of important risk information over time. The assessments also cover whether the REMS is adversely affecting patient access to necessary pain medications, which manufacturers must report to FDA as part of periodic required assessments.

The FDA expects the first continuing education activities under the REMS will be offered to prescribers by March 1, 2013.

While there is no mandatory requirement that prescribers take the training and no precondition to prescribing ER/LA opioids to patients, the Obama Administration has endorsed a mandatory training program on responsible opioid prescribing practices in April 2011 as part of its comprehensive plan to address the epidemic of prescription drug abuse. The program, which would be linked to DEA registration by providers, would require legislative changes that are being pursued by the White House.

Zogenix claimed that they submitted a REMS that is consistent with current FDA and industry-wide guidelines for extended-release opioid products.

"We have clearly put a lot of time and effort into considering risk mitigation initiatives for the Zohydro ER product. The good news is that you know that there is now a standard REMS that was being recently introduced for all extended release opioid products and clearly our product will fit in line with that. We will become members of the REMS program companies and that we will be able to introduce education and other activities that's in the REMS for hydrocodone, I think for the first time," Zogenix President and COO Stephen Farr stated during the company's Third Quarter 2012 earnings call. "In addition to the REMS, we are looking at other activities working with experts in the field to really supplement the REMS with what we think will be meaningful activities around education as well as surveillance in order to really try and pick up any signals of misuse and abuse of the product early so that we can react to it. So we will be presenting a lot of that information at the advisory committee."

Zogenix promised that their Zohydro sales force would receive training to recognize signs of inappropriate prescribing and would not interact with physicians engaging in this behavior.


On November 8, 2012 Zogenix reported financial results for the third quarter ended September 30, 2012.

Net product revenues for the third quarter 2012 were $8.5 million, compared to $8.8 million in the third quarter 2011. During the third quarter 2011, total revenues of $10.4 million also included $1.6 million in contract revenue related to the company's previous co-promotion agreement with Astellas Pharma (OTCPK:ALPMF) which ended March 31, 2012.

Cost of sales for the third quarter 2012 was $4.2 million, compared to $5.5 million in the third quarter 2011. Product gross margin was 50% in the third quarter 2012, compared to 38% in the third quarter 2011. This improvement in gross product margin is primarily due to a decrease in excess capacity charges.

Royalty expense for the third quarter 2012 was $325,000, compared to $343,000 in the third quarter 2011, reflecting the impact of decreased net product revenue.

Research and development expenses for the third quarter 2012 were $3.7 million, representing a 64% decrease from $10.1 million in the third quarter 2011. The decrease in research and development expenses was the result of lower costs associated with the Phase 3 clinical trials for Zohydro ER, which were completed in 2011. The third quarter 2011 also included a one-time $2.25 million up-front license payment to Durect made in connection with the execution of the Relday development and license agreement and a $750,000 milestone payment to Alkermes made in connection with the completion of the Phase 3 study (801) for Zohydro ER.

Selling, general and administrative expenses for the third quarter 2012 were $10.9 million, representing a 26% decrease from $14.7 million in the third quarter 2011. The decrease in selling, general and administrative expenses was primarily the result of a $3.7 million decrease in service fees to Astellas due to the termination of the co-promotion agreement on March 31, 2012 and a decrease in advertising and promotional expenses. This was partially offset by an increase in product sampling costs and field sales force costs.

Other expenses for the third quarter 2012 were $8.6 million, which includes a $3.6 million non-cash mark to market adjustment in the fair value of the company's outstanding warrants. Also included are non-recurring costs associated with repayment of the company's debt obligations and issuance of warrants in its July 2012 public equity offering.

Net loss for the third quarter 2012 was $19.3 million, or $0.21 per share, compared to a net loss of $22.0 million, or $0.59 per share, for the third quarter 2011. The weighted average shares outstanding were 90,370,000 for the third quarter 2012. Non-GAAP net loss adjusted for certain non-cash or non-recurring items for the third quarter 2012 was $0.16 per share as detailed in the non-GAAP financial results table included in this release.

Cash and cash equivalents as of September 30, 2012, were $49.6 million. During the third quarter 2012, Zogenix raised net proceeds of $65.4 million in an equity offering and repaid $21.2 million of debt obligations to Oxford Finance LLC and Silicon Valley Bank.

Ann Rhoads, chief financial officer of Zogenix, commented, "We have reduced our loss from operations by nearly half as compared to the third quarter of 2011. Following the successful equity raise and debt repayment early in this quarter, we are advancing our development programs while continuing to invest in the growth of our commercial product, Sumavel DosePro, with the support of our new co-promotion partner."

In November 2012, Zogenix announced that the company had refined its full year 2012 financial guidance. The company now believes that total revenue to be approximately $45.5 million, at the low end of the previous guidance range. Net product revenue is expected to be approximately $37 million, at the low end of the previous guidance range due to the disruption in sales focus during the co-promotion transition and prescription growth expected to be approximately 20% over 2011. Product gross margin are expected to be approximately 48% - 49%, towards the high end of the previous guidance range. Research and development expenses are expected to be approximately $22 million, at the high end of the previous guidance range primarily due to expenses associated with preparing for the FDA Advisory Committee meeting for Zohydro ER. Selling, general and administrative expenses are expected to be approximately $50 million, at the high end of the previous guidance range. Zogenix expects the net interest expense to be approximately $10 million for 2012, unchanged from the previous guidance, reflecting the payoff of the debt obligation with Oxford Finance LLC and Silicon Valley Bank

Conclusion: Buy

As a result of the FDA action, Oppenheimer downgraded Zogenix to "Perform" from "Outperform" and removed its $3 price target. The firm predicted that Zogenix would not receive FDA approval on March 1, 2013, and approval could be delayed at least one year. Stifel Nicolaus downgraded the stock to "Buy" from "Hold," but Wells Fargo & Co. reaffirmed their "Outperform" rating on Zogenix. The firm predicts that FDA approval of Zohydro is a probable outcome and recommends buying shares of Zogenix on any weakness after the negative panel vote.

I think the odds of the FDA approving Zohydro in March 2013 are highly unlikely, but there is more to Zogenix than Zohydro. At current share prices under $1.20, I think Zogenix is undervalued as it is now selling at nearly one-third of its 52 week high share price of $3.30.

Zogenix's first commercial product, Sumavel DosePro (sumatriptan injection) Needle-free Delivery System, was launched in January 2010 for the acute treatment of migraine and cluster headache. Sumavel DosePro is the first and only needle-free delivery system for subcutaneous sumatriptan for the treatment of acute migraine and cluster headache.

In June 2012, Zogenix and Mallinckrodt LLC, the pharmaceuticals business of Covidien (COV), announced that the two companies had entered into a co-promotion agreement for Sumavel DosePro.

Under terms of the agreement, Mallinckrodt's 95 salesperson strong U.S. sales force will sell Sumavel DosePro to its customer base of prescribers. Zogenix will continue to record all product revenues and Mallinckrodt will be compensated based on apercentage of net sales from prescriptions generated by Mallinckrodt. The agreement runs through June 30, 2014, and can be extended. Covidien's Pharmaceuticals business is the largest U.S. supplier of opioid pain medications and among the top 10 generic pharmaceuticals manufacturers in the United States.

For the third quarter of 2012, Sumavel DosePro generated $8.5 million net product revenue, a 5% increase over the second quarter 2012, and maintained consistent refill rate for SUMAVEL DosePro at 43% from the second quarter 2012.

Decision Resources, a research and advisory firms for pharmaceutical and healthcare issues, finds that Zogenix/Astellas Pharma/Desitin Pharmaceuticals' needle-free Sumavel DosePro, which launched earlier this month in the United States, and MAP Pharmaceuticals' (NASDAQ:MAPP) orally-inhaled Levadex will earn approximately $400 million in combined sales by 2018 in the migraine drug market.

Zogenix's second DosePro investigational product candidate, Relday, is a proprietary, long-acting injectable formulation of risperidone for the treatment of schizophrenia. In May 2012, Zogenix submitted an Investigational New Drug Application for Relday. A Phase 1 study completion is expected by end of 2012.

The company's validated, proprietary DosePro needle-free technology platform has a broad range of applications, and can be a solution for self administration of subcutaneous pharmaceuticals and biologics.

The AADPAC provides FDA with independent expert advice and recommendations. The FDA usually agrees with AADAC decisions, but the final decision regarding approval of a medication is made by FDA.

In June 2009, a different FDA advisory panel recommended that the agency ban Vicodin (hydrocodone and acetaminophen) and Percocet (oxycodone and acetaminophen). The FDA has yet to do so. The FDA has also refused to approve other opioids such as Pfizer's and Pain Therapeutics' Remoxy formulated with Durect's (NASDAQ:DRRX) ORADUR technology, and Abbott Laboratories' (NYSE:ABT) Vicodin CR.

Those favoring FDA approval for Zohydro argue that it is a safe and effective drug that works without the potential for liver damage. Those opposing the approval of the drug contend Zohydro is likely to produce the next wave of substance abuse. Do the benefits of allowing Zohydro on the market outweigh the risks? I think the FDA is likely to say "no."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.