Alexza Pharmaceuticals (ALXA), an emerging pharmaceutical company based out of Mountain View, California has 1 FDA approved product and is currently trading at a market value of about $73 million. The stock popped more than 10% yesterday during the company's Cowen and Company Presentation at 11:20 AM EST due to several factors which I will cover later in this article. The company had traded in a tight range between about $4.10 and $4.60 on low volume for the past two months after its heavy post approval drop from above $6.30. Alexza actually does have a 6 month return of 1.08%, however. This is much smaller than the NASDAQ return, which has increased 5.08%. Alexza's lead program, ADASUVE has been FDA and EMEA approved during the past 4 months and the company expects a 3rd quarter launch in the USA and EU. The EMEA approved Adasuve for the acute treatment of agitation in patients with schizophrenia or bipolar disease on February 21st. The drug was also approved by the FDA on Friday December 21st, but the stock has since seen a steady decline. Approval was expected by most as the last REMS proposed by the FDA revolved around the respiratory effects on patients with already compromised respiratory systems. The REMS also explained that the product must be shipped to hospitals with educational information and airway management products just in case an adverse event occurs.
As of the end of Q3 2012, Alexza had lost $17.7 million for the first nine months of 2012. This was also about a 57% decrease YOY from 2011, but much of its earnings came from the common offering and stock options, which raised about $35 million according to its Q3 earnings report. It also has $25.5 million in cash and cash equivalents, with about $10.6 million in working capital as of the end of this quarter. Current liabilities also have decreased from $34 to $22 million in 2012. Operational costs decreased due to the end of the Adasuve trials, but these are expected to increase again as Alexza will need to conduct a Phase IV trial and start mass-producing its Adasuve units. EPS at this point is meaningless as its first product has not yet been released, but I would expect that by 2014, EPS will turn positive. Royalty payments from Grupo Ferrer will help cover manufacturing and further development costs, but Alexza will still need a U.S. partner if it does not want to raise additional capital. Milestones revenues from Grupo Ferrer have not been fully disclosed but Grupo Ferrer did purchase 2.42 million shares of Alexza in place of one if its future royalty payments. Any future purchases made by Grupo Ferrer will take place of royalty payments, but will also be made at a premium of the market price at the time of purchase.
Why The Stock Ran So Quickly
Alexza's stock popped at around 11:30 AM EST yesterday due to the information presented at the Cowen and Company conference. Thomas King, the much reviled CEO of Alexza, presented information that was extremely positive for all prospective investors. He went on to review the approval of Adasuve and the overall market value of Adasuve. King explained that the market value for this product has been estimated to be $225 million just in the USA (assumed at $75 per product). This would also assume only a 20% market share in agitation patients. Thomas King also outlined the launch of Adasuve, which is expected to occur first in Germany and followed by several other EU countries. He also informed investors that Grupo Ferrer, Alexza's partner in the EU, Lat Am, and CIS would complete further regulatory filings in these regions during 2013. With expected sales in 2014 in the range of $400 million worldwide, Alexza could be a potential takeover target if a partnership is not reached. Alexza's strong product and GMP manufacturing facility in place also would demand an upfront royalty payment from a sponsor of at least $35 million. He also affirmed that the launch would occur in 3Q 2013 and that its current manufacturing facility would be able to provide the required stock needed to launch the product. The facility has been GMP certified and is currently producing Adasuve units as I write. The facility is about 12,000 sq. ft. and has a current capacity of about 1 million units. This facility can also scale up to 7 million units to accommodate a launch and continued production. King also went on to explain that each Adasuve unit could sell for between $75-$125 per unit, which was slightly above the previously expected price. Alexza plans to target 660 primary hospitals and about 400 or so secondary hospitals, which will be covered by about 40 sales reps. The biggest pop in PPS also occurred right around the time that King explained that Alexza has had multiple offers for partnerships and CSO's, which Alexza expects to finalize by the end of Q1.
I believe a partnership would be more fruitful for investors as it would bring continued revenues for the company, which would allow it to continue with its further clinical trials around the Staccato system. During the conference, King also reminded potential investors that Adasuve was the first non-invasive fast-acting agitation product for schizophrenia patients. Loxapine, the drug behind Adasuve has been used in the clinic for many years in oral and intramuscular (IM) forms, but each have had their disadvantages. Within 10 minutes, Adasuve can reduce agitation by 50%, which is even quicker than IM Loxapine long acting drug. King also explained that IM injections are being phased out of this treatment and a report needs to be written by clinicians when the least invasive practice is not used. This will allow Alexza to capture both oral and IM patients, increasing its potential market cap. From a sales point of view, it will be important that Alexza hire experienced reps as this market may not be the easiest to break into as an orphan company. A partnership would certainly help as Alexza may not have to do the sales work itself, but it may also limit its potential revenues. A large pharma partnership with the likes of Pfizer (PFE) or Johnson and Johnson (JNJ) would be increase Alexza's profile, but I believe a smaller company will offer a better deal financially and will be a more realistic target.
Several exciting trends have occurred during the months that Alexza's PPS has declined that make me optimistic about its future. Among them are the addition of a veteran pharmaceutical CEO to their board of advisors and an increase in institutional ownership. On January 3rd, 2013, Alexza appointed J. Kevin Buchi, a pharmaceutical veteran, and previous CEO of Cephalon to the Board of Directors. Buchi was the CEO when Teva (TEVA) made a lucrative buyout offer for the company, and speculation has arisen that this was the reasoning behind appointing Buchi. During the past two months, Blackrock has increased its total shares owned to 1,322,398, Credit Suisse to 835,067 shares, and Lansdowne Capital to 1,520,055 shares. Several other institutions have purchased more Alexza shares during February, increasing the institutional ownership to about 47%.
With the potential U.S. partnership and launch of Adasuve, I believe that Alexza is an attractive stock trading at a fraction of its potential Adasuve sales. Alexza also has a strong pipeline with its Staccato system, which will make it an attractive long term stock. Investors have felt nothing but pain to date as King has diluted several times, but I believe this is all due to turn around by the end of the month. Basically, yesterday's sharp increase in price was due to increased revenue expectations and the affirmation that a partnership deal should be announced by the end of the quarter. While the company's valuation will be significantly different in the short term if it chooses to partner or go forward as a CSO, I expect that Alexza's market cap will cross the $100 million dollar market cap within 2 months and $200 million by 2014. This would equal about a $12.75 target by 2014, which is slightly above that of Roth Capital, but right around that of JMP Securities. I believe that the partnership, increase in sales expectations, and pricing in Adasuve will lead to this increase.
Disclosure: I am long ALXA.