Early Wednesday morning, AP Pharma (APPA.OB) received a Complete Response Letter from the FDA regarding AP's drug APF530. This drug was designed for the treatment of chemotherapy induced nausea and vomiting. While it does seem as though the Complete Response Letter received by AP Pharma is rather minor, in the idea that the studies already conducted should be sufficient, it puts the timeline for the drug's commercialization back by more than a year.
With the CRL being issued, we can assume that AP Pharma will have to ask the FDA for a meeting to clarify exactly what needs to be done. While I am sure that AP will attempt to get a jumpstart on what they can, they will need further clarification from the FDA on exactly what needs to be changed, and how they should probably change it. This will be even before the company submits a response to the complete response letter. Remember, that the CRL response also takes time. Even if AP is given the benefit of a class II response, then it will be six months from the time of the filing for a PDUFA date to be established. Management has issued guidance in its conference call that they plan to launch the drug in the first half of 2014.
So let's say that they get to commercialization in the first half of 2014, that would probably be at around June. Luckily, AP Pharma seems to have much of its commercialization structure in place due to this PDUFA date, so they will not likely dismantle their commercialization structure. If it is June, then we have a problem regarding AP's cash, and how much they will have to burn through in order to reach the point of commercialization. According to the conference call held today, AP Pharma has as of the end of 2012 $53.5 million in cash and cash equivalents. They burned through $6.5 million last quarter, and nothing in the conference call would suggest that this number was high. If we continue to project that AP Pharma uses $6.5 million per quarter, we are looking at a total cash burn of $32.5 million, which would bring us up to the end of June 2014. This would also, provided that there are no changes, bring the cash and cash equivalents down to $21 million. Now, we also need to calculate in the fact that AP will have to build up a national sales force for their drug, and that is the huge variable. The question of how much this would cost is really not very clear, however, if we assume that it costs $5 million which is rather low for such a force, this brings AP down to around $16 million. AP will have to dilute because remember it will not be profitable right out of the gate with its drug, and will have an even higher net loss likely the first few quarters due to the higher General & Administrative costs associated with building a national sales force. If they receive approval for the drug, that sounds great and likely AP will not have very many problems with selling the drug, right?
Well, actually the market for chemotherapy induced nausea treatments is already saturated with many different generic competitors. In a treatment area with many different competitors, AP will have trouble convincing doctors to prescribe their drug. I would also expect the company to have trouble with insurance companies covering the price of their drug. This commercialization reminds me a lot of a company called Somaxon, and their troubles commercializing their treatment for sleep apnea in a market saturated with generic treatments. Also, remember that in phase III testing it was found that AP's drug was equivalant, but not superior to, the current standard of care Aloxi. While people will be quick to point out the fact that Aloxi is not yet generic, it could become generic as early as April of 2015. Also, remember that AP would have a hard time competing, as Aloxi has already been on the market, and has an entrenched market position. It would be hard to convince doctors to switch from a drug they know in Aloxi, to a drug they do not know and that has no additional therapeutic benefit. Also, if Aloxi does become generic in April of 2015, then Aloxi would even be much cheaper than AP Pharma's treatment. If doctors don't use Aloxi, there are many different chemotherapy induced nausea and vomiting drugs which are generic, and present some serious challenges to APF530. APF530 is not superior to the current treatment, and getting insurance to cover it will be hard; these facts will not bode well for the marketability of APF530.
AP received some bad news Wednesday regarding a CRL for their drug. This pushes the launch date back, and makes dilution a real risk. Also, given the concerns about the marketability of APF530, there is not anticipated to be a partner in commercialization. If APF530 had the kind of market potential that everyone is implying, don't you think that big pharma would have jumped on the opportunity? This company could be had on the cheap right now if big pharma wanted it. However, given the problems with AP Pharma, I don't think that big pharmaceutical companies would be interested. AP Pharma does not represent a buy in my opinion, not at these price levels. You might see what is often referred to as the "dead cat bounce" in price-levels. However, provided that AP does not have any new drugs in its pipeline, according to their website, the long-term outlook for this company looks bleak.
The rather bleak state of AP Pharma is in contrast to the position of Ziopharm (ZIOP). I have previously analyzed Ziopharm, but some of the constructive comments that I have received from Ziopharm shareholders have made me view this company a little bit differently. I do still maintain that Ziopharm's biggest concern would be in obtaining additional cash in order to fund their trials. However, as was very well noted, Ziopharm's expenditures should taper off a bit due to them not having to R&D one drug anymore, so we could probably push back my projection slightly. One of the principal pieces of information which have changed my views is that: these shareholders have pointed towards the value of Ziopharm's underlying synthetic DNA pipeline. A very nice analysis of the sales potential can be found here. I must thank biothoughts for providing me with the link to that article, he originally posted it in his comment. They also point to the underlying value of Ziopharm's relationship with Intrexon, and I must concede this point. As the market gives more and more attention to Intrexon, it appears as though that attention will also spread onto Ziopharm. As Ziopharm receives more and more attention it seems as though they should also be able to attract investment in a much easier manner, and in a way which would be much more attractive to Ziopharm shareholders.
Also, the market value of Ziopharm's drugs (should they be approved) is very large. While there are a lot of other cancer drugs, should the DNA technology work as well as everyone predicts, Ziopharm should make a killing as it would be superior to other drugs on the market. Another differentiating factor is the anticipated timing of the release of clinical results by Ziopharm. Notice that Ziopharm is projecting to release Phase II results of its drug Ad-RTS IL-12. Also of note is that this trial would be in very late stages of cancer, where there are not very many drugs, and none that are incredibly effective. At stage IV of cancer many people are looking at a ticking clock, so it seems as though if Ziopharm is able to blow that trial out of the water, I would expect some major appreciation in Ziopharm's share price. Ziopharm has a much better marketability and more drugs in its clinical pipeline compared to AP Pharma. Notice that Ziopharm has many different drugs that it can almost fall back on, whereas AP Pharma has only one. Also of note is the fact that when taking into account the rather weak sales projections for AP Pharma, compared to the potential of Ziopharm's drugs. AP Pharma has also had multiple attempts at FDA approval, this was their second CRL. With little in its pipeline, and AP Pharma burning cash at a rather high rate, it does seem as though the future looks bleak.
While it is undisputed that both stocks suffered very bad days, it does seem as though Ziopharm would be the better of the two. Ziopharm's underlying technology is quite valuable, and Ziopharm can continue to draw investor attention. For AP Pharma there is nothing to really invest in right now. AP is going to have to at least conduct more statistical analysis, which will push them back and will have to resubmit. I do not look for AP Pharma to really have approval until at the very best the end of this year, or early next year. This means that for all of that time if you invested in AP Pharma now, it would essentially be dead money. Whereas Ziopharm has some very exciting upcoming drug results, which have the potential to help raise Ziopharm's stock price.